Thursday, March 22, 2012

Breaking up: What's the difference?

Recently, we learned of a case regarding a client concerned about the fees being levied against their superannuation fund for the level of service being delivered by their existing financial adviser.

There was an obvious lack of clarity around fees and when the client asked some clear questions, there was a distinct lack of clear answers. Not surprisingly, this left the client questioning the integrity of the relationship, which had existed for around 10 years.

Of particular interest is the client's recognition that during times when performance is positive, as was the case in the early years of the existing relationship, the fees are often ignored.

In response, the client made an appointment with the long term adviser of another member of his family.  After a detailed inspection of the facts, the adviser was able to confirm that the total fees being charged against the portfolio were amongst the highest they had seen over the past 15 years.

The adviser then calculated the ongoing costs of an alternative administration system with an asset-class portfolio, and set a fixed retainer style annual fee in line with the service required by the client.  When compared to the existing costs, the results were staggering.

This got us at The Trusted Adviser thinking.  What could the difference in fees be for a client in a similar situation, over the course of 20 years?

Using all the facts and figures from our earlier example and a simple calculation methodology, we put the difference over a 20 year period at around $83,000*.

Bear in mind that the reduction in fees in our example includes the client having engaged a fee for service, professional Financial Adviser who uses asset class investing.  Not a bad outcome in our view.

Naturally, there are an endless number of assumptions that can be made about what the results could be.  However, a simple fact is:  the higher the fees you are paying, the more return your assets are required to generate for you to break even.  It really is a negative sum game.

This issue has led us to place some attention on a current marketing campaign of the National Australia Bank, commonly known as "Break up with your bank".  We think this is an excellent campaign and the concept can be considered in so many other areas of life.

In relation to financial advice, it is so important that you are engaged with your adviser.  That is how you are able to gain the most value out of the relationship.  In our experience, clients who continually seek professional advice are taking action, as opposed to not taking action, which makes all the difference over a lifetime.

If you feel something isn't quite right, be sure to ask questions until you are satisfied with the answers provided.  If this doesn't work, as the NAB suggest (at least on the topic of banking), maybe it's time to consider a break up.

* Starting capital: $300,000.  Term: 20 years.  Return: 5% p.a. average.  No additional contributions.  Fee differential $2,600 p.a. 


  1. If as indicated in the footnote of the post, the return on $300,000 is only 5% per year, surely the true value of the capital sum will have declined due to the ongoing effects of inflation. For example, 20 years ago $300,000 would have possibly enabled the investor to purchase say two good quality average sized new houses and two small new cars.

    Invested at 5% the dollar amount would by my estimation today have grown to about $795,989. Which would possibly not have the same purchasing power that the earlier sum had twenty years previously. This long-term investment does not therefore appear to be credible.

    Plus, 'any' fees paid out of those earning, would have had a substantial negative impact on the accumulating earnings, meaning that the investor will in real terms have made no gains and will have most probably have made significant losses in the real value of their wealth over the twenty year period.

    By comparison, a block or several blocks of land purchased for $300,000 twenty years ago, will have incured some modest ongoing costs such as council rates and possibly some minor maintenance costs, although would today possibly be worth well in excess of a million dollars, depending on location possibly as much as two million. Even after paying capital gains tax following the sale of the land today, if that applied, the investor would most probably be far ahead in terms of their wealth creation program.

    1. Thanks for your comment David. You have many friends that share your devotion to property as the best investment. In this case, the 5% rate of return we used was an example to illustrate the effect of costs over time. I think your comment is really useful though and so I went looking for some research on the returns of property v shares. I found an article written back in 2010 by James Dunn where he interviewed people on both sides of this great debate. The article can be found here
      Naturally everyone's experience with investing in property and shares is different which is why people bring different points of view to this issue. It sounds like your experience with property has been very good and for direct comparison, the return on a single property investment is akin to the return on a single share investment. For example, I think shareholders in Woodside over the past 20 years may challenge the view that property is the best investment. Woodside was $4.00 twenty years ago and is now $35.00 and so investing $300,000 back in March 1992 would now see that investment worth $2,625,000 without any ongoing costs.
      As the above article in The Australian points out, property and shares perform "about the same" over the long term. Thanks for your thought-provoking contribution and we look forward to hearing more from you in future posts.