It’s estimated that roughly $2 billion each year is taken out of investors’ accounts and handed over to financial advisers and product providers who offer no financial advice for the fees charged. It’s highway robbery, but until laws caught up with the scam, there was nothing that investors could do about it.
Upfront and trailing commissions, and hidden fees on investment products have been a sour point for investors for decades. Trailing commissions can be as high as 1.5%, which means that if you’ve got $1 million in the market, you’re saying goodbye to $15,000 each year for financial advice. Not getting financial advice? Well, you’re still up for $15,000 a year.
Financial statements received from super and investment funds held “administration charges” which were fees to pay for financial advice received when the product was first taken out. But the problem for investors was that these fees were deducted regardless of the amount of advice actually received. The system was good for advisers and the product providers who received a recurring stream of money, but was not good for investors trying to boost their wealth or save money for retirement.
The system prayed on lax investor behaviour – because once set up, investors tended to forget about monitoring their investment portfolio and keeping in contact with their financial adviser. Even if the financial adviser ended its relationship with the client, the product provider would often continue receiving the trail commission.
The Federal Government’s Future of Financial Advice reforms announced in April this year by the Assistant Treasurer and Minister of Superannuation, Bill Shorten, aims to put a stop to the fee drain. From 1 July 2012, advisers and product providers will be banned from charging commissions and volume-based payments across managed investments, super and margin loans - but not risk insurance products (except insurance held within super), home loans and savings accounts. Upfront and trailing commissions will be axed, and in their place advisers will be required to charge a fee for the advice they actually provide.
Come next year, you should take a moment to consider:
1. How much in trailing commission you’re currently forking out for investment and super products, including margin loans.
2. Aim to reduce, or eliminate, these fees from your account
3. On the subject of fees, you should also take a look at any trailing commissions or hidden fees on your mortgage, home and car insurance. The ban will not extend to insurance policies, home loans and banking products such as savings accounts – but this doesn’t mean that you still have to pay these fees if you team up with a rebate service (more below).
The ban does not apply retrospectively, which means that, unless you do something about it, the products you’re currently invested in will continue to cop trailing commissions every year.
Therefore come next year you have a couple of choices: you can either switch investment products and eliminate the trailing commission for future years, or transfer your existing products to a rebate service.
Switching investment products may not be a sound option if your existing products incur exit fees, and if there’s a significant buy/sell spread incurred when selling and buying. You must calculate how much these fees cost, and compare that to the ongoing trail drain you’re incurring on your existing accounts. Furthermore, if you have a financial adviser who advises you regularly, then financial advice will still incur a fee. Removing the trail commission from existing products does not mean that financial advice suddenly becomes free. If you’re happy with your existing financial planner and the job they do, then staying with the status quo may be the best option to take.
If you don’t need financial advice then there are rebate services around that can help you turn off the trailing commissions on existing products. Rebate services such as Dixon Advisory, YourMoneyBack, iRefund, YourShare and Infocus – allow you to nominate them as the recipient of the commission and they rebate it back to you. Clearly, these services are not voluntary organisations – they have to make a buck from the transaction too; they normally take a fixed percentage of the commission that’s capped at a certain dollar amount, or alternatively they charge a flat fee. In any case, you’ll be up for no more than $350, and potential savings from rebates on trailing commissions can be thousands.
This latter option is probably the best given that it doesn’t involve switching funds, and incurring possible exit fees, buy/sell spreads and the like. However, if you’ve been thinking about switching investment products then maybe it’s best to wait until July next year when the regulatory changes come into effect.
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This article is of a general nature only and does not take into account your individual circumstances. For advice, TheBull recommends that you employ the services of a qualified financial adviser.