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'Do nothing' is good financial advice worth paying for

The Financial Services Royal Commission, which made headlines in the financial media two-and-a-half years ago, rightfully castigated many financial institutions that were charging clients ‘fees for no service’. In other words, they had failed to deliver services to clients despite charging fees for those services.

Do nothing is often the best strategy

Financial advisers today face a similar and not-unrelated conundrum of convincing ASIC that advice to ‘do nothing’, or maintain a current positioning in the market, is indeed valuable advice, often more valuable than telling clients to buy or sell shares.

Many clients understand that ‘stay the course with your current portfolio’ is advice worth paying for, but some do not. ‘How’, they argue, ‘is telling me to do nothing good advice? I’m already doing that. I don’t want to pay ongoing fees on a portfolio that doesn’t change.’

What such people fail to realise is that many of the world’s great fortunes have been made by investors who undertook thorough research (or took advice from an advisor) before investing for the long-term in companies with consistent earnings growth and good management, and then riding for years the resulting increase in share prices, ideally receiving some dividends along the way.

Charging a fee as a percentage of funds under management is now the most common way that advisers charge clients. It allows advisers to be completely objective, aligning the advisers’ interests with the clients’ interests. The old brokerage model, where advisers were paid only when clients bought or sold shares, did not align those interests.

Advisers who transact for a living – earning brokerage only when their clients trade shares – are outdated and ethically questionable. The days of ‘churning’ shares to maximise brokerage are well and truly over.

Holding and patience comes with rewards

One of the world’s greatest investors, Berkshire Hathaway’s Warren Buffett, is fond of saying: ‘Our favorite holding period is forever.’

Early investors in Apple, Microsoft, Google and Amazon who resisted the temptation to sell during difficult times or during market dips have made once-in-a-century fortunes. Those who sold out early and never bought back in can only look on with wonder and regret.

In Australia, there are similar case studies. CSL listed on the ASX in 1994 at (adjusted for the 3:1 share split in 017) 76c per share. The share price hit $16 in October 2001 before falling below $4 in April 2003. Pity the investors who sold out then (admittedly making more than five times their money), then missed out on the subsequent share price appreciation from $4 to $300. Commonwealth Bank listed in 1991 at $5.38 a share; its share price today is around $100, and it still yields 2.5%.

The sharemarket gyrations during the pandemic are another interesting case study. Investors who panicked and sold in March last year have missed out on one of the great rallies in the All-Ordinaries Index – from 5,006 on 24 March 2020 to 7,600 today, a rise of more than 50%.

One of the great challenges faced by advisers is convincing clients that they do not need to transact regularly to maximise portfolio performance. Many retirees in particular have too much time on their hands and don’t know how or when to sit on their hands. Those who insist on trading shares should set aside a small part of their portfolio to satisfy the itch. Investors who trade in shares are generally too quick to take profits, and too prepared to let their losses run.

Royal Commission was counterproductive in some ways

Following the Royal Commission fee payment regulations for stockbrokers and advisers and their retail clients in many ways work against the ‘long-term investment’ approach. Advisers must send to all retail clients who pay ongoing fees an annual Fee Disclosure Statement which outlines:

  • fees paid by the client in the previous year (in dollar amounts, not percentages)
  • services actually received by the client, and
  • services that the client was entitled to receive.

The advice ‘Maintaining your current portfolio’ may appear a little weak on a Fee Disclosure Statement, despite the fact that most advisers provide many other things including advising on corporate actions, forwarding research notes, having regular market discussions and providing warning on potential company concerns.

The obligations have become so onerous that some advisers have decided that they can no longer act for retail clients because they cannot satisfy the regulations, choosing to deal only with wholesale/sophisticated investors, for whom disclosure obligations are far less onerous.

The disclosure pendulum – introduced to protect retail clients from unscrupulous advisors – has arguably gone too far, and has hurt many retail investors.

These retail investors fall short of satisfying the requirements of being classified as wholesale/sophisticated investors and do not wish to be invested into model portfolios or managed funds. They wish to seek advice, digest it and make their own decisions. These are ‘self-directed’ clients who prefer to pay an annual fee for access to an adviser.

Government has made advice harder to receive

The Government, which wants Australians to become self-funded retirees, has put in place regulations that make this increasingly difficult.

