Round 3 of Alan Kohler v Financial Planners continued in earnest
in today’s Smage. Kohler’s article today again focused on the
fact that hefty fees paid by clients of financial planners are often
being hidden in commissions (effectively “kickbacks”) received by
financial planners.

Kohler noted: “The reason the [financial planning] industry likes
commissions is most clients don’t understand percentages and there is
no invoice, so planners don’t have to ask for an annual fee increase –
it rises automatically with the account balance (investment return plus
contributions – at least four times CPI.)”

Kohler’s point is, of course, perfectly valid – it is absurd that
financial planners receive a kickback from the person whose product
they are selling rather than from their actual customer. However,
Kohler’s suggestion of paying an initial fee to financial planners,
while transparent and fairer for the customer (usually a “mum or dad”
investor) is still not the wisest financial move for the investor.

Rather, any person who is even thinking of using a financial planner
will be better off ignoring financial advice about specific investments
altogether. Instead, mum or dad investors would be far better served
placing their savings into what is known as an index fund. An index
fund is administered by a financial institution and is designed to
replicate the performance of the broader market (or the performance of
a large section of the market such as the ASX200). The beauty of an
index funds is its low fees and built-in diversification for the risk
averse. Because the index fund administrator is merely replicating the
performance of the market they are not required to research specific
stocks. Further, because the investor is simply buying an index fund
and holding it for years to come, there are no regular transaction fees
(such as brokerage or capital gains tax until sale).

To top it off, on average, financial planners (and other advisers) do
not as a rule, tend to “beat the market” with their investment advice –
and that is before the significant commissions or up-front fees are
taken into account.

So while Kohler is correct in criticising how the financial planning
industry charges clients, he is probably being too kind. Using a
financial planner instead of buying an index fund is like paying more
for a Hyundai than a BMW – investing in an index fund is cheaper, safer
and will most likely result in a greater return – just ask anyone who
listened to their financial planner and invested in Westpoint.

Peter Fray

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