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FINANCIAL PLANNING FIB #1
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.
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