For advisers, the costs and obligations of advising a retail client with $100,000 to invest is the same as for someone with $1 million to invest. Many older advisers and brokers are simply leaving the industry. According to Financial Standard Magazine, 450 financial advisers in Australia left the industry in the month of June 2021, reducing total numbers to 19,544. At the end of 2018, before the Royal Commission, adviser numbers in Australia peaked at about 30,000. During the March 2021 quarter, 1,017 advisers left the industry, while only 538 new advisers registered.

Many retail investors who would benefit from financial advice can no longer find an adviser.  

 

Rodney Horin is CEO of wealth manager and aged-care adviser at Joseph Palmer & Sons

 

23 Comments
Dan Pimental Qualified Retirement
January 15, 2022

'Do nothing' is good financial advice worth paying for · Do nothing is often the best strategy · Holding and patience comes with rewards. A good financial advisor can add tons of value to your financial well-being. 

Lisa
August 16, 2021

In today's information technology age we are flooded daily with investment news, from reliable investment and research companies. By reading every day - spending more time reading and learning via video links than trading - we can accumulate a broader understanding of the market and emerge as self-taught investors, whether we be retail or sophisticated in status. The idea we trust an advisor with all our accumulated wealth is fine, but that trust can only be strengthened if we understand their jargon, their strategy and their questions about our goals.

George
August 15, 2021

Warren Buffett gives this advice for free (he doesn't ask for a flat fee or a percentage fee for this advice).

He said:

"The trick is, when there is nothing to do, do nothing."

Greig
August 16, 2021

Warren Buffett charged both percentage and massive performance fees when he was starting out, until he moved his investment activities into Berkshire Hathaway. Even he seems to have forgotten this when commenting on fees these days. So no doubt have the families who have stayed with him over the years and now have hundreds of millions, sometime billions of dollars as a result of paying fees to him.

JJ
August 15, 2021

Arguing for ongoing fees while doing nothing based on being better than paying ongoing fees for doing something detrimental surely must be a joke.

The premise of the article is that paying $100 for someone to do nothing is better than paying $100 to get punched in the face.

Phil
August 16, 2021

I'm not certain that was the premise of the article. The ongoing fees would be to pay for review, discussion and the end outcome of that might be no changes, but there is still a cost to the process - I don't think the 'doing nothing' it to be taken literally. In fact, you can't by law charge an ongoing fee and do nothing. The do nothing outcome may in fact be very valuable - calming a panicked investor in March 2020 and stopping them from selling out of equities for example, is a do nothing strategy, but ultimately very valuable.

Chris
August 14, 2021

A flat fee based on the amount of work involved is the only way to go. Like Stan says the work involved in investing $1,000,000 in say 10 different investments and $2,000,000 in 10 different investments is about the same, so why pay more for the larger amount. There are obviously some INDEPENDENT and highly competent advisors out there, but how do you find one? I have been a completely self-directed investor for almost 10 years now and and have been dong well. Before that I went through 4 different Advisors, but none of them were any good. They were either not truly independent and thus limited to what kind of investments they could recommend or they were my age but with much less wealth than I had. One therefore wonders if there advise is any good, how come they themselves are not better off

Donald
August 15, 2021

terrible analogy you use to suggest that an adviser must be wealthy before they're able to provide good advice.

John
August 16, 2021

I was paying a percentage fee for advice until the pandemic hit, and was totally ignored by my advisor while the share meltdown went on. I left them and do it all myself now. After 6 weeks researching I redirected 25% of my assets into new areas never mentioned by my advisor and that money has almost doubled in 10 months (e.g. Pilbara Minerals at 47cents). Forget the fees I've saved, the reward for being pro active has been a real eye opener.

mark ridhlgh
August 12, 2021

The readers responses reflect their financial education intelligence with regard to advisor fees. Surely everyone needs to have some financial savvy. If this is not learnt from parents, formal or informal education one requires advice from planners. It is these people with (generally) less money who require it most.

