FINANCIAL PLANNING FIB #1

Commissions at no additional cost to you

One of the biggest fibs in the financial planning industry is that product commissions don't affect you because they are paid from the fund manager's own pocket. Clients are often told that the commissions are part of the fund manager's marketing budget, or that if the planner doesn't accept the commissions, the fund manager will keep the money anyway.

Other planners are even more creative and portray the commission as a kind of refund or discount on the advice fee. For example, they might say: 'My fees for this plan will be $1,500 but once I rebate the upfront commissions, the actual cost to you will only be $300.' The commissions are therefore saving you money.

This really is a little sales gem, so let's set the record straight on it.

Funds management companies don't have a magic money tree. They only get their money from one place - the funds that you invest with them. At regular intervals, usually each week or month, they dip into your fund's bank account, take out their fees and charge any expenses which might have accrued.

Commission-paying retail funds generally withdraw around 2% of each fund's assets this way every year. Now that might sound like a pretty modest sum until you compare it with investments that don't pay any commissions, such as index funds. Their expenses are only about 0.75% per annum. Guess where the bulk of the difference goes? Exactly right, straight to your adviser.

The truth is that it suits both the financial planner and the fund manager to scoop commissions directly out of the fund's bank account rather than getting you to write out a cheque for them. The financial planner likes the arrangement because it's discreet and means that they get paid irrespective of whether they provide any on-going service. The fund manager likes the deal because it keeps the planner on side and the money flowing in. It's a win-win situation for both of them.

The only person who loses out is you, the investor. History shows that the extra 1% or more that commission-paying funds charge each year is rarely recouped by higher returns.

So don't believe the sales spin. Adviser commissions are an additional cost to you.

	Financial Planning Fib #2 >>