I’ve had some clients come to me recently for a second opinion. They had previously been to an unnamed company that had given them a financial plan but they weren’t entirely happy with the plan they received, nor felt listened to.
The adviser firm they went to charges very little up-front cost but make their money by the products that they recommend. For example, if you join a certain KiwiSaver or investment fund, then the adviser firm will get a kickback. Sometimes they receive ongoing monthly kickbacks for as long as you invest. Likewise for your insurance and mortgage needs. Sometimes the backhands are better than Roger Federers.
In other words, the advisory firm’s motivation is driven by signing you up to the company that pays them income. This is clearly not in your best interests and definitely not individualised advice. It is a clear conflict in interest.
So just like anything in life, you get what you pay for.
Low or no cost financial advisers have conflicts of interest
If you aren’t paying much, or anything at all, for your financial advice, then you are the product being sold to other companies. You are the cash cow.
Over the long term this could cost you far more than if you paid more up front for an independent financial adviser from the beginning.
To show you the impact of unsuitable product recommendations, let’s use an example.
One company popularly recommended by many conflicted financial advisers is Generate. Generate provide KiwiSaver investments. Funnily enough they are also very active in finding financial advisers to “work with” as their middleman. Effectively the adviser is a sales agent masquerading as an adviser.
The Generate growth fund charges 1.45% per dollar invested, plus a $36 per annum administration fee. Let’s compare that to the Simplicity growth fund which charges 0.29% per dollar invested, plus a $20 per annum administration fee.
If you have $30,000 in your KiwiSaver and are adding $4,000 from all sources (employee, employer and government), increasing with inflation each year, after 30 years (assuming 7% returns), you would have paid the following amounts in fees:
The difference in active vs passive investment fees
A whopping $75,000 extra in fees and a closing balance of over $155,000 less. If you earn more, or contribute more to KiwiSaver, or have a higher balance, the results will be even more startling.
The adviser who recommends Generate may point to the fact that it’s a better fund and it is after fee returns that matter. Yes, after fee returns do matter. That is why low fees make such a significant difference. To make up the $155,000 shortfall in this example, the Generate fund would have to return 8.3%. A whole 1.3% more than the Simplicity fund every year.
Is the adviser going to pay you the shortfall if it doesn’t return an extra 1.3% per year? Heck no. They’ve got their money.
Other advisers charge little to nothing upfront but are paid a percentage of your assets under management. Over the years this can also add up to tens to hundreds of thousands of dollars. Even if it is 1% per year.
A lot of these extra fees go unnoticed because they are not taken out of your bank account. They are deducted from your investment returns. But a dollar is still a dollar, no matter how discreetly you pay for it!
Or how about an adviser that gets paid by a certain insurer. This particular insurer may or may not be best for you. There could be cheaper options that are better for you. There could be other insurers that don’t have as many exclusions as the one your adviser recommends.
All this can translate to hundreds of thousands of dollars over your lifetime.
Being in the wrong investment funds. Having the wrong insurance cover or being with the wrong provider. These decisions can be very expensive.
So if you are getting financial advice on the cheap or free, it can be very costly indeed. Far more expensive than paying the higher up-front cost for an adviser that works more independently.
Obviously I am also biased as I’m an independent adviser. However, seeing these recent clients come through who have received terrible advice that is not in their best interests makes my blood boil. If they didn’t come to me they would have spent many thousands more over the next 20 years than the cost of my service.
So just think carefully about the true cost of that cheap advice you are getting. Is it in YOUR best interests? Low cost advice may be costing far more than you realise.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here