Richard Brannelly
August 12, 2021

The author generally makes a strong case for the value of advice and the outcomes of some of the recent regulatory over reach, however as an adviser of 20 plus years experience - and one who is actively engaged with many other professional advisers - I will strongly disagree that the most common fee today is a percentage of funds under management. That is simply untrue and not backed by the research for many years. The majority of licensed advisers in 2021 are charging a fixed flat dollar fee to clients, that is agreed and renewed annually. The fee is based on client needs & complexity, and the value that the client perceives in the advice. We weren't the first but we moved to this transparent fee methodology over a decade ago and have never had a client question our approach. We hold our own AFSL but I would also point out that nearly all of the big licensees moved to flat dollar fees before or soon after the RC. Other comments here support the majority client preference to avoid percentage based fees!

Brett
August 13, 2021

As a long-time financial adviser myself, I agree with this comment.

Most advisers these days charge a flat dollar fee for advice that clients need to opt into each year if they wish to continue the advice relationship.

Kevin
August 13, 2021

I am a big cheerleader for doing nothing,that's what I did for decades .I'm not enamoured of the financial industry but Rodney covered that with " did research or took advice" There is a place for guidance for most people probably . My understanding is that independent planners charge an hourly rate rather than %age based.I think the hourly rate for a guy here in WA is $350 an hour.He is always on local radio and to the extent of my knowledge offers good advice.

Stan
August 12, 2021

"Charging a fee as a percentage of funds under management is now the most common way that advisers charge clients." Why ? Does advising on a million dollar portfolio require ten times work than on a hundred thousand dollar one ? I don't believe so.

John
August 12, 2021

Wholeheartedly agree with you Stan.
It offends me that an investment adviser would charge me a fee based upon the total funds that require "management". The information imparted comes with a high per unit time cost. You would have to be pretty confident that you were getting what you paid for.
Try finding an investment adviser that works on an hourly rate. If there's an opening in the investment advice area it has to be here.

Phil
August 16, 2021

Hi Stan, it wouldn't take 10 times the time, but would take more time usually but may also amount to more legal risk for the adviser and likely more complexity in the clients situation. The fee debate over hourly etc is more nuanced than many think - hourly rates can be just as manipulated to client dissatisfaction as other methods. Go slow on files, overcharging time, meaningless research etc etc. For some clients they see % as the advisors having skin in the game, the portfolio declines 20% so does the advisers revenue, or that portion of it. Charging % can also create bias risks by the charging adviser, take more risk and wait for markets to have strong years. % Fees for retirees where often they are drawing down in excess of returns means their fees are declining year on year. As I say more nuanced than many think.

Wildcat
August 12, 2021

Government compliance and red tape costs about $140k per adviser. It’s not possible to take on low value clients.

The complete naivety of Hayne will lead to a broadening of the wealth divide as only the wealthy can now afford advice.

Asic, treasury and the government have conspired to preclude the ability of normal Australians to receive advice.

The sooner corporate and union fund self interest and political agendas are removed the sooner regular Australians can receive advice that actually can change their lives for the better.

Boyd
August 12, 2021

When a dentist/doctor charges us for a regular check up and says (based on their knowledge and research) that there's no need to do anything, we are usually relieved. If a financial planner charges us for a regular check up and says (based on their knowledge and research) that there's no need to do anything, shouldn't we also be relieved? No need to do anything means the financial plan is working.

As somebody once said: an investment (presumably a reasonable one) is like soap, the more you touch it the less you have.

G
August 12, 2021

Would you say the same thing if the Dentist/doctor wants to charge you a percentage of your wealth as the cost of the regular check-up? This article is obviously written by some one in the wealth industry who wants to be continue to take a percentage of the assets with no risk!

Boyd
August 12, 2021

Your assumption that all advisors charge a percentage of your investments is not necessarily correct based on what Richard Brannelly says above. However, what I find unusual is your comment that advisors ‘take this percentage of assets with no risk’. It is precisely the different risks that advisors run that leads to a large proportion of their fees.

here
August 12, 2021

"Many older advisers and brokers are simply leaving the industry. According to Financial Standard Magazine, 450 financial advisers " good riddance I say, too many product floggers parading as FA, FP. The sooner these are weeded out the better.

Wildcat
August 12, 2021

Glad you know it all and what’s really happening. Media the source of your vast knowledge I presume?? You have no idea.

Geoff
August 16, 2021

spot on with both your comments Wildcat. Most people need advice on a topic they're unfamiliar with and the sad outcome is many who require advice will not be able to afford it whether it be based on assets or an hourly fee.

 

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