Commissions on financial products
In the beginning the commissions on financial products were not disclosed to the customer.
Long ago financial products were sold to consumers. A glossy brochure illustrated the great features of the product and the small print mentioned the fees and charges.
The insurance salesman offered ‘unit linked’ investment contracts for substantial amounts of upfront deposits and/or regular monthly payments. Your friendly bank manager, remember those old guys, guided you to invest in term deposits and other products of that banking group. The five, seven, or ten year debentures of the bank’s own leasing finance company were sold to retirees.
Time shares and managed forestry investments were spruiked by independent sales teams.
Financial advice was offered ‘free’ as the ‘advice’ could be just a personalised marketing document.
Compulsory disclosure of commissions on financial products introduced
But then changes to legislation required detailed written disclosure of commissions on financial products. The Corporations Act 2001, introduced requirements for financial advice to be provided before any ‘financial product’ is purchased. The insurance salesmen became ‘financial planners’ and the sales materials were upgraded to include the personalised financial advice in a written report: the Statement of Advice.
The Statement of Advice must
• demonstrate very clearly, based on the customer’s actual position and attitudes, why and how the recommended financial product suits the customer; and
• disclose the amount of the potential rewards received by the financial planner/adviser in both dollar terms and as a percentage of the amounts of money invested.
Financial planners/advisers may be rewarded via fees and commissions deducted from your investments. Until June 2013, your financial planner/adviser may recommend any products that suit your needs without regard for the different commission rates on similar products. These fees and commissions are allowed to be set as percentages of the amounts invested provided that the customer was informed at the outset in the Statement of Advice.
Coming soon the Future of Financial Advice, FOFA, new legislation impacting in July 2013
FOFA requires that all financial advice puts the client’s interest first. Any potential rewards for the adviser must not ‘colour’ the advice or product recommendations.
Thus FOFA is requiring that all financial advisers operate as professionals who use their knowledge and skills primarily for the benefit of their clients.
FOFA allows financial planners to be rewarded via fees and commissions set as percentages of the total amounts invested. But FOFA requires that any money borrowed for investment must be excluded from the ‘amount invested’ to be used for calculating upfront commissions and financial planner/adviser fees.
Thus FOFA prohibits your financial planner/adviser from recommending product A which pays commissions of 4% of your investment, rather than the very similar product B that pays commissions of only 3% of your investment.
FOFA also prohibits your financial planner/adviser encouraging you to invest via a particular investment manager or ‘platform’ just so that your financial planner/adviser has a higher total with that investment manager and thus attracts a bigger ‘volume bonus’.
Your 2012 investment could have moved your financial planner/adviser from ‘bronze’ status to ‘silver’ status and thus a higher percentage rate of volume bonus and you would not know about it.
Once your investments are in place, under FOFA you will need to sign on every two years to allow ongoing commissions and adviser fees to be charged to your investment accounts. Your financial planner/adviser will need to demonstrate that the ongoing commissions and fees give you value for money.
Examples of adviser fee models – Independent professional financial advisers
Independent professional financial advisers charge fees in a similar way to lawyers and other professionals. You could expect to pay hourly rates for discussions and agree flat fees for detailed reports and any Statements of Advice.
For example, an ordinary financial adviser might charge $220 per hour for consultations and $6,600 for preparing a Statement of Advice. A specialist professional adviser who is experienced in your type of situation might charge $440 per hour but give you a better solution at a lower cost than the general adviser.
The new legislation, Future of Financial Advice, FOFA, allows you to obtain scaled financial advice just regarding your immediate problem rather than requiring everyone to obtain comprehensive advice before purchasing any financial product. This ‘scaled advice’ could just relate to your investing a retrenchment payout and not have to cover every aspect of your financial life.
Examples of adviser fee models – commissions on financial products sales
A financial planner/adviser might offer all enquirers a ‘free’ introductory consultation: an opportunity for the potential customer to talk. At that first meeting, the financial planner/adviser gives the customer a Financial Services Guide which includes how you pay for investment advice.
