Low-cost advice still an investor’s pipe-dream

Australian Financial Review - Special Report - FINANCIAL PLANNING

Low-cost advice may mean low-quality advice and advisers tend to encourage a ‘holistic approach’ which never comes cheap, writes Miriam Hechtman.

With Australians spending more, using greater credit and saving less, the need for financial advice is paramount. But very few are willing or able to pay the hefty amount needed to have a planner reorganise their finances. Some form of low-cost advice, which uses only the basics of financial planning is sorely needed.

“In terms of low-cost planning, the main issues facing individuals tend to be debt, budgeting and cash flow and always being on the back foot so not able to get ahead meaning purchasing now and paying off later rather than saving first and then purchasing,” says the CPA’s financial planning policy adviser, Kath Bowler. Bowler accepts the need for sponsored activities, government-sponsored initiatives and corporate social responsibility programs to overcome the problem.

One such initiative is the government-sponsored Financial Literacy Foundation, to be launched in February 2006. The foundation aims to raise community awareness of financial literacy and enable Australians to better manage their money. Foundation chairman and financial adviser Paul Clitheroe says issues such as the ageing population, the high material standard of living in our society and people looking to retire earlier all contribute to a growing conversation on financial planning. “This sort of issue is not going to go away,” says Clitheroe. “Why is it that we’ve got over half of Australian adults now spending more than they’re earning? Why is it that our savings ratio is now negative?

“The cheapest form of financial planning is to motivate Australians to do the basic work themselves.” Clitheroe says a good financial planner will not talk to you about money but about attitude. He says that having a set of goals is a conversation that can be had with yourself or your partner and does not initially require a financial planner. “Our program is about the fundamental building blocks of financial planning,” he says. “With the right financial knowledge, the basics can be accomplished by yourself.“One of the lowest cost forms of financial planning is when you sit down at your dining room table, preferably with a large glass of red wine and have a decent go at your budget.

“Low cost for me is how much does the client pay for the service directly versus how much the value is that they get for that service,” says Chris Craggs, a director at the Financial Planning Association. Craggs says that what planners need to do is “be holistic” and look after a client’s full financial needs including super, insurance, expenses and debt.” “By looking after all of those affairs the client can then afford to service you,” he says.

Craggs says the workplace is a great model for introducing very low-cost planning and Joel Goldman of Goldman Financial Services agrees. “One way of getting around the high cost of planning is by providing advice to employees through their corporate super plan,” he says. He says it is a growing area which few planners cater to because it is difficult to get up and running. “Because I am looking at them as a group I can then provide the level of service that they would otherwise not be able to afford on a personal level.” Goldman says he can justify his time because he looks at it from a group perspective. In addition, he says, though he is exclusively looking at their super, he is more easily able to identify those needing a personal financial plan.

However, Craggs does warn of the possible backlash if a workplace model is introduced whereby there is no cost to the employees and the fee comes out of the corporate superannuation fund.
“The problem with that of course is that we’ve got the industry funds saying that you’re ripping people off,” he says. “So how do we manage that? The adviser has to get paid. It is an unsustainable model to expect people to do work for free.”

In terms of the industry, the current climate of compliance makes it difficult for financial planners to provide good advice at a low cost, says Goldman. “Over time, as the compliance requirements become more diluted there may be additional room for servicing those [lower paying] clients,” he says.