RETIREMENT & LIFESTYLE PLANNING      Baby boomers need to plan their transition into retirement for  Financial Security     Active Health Management  Emotional Wellbeing  Maximum Self Esteem ISSUE - 17 - APRIL 2003

The past year will go down in the history books as the end of the decade-long party enjoyed by the financial planning industry.

Throughout the 1990s the industry grew rich on big and ever-increasing commissions. Few people questioned how it operated or the value of what it delivered, especially while booming equity markets made everyone a winner.

But in 2002 share prices started to fall and things began to go bad for advisers and their clients. The commission of up to 2.5 per cent paid every year for investing in a managed fund suddenly looked expensive when it had to be paid from a paltry return of less than 5 per cent (and that was for the top performing funds). The types of fees were also being questioned, with growing objections to trailing commissions that keep paying the adviser even 20 years after they gave advice.

Against this backdrop of growing discontent, the Australian Securities and Investment Commission (ASIC) and the Australian Consumers Association (ACA) recently landed a devastating blow. A survey released earlier this year found that more than half of the 12 financial plans prepared for real consumers in its survey were below acceptable standard. And only 21 per cent were rated by expert assessors used by ASIC and the ACA as good or very good.

The bad financial plans were prepared by individuals from all types of advisory firms, from the smallest companies to the largest financial institutions.

Among the common problems identified in the survey were advisers recommending higher fee investments such as many master trusts and wrap accounts without showing why these were better than cheaper alternatives, and advice to switch between investments without good reason.

Many advisers failed to offer the obligatory Advisory Services Guide or Financial Services Guide at client meetings.

In short, the ASIC/ACA report confirmed the widespread occurrence of many of the worst practices of which the industry was accused, including a bias towards products that pay the adviser the highest commission and “churning” of investments simply to generate fees.

Ironically, the exposure of these practices and huge loss of public confidence in the financial planning industry comes at a time when the need for good, independent advice has never been greater. Even before the plunge in investment returns in 2002, tens of thousands of baby boomers were desperately looking for ways to boost their savings as they hurtled towards retirement.

So, what do you do now? Firstly, it’s important if you are in this group not to give up on getting financial advice. Australia’s tax and social security laws in the areas of superannuation and annuities are simply too complex for you to do it yourself. Getting it wrong could cost you dearly in extra tax or missed entitlements.

Secondly, be informed and educated about how financial planners work, where they sit in the financial services industry and how they get paid. This is not as difficult as it sounds, especially if you use resources provided by organisations such as ASIC, the ACA and the Financial Planning Association (FPA). You don’t have to know all about financial products, tax laws and social security rules, that’s the adviser’s job, but make sure you understand who you are dealing with and how they operate — just as would when choosing an estate agent to sell your home.

Most important of all is finding independent advice. This means finding an adviser who is going to recommend the best financial options for your needs, not the ones that earn the adviser and his or her employer the most income.

This has been the most difficult of all challenges for consumers of financial planning advice because the industry is “structurally corrupt,” according to the ACA. The industry is structured on the payment of commissions (a percentage of the amount you invest) to the adviser and to the fund managers who take your money and make decisions about where to invest it.

Commissions vary from one fund manager to the next, which immediately creates potential for advice to be skewed towards the institutions that pay the adviser the largest commission. Finding independent advice is made even more difficult by the fact that most advisers are employed by banks and fund managers who manufacture the products that advisers recommend. This creates even further pressure for bias as advisers steer customers towards the products of their parent company.

In short, the industry is designed to serve its own needs. So, is there any hope of finding independent financial advice? Happily, there is. The secret is to find an adviser who works for a fee that is based on the hours of service they provide and effort they put in, not a “get rich quick” commission that escalates with every dollar you invest.

The good news is that an increasing number of advisers are dumping the commission fee structure in favour of fees for service. It will mean lower income for many adviser firms, but the alternative may be to go out of business as consumer outrage about the financial advice industry continues to gather momentum.

Finding an adviser who is prepared to charge a fee is the most critical step in getting independent advice. It’s even more important than who the adviser works for. For example, a commission based small financial advisory business in your local shopping strip is not necessarily any more independent that an adviser who is tied to big fund manager. If the small firm works for commissions, it will still be tempted to steer you into the products that bring it the highest return.

Another important thing you can do for yourself is to read the financial press and learn about some of the excellent alternatives to regular managed funds, such as listed investment companies, index funds and even boring old products like term deposits. These are good investments but not widely promoted because they earn advisers little or no fees.

A final point – don’t panic. It is possible to find good, caring financial planners who can help you be financially ready for a comfortable retirement. You may also be pleasantly surprised if your previous experience has been with one of the many planners who like to scare their clients. This type of adviser will do a financial projection that shows you are headed for ruin in retirement. Their solution? Pour every cent you have (and borrow some more) into high-fee managed funds that will create a rich stream of commissions for years to come.

While baby boomers do have real financial pressures on their retirement, there are many solutions that don’t involve paying any fees to advisers or fund managers. For example, postponing your retirement date just two years can add up to six years to the life of your retirement savings.

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