Look For Advisers Who Charge Fees

By Mary Holm

Monday 23rd July 2001

Let's say you're visiting a financial adviser for the first time.

She spends several hours with you, discussing your current investments, debts and spending.

She helps you work out your financial goals, how much risk you feel comfortable with, and your likely future needs.

Your best strategy, she says, is to move some savings out of the bank, repay your credit card debt, and put the rest towards your mortgage. She explains why this is a good way to use your money.

She then suggests you boost your mortgage repayments by $200 a month, and points out how much interest you will save by doing this.

Once the mortgage is repaid, in five years, she suggests you return to her to consider investments for retirement savings.

You leave, feeling more confident and in control of your finances.

This is the sort of advice that many New Zealanders need. But it is rarely given.

Why? Because most financial advisers would receive nothing for that work. They get paid only if they put you into investments.

The fund managers and others that provide the investments give them some of your money as it goes in, in the form of entry charges.

Advisers also get "trail" commissions, taken every year out of the returns on your investments.

It's not a good system.

Advisers swear they don't steer you towards the companies that give them the highest upfront or trail commissions.

They also claim to be unaffected by the parties and holidays some product providers give to advisers who sell more than a certain amount of their products.

But isn't it just possible that - all other things being equal, of course - they might have a slight leaning towards the more generous providers?

Even if they don't, they're certainly not going to strongly recommend repayment of mortgages and other debt, which gives them no reward.

How else could the system work? We pay lawyers, accountants and doctors fees based on the time they work for us. Why not financial advisers?

When I've asked advisers that question, most respond, "People aren't prepared to pay us fees".

"It's funny," they'll continue, "but a client will readily accept that a 3 per cent upfront commission has been taken out of their $10,000 investment - which comes to $300.

"But if I give them back that commission, and instead charge them a $300 fee, they'll complain."

Every now and then, though, I meet an adviser who does charge fees. And they report that their clients are happy with that arrangement.

Some of those who charge fees base them on the hours they spend working for a client. Others base their fees on the amount of money they handle for the client.

I prefer fees by the hour. Otherwise, you're once again getting into the situation in which advisers aren't rewarded for help with goal setting, debt reduction and so on.

On the other hand, advisers say it takes much more time and effort to run a $1 million portfolio than a $10,000 one, so they need some reward related to the amount invested.

The ideal might be an hourly charge for information gathering and advice, plus a smallish percentage of money handled.

In any case, if you're looking for an adviser, I suggest you favour one who charges on some sort of fee basis.

And, if you've got a mortgage or other debt, be suspicious of any adviser who doesn't at least discuss debt reduction with you.

Sure, there's a strong argument for doing a little saving while you repay your mortgage. But only keen risk-takers should put all their savings into investments while they are still in debt.

Mary Holm, a freelance journalist and author of "Investing Made Simple", is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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