How to determine whether financial advice is worth the cost 

A question I frequently get asked is whether it’s worth paying for financial advice and how much investable cash flow or portfolio size justifies the expense. These are excellent questions.  

When considering paying for financial advice, it’s important to ensure that the benefits you receive far outweigh the cost. In other words, you must be confident that the value of the advice you get will significantly exceed the price you pay for it in the long run.  

How much do you have to invest?  

The potential benefits of financial advice generally increase with the amount you have to invest.  

For example, if you invest $2,000 annually for 20 years with an 8% p.a. return, your balance would be $61,500 in today’s dollars. With a 10% p.a. return, it would be $78,000 – an additional $16,500. While this is a notable difference, the cost of financial advice is likely to exceed this extra $16,500 over 20 years, making it not worth the expense. 

On the other hand, if you invest $60,000 annually over 20 years, which many of you might do when including superannuation contributions, even a 1% difference in annual returns can lead to an extra $200,000 in today’s dollars. In this scenario, the value of financial advice could far outweigh its cost. 

For those with significant surplus investable cash flow, like $150,000 per year including superannuation contributions, even a 0.5% difference in annual investment returns can be worth about $250,000 in today’s dollars over 20 years. 

Scope of advice needed  

A financial advisor can assist with more than just investing money. They can help with various areas, including: 

• Developing a strategic, long-term investment plan that articulates when you will retire and how you will fund it. 

• Making important property-related decisions, such as whether to upgrade your home or invest in property. 

• Reviewing, managing, and optimising your current property investments. 

• Mitigating risks through personal insurance and ensuring your estate planning documents are in order. 

• Collaborating with your mortgage broker and accountant to identify new opportunities. 

• Providing ongoing advice to help you navigate the inevitable changes that life throws at us.  

The broader the range of services you need, the more likely a financial advisor will be able to provide significant value.  

How do you assess the potential value of advice?  

It’s common for people to think that financial advice is solely focused on maximising investment returns. However, the true goal of financial advice is to increase the likelihood of achieving your lifestyle goals.  

For instance, if I can help a client over the next 20 years to secure a comfortable retirement without the risk of running out of money, then I consider my job well done. In some cases, aiming for higher returns by taking on more risk might be counterproductive to achieving this goal. 

While investment returns are important – you can’t achieve your goals if your investments lose money – it’s important to remember that no one, including financial advisors, can control the markets. What we can manage are factors like how and where you invest, investment fees, tax implications, and cash flow. Ultimately, returns are unpredictable and will be what they will be, especially over periods shorter than 10 years. 

Quantifying the value of advice 

Russell Investments, a global fund manager, publishes an annual whitepaper to evaluate the value of financial advice. In its latest report, it estimates that advice can add 1.2% p.a. through asset allocation, 3.4% p.a. through behavioural coaching, and 1.3% p.a. through tax optimisation, totalling a 5.9% annual value. 

None of the financial advisors in my office agreed with these figures, as we believe they may overstate some of these benefits. In fact, we recognise that the actual value of advice varies for everyone. It depends on how well their investments would perform without advice – some may fare well on their own, while others might struggle. 

We think it’s more useful to outline the factors to consider and let individuals assess the value of advice based on their own circumstances. I briefly discuss the main considerations below.  

How, where and when to invest new capital  

One of the most apparent benefits of professional financial advice is guidance on how to invest money. An advisor brings two key elements to the table: knowledge and experience. A good advisor spends significant time each week researching, analysing and thinking about investment matters. However, it’s experience that helps in applying this knowledge effectively to avoid mistakes and achieve optimal results.  

Investment advice can add value in four main ways: 

• Investment Approach: A good advisor will have a well-considered, time-tested investment approach. In my view, using an evidence-based approach maximises success. For instance, for property investments, this includes understanding the fundamentals that drive investment property returns. For shares, a low-cost, rules-based approach is supported by extensive evidence.  

• Asset Allocation: This involves deciding which asset classes to invest in, the proportions to invest, and the timing. For property, an advisor should determine the best State, property type, and attributes to target, as well as recommend a trustworthy and skilful buyer’s agent. For shares, the advisor must choose suitable indexing strategies and allocate funds across geographic markets and sub-asset classes. 

