Hi, My name is Michael and I am 61 years old and not working. I have $570,000 in Superannuation, which I am drawing down on it at $983.00 per fortnight. My share in my house is $300,000. I will not be working again before I reach 65. I have $4,000 dollars in the bank.
I have no other investment properties or major assets. I pay a financial advisor $5,500 per year to manage my investment strategy. In these times, I wish to maximise the money that is available to me.
My question is: Is it worthwhile paying my financial advisor? Would I get the same return if I went with a standard investment strategy offered by a superannuation company and saved money by not paying his fee? This money would then stay in my superannuation account and benefit me.
Hoping to hear back soon,
What a great to question. Something I cover a lot in my content is fees paid to advisors and their worthwhileness. Unfortunately, there isn’t enough information here to accurately answer your initial question of whether you should continue your financial advisor.
That being said, there are a few things you can consider that can help you to effectively answer the question yourself.
1. Is the advisor right for you?
Firstly, it is my professional opinion that yes, you should always consult an advisor to help you in the navigation of your financial needs and goals.
As such, the question is not should you continue to pay your advisor, but whether you have the right advisor for your needs?
Looking at the fee you are paying your current advisor, and taking the information provided into consideration, it sounds as though your advisor is simply providing you advice on your superannuation.
At present, you’ve mentioned this is $570,000. As the advisor is charging you $5,500 per annum, this falls just below 1 per cent per annum, which is a fairly average fee.
2. What are you paying them for?
The next question you need to consider is, what are you paying your advisor for? For example, you may pay your advisor to manage your investments.
The objective for this investment could be to earn 6 per cent per annum across capital growth and income.
Some years, your investments might achieve above this target, whilst others may just fall short. However, if, on average over a three year period your advisor is achieving this, then you’re getting your moneys worth.
If, however, your advisor is achieving an average of less than 3 per cent per annum, then you may want to consider a switch.
Alternatively, you might be paying your advisor to manage a strategy. Let’s say your advisor has arranged a transition to retirement strategy, and your super balance is increasing whilst decreasing your personal tax bill every year. This transition management and guidance can quantify that fee through the review of your super balance and tax returns.
A formula to figure out if they're worth it
Overall, one of the most importance questions I pose to new clients is, what fee are you paying, and what are you getting out of it?
To review the value of advice to you, we use a fairly simple exercise that involves looking at your super fund performance, and I always suggest the per annum averaged over three years.
This will give you, what I believe, is the best overall indication. One year won’t tell you much and can be misleading, whilst reviewing over five years is too long to get a proper snapshot of active performance.
Once you know your performance over that period, then you can take away the following elements:
Inflation: For example, 2 per cent p.a. This is the value of which time will impact your money. If you had $10,000 in 2011, how much would that same $10,000 buy you today? The argument is around 2 per cent p.a. less. This doesn’t have a huge impact year to year, but the impact it will have on your retirement savings by age 75, being that you mentioned you may not work again, will give you a better understanding of how much this will erode your savings over time.
Your annual allocated pension: this is the amount that you draw from your retirement funds to live on – in your case, 4.48 per cent.
Costs: whilst I don’t know whether you have other costs associated with your fund, i.e. personal insurance costs, what we do know is that your advisor is charging you 0.96 per cent.
Taking these factors into account, if you were in Australia’s best performing super fund, which, at present, advertises its average over three years’ performance for their Balanced Investment option at 6.65 per cent, we can use the following sum:
6.65% [superfund rate] - (2% [inflation rate] + 4.48% [allocated pension rate] + 0.96% [costs]) = -0.79%
Based on these numbers, your super fund will decline in value every year by around 0.79%. If we, however, consider that your advisor is doing a good job at managing your money and your average return over three years is in fact 8.85%.
8.85% [managed fund rate] - (2% + 4.48% + 0.96%) = 1.41%
This means that you are drawing your allocated pension, as you require every year, and the investment performance means that your super balance isn’t eroding over time.
Should you break up with your advisor?
Now, of the two, neither mean that you should ‘break up’ with your advisor. Perhaps, in the first instance, you’re a very conservative investor and aware that you’ll sacrifice some growth and submit to some super balance erosion for safety.
This isn’t uncommon; however, calculating the above will give you a good idea of the position your advisor is putting you in.
There will also be other circumstances to consider, such as superannuation member fees, other personal circumstances such as tax positions, family situation and whether you have dependants to consider and so on.
It is worth noting that most industry superannuation funds do offer some sort of standard advice options including a low-cost option to those who may not be able to afford personalised financial advice.
Everyone should be able to access advice
It is my strong opinion that all Australians should have access to financial advice in one form or another.
A good financial advisor will understand your personal circumstances in depth and take these into full consideration when curating a strategy.
From your budgetary requirements, to your tolerance to risk, and where you hope to be in five, 10 and 15 year, they will tailor advice to suit your direct needs and understand the worth of their advice to you.
Most financial advisors would rather provide good quality, affordable advice that clearly shows on the balance sheet, than to charge exorbitant fees and risk long term relationships. A good advisor will gradually find clients they wish to grow old with, and continue to build on that relationship over time.
So, if the above tips don’t provide any further clarification as to your direction, the best step I can suggest is have a close conversation with your advisor and let them know how you’re feeling, lay your thoughts on the table for you both to discuss and devise a clear and objective strategy to move forward on.
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Brendan Gow, an authorised representative (no. 427470) of Shaw and Partners Limited AFSL236048 (the “Aussie Advisor”). This article has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this article, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at http://www.shawandpartners.com.au/.