When do people typically start working with a personal financial advisor? While there is a range of triggers, more often than not it’s because of one of these two things:
- Age: They’re in their late 40s or early 50s, and want to ensure they are on track to achieving a retirement income that will allow them to enjoy the lifestyle they want.
- A windfall: They’ve come into a significant sum of money, perhaps via redundancy, inheritance, business sale or the like, and want to ensure they maximise that windfall.
But what if you’re younger, don’t have a windfall gain to manage and are thinking you’d like to get ‘ahead of the game’ with regard to your financial life planning?
- Is there a particular age you should start?
- Should the advice trigger be asset driven?
- Or is your income the deciding factor?
While there are no hard and fast rules, there are some rules of thumb that apply.
Income generally comes first
Industry surveys indicate that, on average, ongoing personal financial advice starts at around $3000/year in Australia. Based on this starting point and independent of a person’s age and investible assets, if a household has an income of around $150,000 a year, that household would ordinarily be able to devote 2% of that income ($3000) towards ongoing financial advice.
So a household income of $150,000 is a good ‘rule of thumb’ starting point.
What about Assets?
While income may be a good indicator for when to begin accessing advice, financial planning fees have traditionally been applied as a percentage of a person’s investment assets. This approach is still common and in such instances, investible assets is obviously the most relevant factor.
While 2% of income is a reasonable percentage to allocate to advice, in the case of an asset-based advice fee, this typically sits at around 1%. Referring back to the fact that ongoing advice usually starts at around $3000/year, having assets of at least $300,000 upon which an asset-based advice fee of 1% is applied, arrives at the same number of $3000 per annum.
Age is the final factor
It might sound self-serving to say ‘you’re never too young to start working with a financial advisor’. But, so long as the income is there to support the level of advice you need, then it’s hard to argue that someone is too young to experience the benefits of:
- Having a trusted sounding board to talk about money with
- Having confidence they can afford the lifestyle they want both now and in the future
- Being financially organised, with someone else doing the work to keep things that way.
If you’re looking for a ‘rule of thumb’ age we’d say that starting with a financial advisor in your late 20s/early 30s is definitely advisable. The important thing to note here is that the effects of sound financial advice compound significantly over the years. If you wait until your 50s to do something you could have started in your 20s and 30s, you’re missing out on the benefits of what is often called ‘The 8th Wonder of the World’ – compound interest.
Fixed-price fees or percentage-based fees?
In the age/assets/income discussion above, I’ve spoken about the common percentage point for income or assets where paying for financial advice becomes economically viable.
Acknowledging that most advisors work with clients on an ongoing basis (allowing them to update and adapt their clients’ financial planning as life inevitably changes), let’s take a look at the two most common ways financial advice fees are charged.
1. Percentage-based fees
Based on the total value of the assets in your portfolio, the more assets you have, the higher the fee you pay. There is a case to be made that this approach aligns the investor’s interests with that of their financial advisor. There is an in-built incentive for the advisor to pursue strong returns on behalf of the investor, and also to aggregate the available assets of an investor in that investment portfolio. The more money the investor makes, the more the advisor makes. This ‘performance’ style fee is also the way that investment management firms charge their fees on the money they manage in investment funds and super accounts.
2. Fixed-price fees
Fixed-price advice fees usually take the form of an annual service fee, paid monthly or quarterly from a client’s bank, super or investment account. Separate one-off fees may also be charged by an advisor for services including:
- Preparation and provision of a Statement of Advice (SOA)
- Implementation of advice recommendations, such as opening accounts, consolidating superannuation and purchasing investments.
There may also be other separate fixed fees for services that sit outside the scope of an advisor’s standard annual service offering.
Which is better?
We’re not going to wade into that debate now (though others have). And really, it comes down to the fee structure the client is most comfortable with.
At HPH Solutions we have an all-inclusive fixed-price fee model. This model puts the onus on us to demonstrate we are providing value for money. And this is an onus we are very comfortable with.