What is fee for service financial planning?
Fee for service financial planning is where a client pays their financial adviser a fixed fee for the services and advice they provide. Much like you would pay your mechanic to service your car.
Currently in Australia there are two main ways that financial planners are paid Commissions and Fee for Service:
Commissions – this is the most common form of remuneration for financial planners in Australia. It is where product providers or financial institutions pay financial advisers a commission when their client invests or purchases their product or investment. There are generally two types of commission that are paid:
- Upfront commissions which is a larger lump sum amount paid to the financial adviser when the product or investment is first set up. This lump sum amount varies depending upon the arrangement with the provider but is generally around 4%
- Trail commissions which is a smaller ongoing commission which is paid to the financial planner usually on a monthly basis for the life of the investment or as long as the client retains the product or advises the provider that they have transferred to another financial planner. The average trail commission is around 0.8% per year.
Fee for Service – this is a less common form of remuneration for financial advisers where instead of receiving payment from the product provider, the client pays their financial planner directly for their time and advice. Often there will be a set fee either based on an hourly rate and/or packaged based where you can choose to pay for particular services such as a full Statement of Advice or setting up of a Self Managed Super Fund.
Which financial planning payment style is better? Commission vs fee for service?
There has been a lot of debate in the media about which style of remuneration provides is better for clients. The overwhelming majority of financial advisers in Australia are still commission based but our opinion is that fee for service financial planning is much better for clients as it lessens the risk of a conflict of interest. When a financial adviser is paid by a product provider we believe that they are inclined to work for the commission rather than work for the client. This can result in clients being “sold” into products which may not necessarily be the 100% best option for their needs. Say your financial planner has 2 options of where to recommend you invest. One is better for your needs than the other, but the lesser alternative happens to pay the adviser a larger commission. You can see where the conflict for commission based financial planners arises.
In addition is the problem where most financial advisers in Australia don’t offer advice in areas such as budgeting, savings, and tax structuring as because they aren’t placing their client into a product they don’t get paid. Many people need this grassroots financial advice from a professional and aren’t getting it for this reason.
At Financial Spectrum, we believe that fee for service financial planning is the way forward. We know that we are in the minority of financial planners in Australia but we believe that this payment structure offers the best service to our clients and enables us to give advice to our clients in all areas of financial advice. At the end of the day, it is our clients who pay us for our service and advice, and it is our client that we are working for.
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