Investing a one off lump sum as a retail client
Customers who just want advice about investing a modest retrenchment benefit could agree to pay, say, $550 for a Statement of Advice. The Statement of Advice could recommend a suitable financial product and disclose that the adviser would be paid upfront commissions of 4.4% of the amount invested plus annual ongoing trail commissions of 0.44% of the investment balance.
For example, Kim wanted to invest $100,000 retrenchment payment. Kim expected to pay $550 for a Statement of Advice. Later Kim’s financial planner/adviser could receive 4.4% of the money that Kim invested as an upfront commission and another 0.44% of Kim’s investment account balance each year that Kim maintains the investment account.
If Kim had $100,000 to invest then the financial planner/adviser could collect $500 for the Statement of Advice plus $4,000 in upfront commissions. Kim would also be charged $450 in GST, making a total cost of $4,950 to invest $100,000. Kim’s financial planner/adviser could collect about $400 plus GST, each year that Kim’s investment continues.
Thus from ten enquirers who have the ‘free’ introductory consultation, three might progress to the $550 Statement of Advice and one might purchase a financial product. The one who purchases a financial product has helped with the costs of the other two Statements of Advice and the other nine enquirers’ ‘free’ introductory consultations.
Comprehensive advice and investment via an investment ‘platform’
Customers who have more funds to invest and/or want more complex financial products might become long term clients of a financial planner/adviser and utilise an ‘investment platform’ read investment administration system. These customers could agree to an overall advice fee package for their investments and other financial products. Their Statements of Advice would recommend investment in various financial products held via a specified investment platform.
A common style of determining the total amount of upfront, or initial, adviser fees charged to the client who utilises the investment platform to ‘purchase’ the financial products recommended in the Statement of Advice could be calculated as
– 4.4% of the first $150,000 of ‘funds under advice’ plus
– 3.3% of the next $250,000 of ‘funds under advice’ plus
– 2.2% of the next $400,000 of ‘funds under advice’ plus
– 1.1% of the next $400,000 of ‘funds under advice’ plus
– 0.55% of any excess over $1.2 million of initial funds invested
where of ‘funds under advice’ means the total financial assets that were discussed in the Statement of Advice.
FOFA prohibits any borrowed money/loan amounts from being included in the ‘funds under advice’ after June 2013. But this style of determining the total upfront adviser fee will continue to be used by many accountants who act as financial advisers.
The investment platforms are owned and operated by the major financial advisory companies who charge fees for the administration of your investments. The platform fees are deducted from your account each month.
Note all adviser fees and commissions on financial products are subject to GST.
Thus under this approach, the upfront adviser fees deducted from the investment of a $400,000 inheritance could be $14,850 calculated as 4.4% of the first $150,000 plus 3.3% of the other $250,000.
A substantial fee for the preparation of the Statement of Advice might be required from a client who received a Statement of Advice but chose not to proceed with any recommended investment.
Financial Care Services charges professional fees
Financial Care Services is an independently owned financial advisory service. Clients of Financial Care Services are charged fees based on the complexity of their situations and the extent of the written advice required. The fee for a Statement of Advice is agreed in advance; Financial Care Services does not accept commissions in respect of client investments. Any payments from investment managers are credited to the client’s fee account at Financial Care Services.
If you would like further confidential, independent and professional advice about Centrelink, lifestyle or financial issues please contact Christine at Financial Care Services (03) 9808 0338.
Financial Care Services – call (03) 9808 0338
Disclaimer: The information contained in this website is of a general nature only and does not constitute “financial advice”. You should obtain your own personal financial advice before investing any money or moving in to any retirement village, lifestyle community or aged care facility. Financial Care Services is licensed to provide financial advice to individual clients based on their personal situations. © 2013 Financial Care Services Pty Ltd. All rights reserved.
To make an appointment for professional advice, call Financial Care Services
(03) 9808 0338