You should opt to be the judge

IF YOU use a financial planner, you're probably familiar with how much you pay for the service. If you're not, you really should be. Do you know if it's a commission or a fee for service?

By InvestSMART · 6 Mar 2011

By InvestSMART ·
6 Mar 2011

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IF YOU use a financial planner, you're probably familiar with how much you pay for the service. If you're not, you really should be. Do you know if it's a commission or a fee for service?

A commission is a percentage of the total amount you have invested via the financial planner's advice and can be different for various investments, depending on the product provider.

A fee for service can be a dollar amount per visit, which is rarely cheap and the reason some people prefer the amount taken out of their assets, or a percentage of assets under advice.

As part of the government's push to improve the quality of advice under its Future of Financial Advice reforms, if you get professional financial advice you will have to make a conscious decision each year to carry on with your current advice and planner.

The Financial Planning Association the biggest representative body for the industry is not happy about this clause, concerned that it is bad public policy, will cost the industry and result in poor outcomes for investors and retirees. It has issued a "FoFA Pack" for members and asked them to engage with their local elected representative on issues such as this.

The Industry Super Network, which represents industry superannuation funds, commissioned Rice Warner Actuaries to conduct some research on the potential cost of the proposal to the industry. They came up with $28 million and ISN says this is a small percentage of total advice fees of $1.6 billion charged each year.

In response, the FPA has said it is "tired of the industry fund one-track agenda", saying "proponents of the 'opt-in' argument are running a myopic campaign that risks endangering the robust financial futures for many Australians".

They are right in that there will be a cost to the industry and consumers there might be additional visits and you will have to go back to your financial planner to review your investments. But is this a bad thing? You be the judge. And make sure to tell your local member what you think.

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Frequently Asked Questions about this Article…

What is the FoFA “opt-in” requirement and how does it affect my financial advice?

Under the government’s Future of Financial Advice (FoFA) reforms you would need to make a conscious decision each year to carry on with your current advice and financial planner. That means an annual “opt-in” rather than advice continuing automatically — you’ll be asked to confirm you want the relationship and services to continue.

How might the annual opt-in impact the costs I pay for financial advice?

The opt-in could create costs for both the industry and consumers because it may require extra meetings and administrative work. Research commissioned by the Industry Super Network (ISN) and done by Rice Warner Actuaries estimated a potential cost of about $28 million, which ISN says is a small percentage of the roughly $1.6 billion in advice fees charged each year.

What’s the difference between a commission and a fee-for-service when I use a financial planner?

A commission is a percentage of the total amount invested via your planner’s advice and can vary by product provider. A fee-for-service can be a dollar amount per visit (often not cheap) or a percentage of assets under advice. Knowing which model applies to you helps when comparing costs and value.

Who is opposing the opt-in proposal and what are their concerns?

The Financial Planning Association (FPA), the biggest representative body for planners, has expressed strong opposition. The FPA says the opt-in clause is bad public policy that will cost the industry and could lead to poor outcomes for investors and retirees. It has produced a “FoFA Pack” for members and asked them to engage with their local representatives.

What role did Industry Super Network (ISN) and Rice Warner play in the debate?

The Industry Super Network (ISN) commissioned Rice Warner Actuaries to estimate the potential cost of the opt-in proposal to the industry. Rice Warner’s work produced the $28 million estimate, which ISN highlights as a relatively small share of the $1.6 billion in yearly advice fees.

Will the opt-in requirement improve the quality of financial advice?

The government frames the opt-in as part of reforms to improve advice quality by ensuring clients actively agree to continue. Critics like the FPA argue it could have unintended negative consequences. The article presents both sides and invites investors to weigh the trade-offs themselves.

What practical steps should everyday investors take now about the FoFA opt-in?

Start by understanding how you pay for advice (commission or fee-for-service), check how often you review your investments, and be prepared to make an annual decision about continuing advice. The FPA has urged members to contact local representatives, and the article encourages investors to tell their local MP what they think.

Could the opt-in mean more frequent meetings with my financial planner?

Yes. The opt-in may require you to revisit your planner to review investments and formally agree to continue the service, which could lead to additional visits and administrative time — something the industry and consumers should consider when assessing the change.