Advice, do you need it?

AMP released their results last week, bringing with it news that it was reducing its adviser numbers across the network. This comes as no surprise given the results but does continue the trend of adviser number reductions across the big players in the market. See here, here and here.

So what’s going on? Normally the fast and easy answer for a product provider to shore up demand would be to increase adviser numbers, who are essentially the coalface sales network. Ideally, this would come from bringing in good talent (expensive), or from some sort of training academy.

As an AMP Horizons alumni myself, it wasn’t obvious why a surveyor from the Pilbara, along with fellow classmates from all sorts of prior occupations (think logistics, hospitality, administration, construction) was an ideal candidate for their sales team adviser network. Now that I’ve been in the industry a bit longer, it’s easier to see that advisers stemming from different backgrounds meant a more diversified skill set when establishing one of the most important parts of a client-adviser relationship, rapport.

It’s the rapport between the client and the adviser that will cement the most profitable part of financial advice, the ongoing relationship.

There is a common tenet in the advice world that gets bandied around, particularly when you hear of a colleague closing an exorbitant advice fee deal and wonder ‘how the hell does the client see value in that?’. Simply put, the client ‘buys the adviser, not the advice’. There is a fair bit of truth in this. Financial advice is first and foremost a relationship game, and this relationship forms the emotive bond that endures the problems that arise from markets, regulation and changes to personal situation.

Well, that’s great Tim you say, but I don’t make friends with my car dealer or real estate agent, etc. And he/she doesn’t take a percent of my savings every year.

Fair point.

So when do you need advice, how much should you be paying and then, what should you be receiving?

There is a terrific article from a favourite writer of mine that runs through some of the key considerations behind seeking advice, more succinctly than I can:

The simplest financial situation is a young single working person who rents his or her home.

At the other end of the scale is someone like this: A successful entrepreneur who owns a company (or three); is facing large capital gains reflecting the sale of a business; has children and grandchildren to pass wealth to; has multiple sources of income and a fairly involved tax filing (including K-1 distributions, loss carryforwards, etc.) to go with it; owns multiple real estate properties in the United States and abroad. He works with multiple attorneys, accountants and other business counselors. He has maxed out 401(k) and defined-benefit plans; owns numerous investment portfolios at different firms; has a fully developed will, trusts and insurance policies; and is involved in major philanthropic endeavors.

Your situation is probably somewhere in between these two extremes.

Simply put, the more complex your financial affairs, the closer you might be to needing the full “sit down and tell me everything” style of face to face financial advice that is traditionally available in the markets.

Prepare to be moved into your adviser’s product (if an appropriate reason can be found) and face recommendations on other products in your advisers Authorised Product List (APL). Almost certainly there will be a Statement of Advice fee (perhaps a few thousand $) along with the potential for an ongoing service arrangement (fixed rate, or more commonly, as a % of funds under management, FUM). Cheekier advisers may look to include (or be forced by their licensee to include) an implementation fee to help fund the cost of you being moved into their product.

For the avoidance of doubt, I should add that there is nothing wrong with the process above, if of course, you as the client are happy with the whole proposal and see value in the cost, both upfront and ongoing.

Initial advice, particularly back in the Reasonable Benefit Limit and Transition to Retirement (TTR) days, was almost always a good deal – helped by some crafty tax wrangling – and could see a client in the black in months, after fees. It was up to the adviser to prove the value and the client to sign. Simples.

Big change in circumstances? Your current setup might not be correct, so seek advice. Big change in legislation? Same, perhaps seek advice – an hour (usually free) will uncover if things like the removal of TTR or lowering of the concessional contribution limit (this July), or the drop in the Centrelink asset test (just gone in January) will affect you. Whether it means rejigging your entire portfolio to another provider might be more a function of the adviser’s objectives than yours.

From there, however, the value proposition becomes a little more grey. The ongoing component, as mentioned above, charged as a percentage of funds under management, can then serve as a handbrake on the overall performance of the investments, often to the tune of a percent or more. Not so bad when an aggressive investor gets reduced from 10% to 9% perhaps, but in this low-interest world we have found ourselves in, this might be a quarter of your return for the year!

So do you really need an expensive ongoing relationship? Think about it. Most decent investment platforms offer the ability to change risk levels easily and cheaply, using either their own tools or by doing your own research. You could also look to re-engage with an existing or aligned adviser on an ad hoc basis, which, providing you don’t move products, should not be a huge amount of work for them to provide some advice on.

It really comes back to the emotional stuff. If paying a percent a year for a coffee and biscuit, a chat and perhaps a face to face market update helps you to sleep better at night, then it sounds like money well spent. If not, it might be time to assess the alternatives.