Using a Financial Professional to Manage Your Super

Managing Your Super | Part 2

There are three options when it comes to looking after your own super:

1. Don't do it at all - leave it with an industry or retail super fund.

We've covered option 1. Low stress, muted returns.

Let’s Discuss Option 2

Everyone needs financial advice at some point. That’s not me selling financial advice, it’s a fact. Most obviously, you need it when there is a change in your life, like a divorce, a death, an inheritance, or even marriage.

So, off you go to see an accountant or a financial professional. Most of the time, two things will happen that make you feel uncomfortable. One, they ask you for $5,000 to $15,000 before they’ll do a financial plan for you. And/or two – they try to upsell you to a lifelong relationship in which they manage your investments for you on an expensive platform (which you pay for), which buys you five to ten managed funds (you could have picked yourself, all of which charge 2% management fees) and involves you paying them a percentage of your managed assets every year in perpetuity.

By the way, a 2% compounding fee will cost you 21.8% of your capital every 10 years, and this structure might cost 0.5% (platform fee), plus 2% (managed fund management fees), plus 1.5% (the financial planner's fee). You work it out. This structure is the Golden River for financial planners in which you end up on the wrong end of a 4% compounding return (costing you 48% of your capital every 10 years). And that’s before any other sundry fees (initial financial plan fee, audits, accountants, lawyers, brokerage).

There's a lot of training and compliance involved in becoming a financial planner these days. They are highly trained and can tell you how to set yourself up, what entities you should use, and the tax implications of all sorts of things. Valuable stuff.

But it's not cheap. When we ran a financial planning business, the financial plans just weren't worth doing unless a client was paying over $10,000 to cover the initial effort of collecting information and formulating a compliance box-ticking financial plan. To do that much work within a personal advice compliance regime is quite intense for financial planners these days. It just wasn't worth it for a small sum of money. You literally can't go to a financial planner and expect to pay a couple of grand and get decent advice or a financial plan.

So assuming you think it's worth it, you go along and get their financial advice. Great. But then what happens is the upsell to investment advice of the financial plan will probably include a DocuSign, which puts you three clicks away from signing up to a relationship with the financial professional, that lasts beyond the advice that was given. So it goes on beyond the financial plan.

This is the upsell.

Nearly two million Australians use a financial planner or adviser.

Proportion using Financial Professional vs Market Average

Source: Roy Morgan

Sign on to this structure and the financial planners will end up looking after your investments for you, and you could end up on the wrong end of 4% compounding.

So if you've got a million dollars, they might charge you 2% a year for their services ($20,000 plus GST). The likelihood is that they will then, in order to manage the super fund, put you onto one of the major platforms which allows them to click buttons and change what you're invested in. And they will do that for you, that's what you're paying for.

But those platforms charge admin fees, and that may be another 0.5% (or more). They pass that on to you. So you're paying a financial planning fee, plus you're paying the admin fees for that platform. Then, the other bit is the likelihood that the financial planner's advice will involve you buying managed funds. Say five carefully selected and sensible, domestic, and international equities. You will end up with managed funds that suit you and your risk appetite, but those managed funds have a 1-2% fee taken out of their performance. Which you effectively pay.

So the reality is that you have then paid a fee, say 1% to the financial planner, you've paid maybe 0.6% to be on the platform, and you're paying the fund's management fees as well, which could be 2% plus a performance fee.

If you've ever felt overwhelmed about your superannuation, you're not alone.

Whether you're unsure about the best approach to super management or hesitant to dive into self-directed investing, this workshop recording is for you.

Watch now - click here.

This of course comes with some benefits - you'll get an annual reassessment of your financial position (the annual meeting), a year’s worth of on-call financial advice (ring them up anytime with any question), you’ll be able to see what you're invested in on your platform, and how much money you're making (or not making).

And if you’re smart, you’ll develop a good long-term relationship that will carry you through various chapters in your life. And there’s value in that. In knowing that you’re not doing anything financially stupid and have someone to ask about anything. And you might even get lunch. It is up to you to extract value for money.

But the reality is that you may end up paying 3-4% to get average market returns.

And you could of course, these days, if you were doing it yourself, minimise those fees by just paying 0.2% management fees for an ASX 200, S&P 500 or other market exposures (FANG, NASDAQ) in ETFs.

This is possibly the most expensive structure in the industry, being with a financial planner on a platform invested in managed funds. The beauty of it is that you are in the hands of a professional. They do know what they're doing, but they will tend to be compliance paranoid so won't do anything risky for you. They will not blow you up and will spread your money across a number of asset classes.

By the time you look at what you're invested in, if you've invested in five managed funds or more, you will find you're effectively holding 3000 stocks in five countries, in five asset classes. So you're not going to get blown up.

The average balanced fund fell just 8% when the market fell 35% in 30 days during COVID-19. So, even one of the worst moments in the market in a decade wasn't really that painful under this sort of structure.

After managing your investments yourself, or leaving your super in a big industry or retail super fund, using a financial professional is the third option.

In my humble opinion, the best approach for someone like myself who can easily manage their own investments, is to see a financial planner for financial advice, and do the investment myself.

If I was a financial planner and wanted to break the mould, I would put up an ad that said "I only give financial advice; I don't look after your investments". That would be the best part of a financial planner.

But let me finish with this. Whilst hiring a financial professional can be expensive, if it offers peace of mind and security, it may suit some of you. Particularly richer people for whom a $20,000 financial plan is a bit irrelevant.

Want to do it yourself? For the final part, click here.

More about the author – Marcus Padley

Marcus Padley is a highly-recognised stockbroker and business media personality. He founded the Marcus Today Stock Market Newsletter in 1998. Over the years, the business has built a community of like-minded investors who want to survive and thrive in the stock market. This is achieved through a combination of daily stock market education, ideas and activities.