• Optimising Taxation: The goal is to maximise after-tax returns. This involves considerations such as placing assets in the most appropriate ownership structures, minimising turnover by reweighting with new funds and understanding the tax implications of different investments. 

• Fees: Fees are certain, but returns are not. Research shows that higher-fee investments often yield lower returns (pre-fees). Often in life, the more you pay, the more you get. But with investing, it’s the less you pay, the more you get. 

Behavioural considerations  

In my experience, one of the most valuable services I provide is helping clients avoid poor financial decisions, often referred to as behavioural finance. I have the advantage of approaching decisions without emotional bias, focusing solely on the financial aspects – something that’s hard to do when it’s your own money. 

When it comes to investing, sometimes doing nothing is the best strategy. People often feel the need to react to changes like a falling share market, negative economic news, or new regulations. However, in many cases, the best approach is to take no action at all and stay on the path to financial success. 

Being a successful investor is dependent upon consistently making smart, evidence-based financial decisions. It’s much easier to achieve this with a professional advisor by your side.  

Sharing responsibility for making financial decisions   

For some, the responsibility of making the family’s financial decisions can feel overwhelming and stressful. Engaging a financial advisor can be a huge relief, as sharing this responsibility with a seasoned professional takes a significant weight off their shoulders.  

Holistic advice  

A home builder’s role is to construct a house according to your specifications. Similarly, accountants and mortgage brokers often act as builders in financial services.  

In contrast, an architect’s role is to design a house tailored specifically to you and oversee the entire construction process to bring that vision to life. A financial planner plays this architectural role in your financial world, working with and coordinating other financial professionals to achieve the best possible outcomes for you.  

How much does financial advice cost?  

Industry reports indicate that the average annual fee for ongoing financial advice is around $5,500. This figure varies widely based on client needs; clients with simple arrangements may attract lower fees, while more complex situations can result in higher fees. 

Operating a financial advisory business has become significantly more expensive in recent years, primarily due to increased compliance costs. These include mandatory audits, compliance services, and ongoing professional development at the firm level. Additionally, there are client-specific compliance requirements, such as preparing detailed statements of advice and records of advice, which often contribute little to the actual advisory process. 

Our analysis shows that meeting these compliance obligations alone costs approximately $3,000 annually per client – that’s before any advisory work is undertaken. 

Decisions by both sides of government have significantly increased the cost of financial advice over the past decade. A recent example is the government’s decision to require the industry to contribute $20 million to the Compensation Scheme of Last Resort (CSLR), primarily to compensate clients of Dixon Advisory. Despite numerous warnings from the industry about Dixon Advisory, regulators did not act to protect these clients, leading to substantial financial losses for them. Now, the government has decided that the industry should cover these costs. 

I’m not sharing this to seek sympathy for the financial advice sector, but to highlight how government mismanagement and regulatory inaction have driven up costs. This has contributed to a sharp decline in the number of financial advisors in Australia – the number of advisors has halved over the past five years. 

What to do if it’s not worth it?  

If you’ve decided that paying for advice isn’t the right choice for you, consider this DIY investing approach: 

• Superannuation: Each year, I write a blog recommending the best industry super fund based on performance and fees. A high-return, low-fee fund can be a significant advantage and often provides cost-effective personal insurance options, such as Life and TPD insurance. 

• Property: Work with a skilled, reputable mortgage broker who understands the property market. They can also refer you to a trusted buyer’s agent with whom they’ve had a long-standing professional relationship. 

• Shares: Diversified ETFs are a solid investment choice, which I’ve covered in previous blogs. 

Each party must make a value assessment  

Just because a financial advisor believes that paying for advice is worthwhile doesn’t mean it is necessary is for you. It’s important to make your own assessment. If you have any doubts, it’s best to take more time to consider it. 

At our firm, we don’t agree to work with a client just because they are willing to pay our fees. We need to be confident that paying for advice will genuinely benefit them – we’ll make our own assessment. We only take on clients when we are thoroughly convinced that there is significant ongoing potential to add a lot more value than our fees.