Sunday, March 18, 2007

Financial Planners - Independents vs Banks

So you've decided to see a Financial Planner. Good for you.

Next decision, who do you see? Do you see a Financial Planner associated with the Bank that you transact with? Do you go with the Financial Planning arm of one of the large Fund Managers/Insurers? Or do you go with the completely impartial totally 'independent' Financial Planner?

Each has their advantages and disadvantages which I plan to discuss.

1. Bank Financial Planner

The Bank Financial Planner most probably sits in a bank branch. Most of his customers are clients that walk in the door of the bank branch, asking investment questions to the front of house 'tellers' and being referred on to the Financial Planner in that branch. The approved list of products is generally limited to the products administered by the Fund Manager arm of the Bank. Advisers are remunerated with a salary, with the potential for bonuses based on the revenue that they generate if they meet targets. This can often be the training ground for new advisers, therefore, advisers might not have large amounts of experience.

2. Fund Manager / Insurer Financial Planner

These breed of planners generally market themselves as an 'independent' practice. However, independent they usually are not. They sit under the umbrella of a large fund manager or insurance agent. The simplest way to describe them would be a 'Franchise' type approach. They use the large organisation they work with to provide all the administration, research, etc support, however, all the costs of running their business are with them, similarly, all revenue they receive from you ends up in their pockets. The products available to them generally are more widespread than the 'Bank Planner', however, there are often incentives to recommend those products administered by their 'dealer group'. Typically, these Financial Planners have been in the industry for a long time, starting out years ago as a Life Insurance agent and their client base is from these clients and referrals from existing clients. Alternatively, they may have purchased a client base from someone else.

3. Truly Independent Financial Planner

These practices really are independent, with no allegiance to any Banks, Fund Managers or Insurers. Quite often they are attached to an accounting practice, with most of their clients coming from the accountant. They might do their own research and admin, or outsource this to someone else. Generally their range of available products is large and the Financial Planners may be Accountants who have realised there's plenty of money to be made in Financial Planning!

So, there you have it. As a rule, the Financial Planner you see will fit into one of these categories. But, who should you see? It depends on what you're after really.

Fees & Costs

The costs of advice can vary remarkably. Even within the same practice, you could see two different advisers and they will charge a totally different set of fees. Different businesses will have different ways they charge their fees. Most charge based on a percentage of the total dollars invested. Some (but not many) charge on an hourly basis like an accountant or solicitor would. Most receive ongoing commissions for the funds that are invested through them, some (but not many) rebate these commissions to the client.

Generally, bank planners fees will be lower than number 2 & 3 advisers (from above list). This is because the bank planner is not paying the bills themselves and because they are only receiving a portion of their fees in bonus/commission. However, bank planners generally have less scope in reducing fees and rebating ongoing commissions. They are likely to have strict limits on minimum fees payable, and as the ongoing commissions are helping line of the pockets of shareholders, it is unlikely they will be allowed to rebate them.

Product Lists

The question that has to be asked here is, who cares how big the product list is? Does it matter if I have the option of investing in 50 funds or 5,000 funds? Not really. A managed fund is a managed fund. Generally most planners, whether they're from 1, 2 or 3, will use "model portfolios" anyway, which involves using a predetermined list of funds, allocated according to the investor's "Risk Profile". Therefore, from the list of 50 or 5,000, only 10 funds are being used.

The advantage that the banks have here, is their research is likely to be very conservative. Therefore, a fund or product has to be top notch to be on the approved list. They don't want their name dragged in mud because they had another Westpoint in their approved list of products. However, your independant practice might have all sorts of wacky, generally high commission products in their approved list. Macadamia farms come to mind.

Conclusion

There's only one question to this debate. Shop around. Spend the money to have plans presented by different companies. Examine the advice. Is one remarkably cheaper? Why? Are there products in there you don't really understand? Stay away! Don't tell the planners you are shopping around. The independents will rubbish the banks, and vice versa. Each type of planner has their advantages and disadvantages. The most important thing is to find an adviser who knows what they are saying and are truly meeting your needs.

2 comments:

Anonymous said...

You write very well.

Unknown said...

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