You might know that we produce two podcasts here at The Motley Fool: Motley Fool Money, and The Good Oil.
Motley Fool Money has two episodes each week; one is focused on the news, events and associated issues, and Andrew Page and I chat about companies, finance and the economy. The other is a 'mailbag' episode, where we try to answer our listeners' questions.
And I'm going to go 'cross-platform' as the cool kids say, and answer a question from a listener here, instead.
But before I do, I want to address the underlying issues that are making things far harder for investors than they need to be.
See, our questioner asked about a fair price to pay for financial advice. (If you're a financial advisor, this might be a great time to go and do something else…).
Because the answer, on an ongoing basis, for most people, should be zero. But it's not. At least, not yet.
Whoa now. Don't fire the flaming arrows over the ramparts, just yet, my financial advice brethren.
Let me explain.
There are some very important functions served by financial advisors, for which they should be fairly remunerated. And the rest are – sadly – also necessary, for now at least. But shouldn't be.
Which is which? I'm glad you asked.
Let's start with the 'zero' bit. And let me put a stake in the ground here:
In a modern, wealthy, well-legislated and -regulated society like Australia, where we care about the efficiency and productivity of both our general economy and financial system, 95% of us should be able to organise and maximise our financial lives without needing a financial advisor to guide us through a ridiculously complex set of financial and tax rules.
In other words, if I was seeking to improve our financial and tax laws, the standard should be: 95% of Australians should not be able to gain a benefit from financial advice that was larger than the cost of that advice.
Which is just a complex way of saying "I should be able to easily plan my financial life without a financial advisor, and not be worse off for doing so".
That's simply not the case, today, which is why we have so many financial advisors, and why, in too many cases, you can more than cover the cost of their fees by taking their advice.
Income protection insurance. Work expenses.
Family trusts. Investment companies.
Negative gearing.
Superannuation contributions (and withdrawals). Lump sums. Concessional contributions. Spouse contributions…
And then there are the investment options, all carrying layers of fees.
It is stupidly complex, stupidly expensive and should be totally unnecessary, but for successive government meddling and pandering to special interests.
I wish I could tell my correspondent not to pay for financial advice. I wish I could tell him that it'll be a waste of money.
But there are so many legal nooks and crannies, I'm not sure that's true.
Which isn't the fault of the advice industry: it's the fault of our successive Governments and Parliaments.
And if I had a magic wand?
I'd get rid of 95% of tax deductions.
I'd get rid of complex tax planning loopholes (the accountants hate me calling them loopholes, because they're all legal. Fair enough… let's call them boondoggles instead.)
I'd use the savings to lower the marginal tax rates (or increase the income levels at which they cut in).
And I'd have a one-page financial advice plan that 95% of people could follow without fear of missing out on hidden tax lurks.
That page? Simple:
1. Don't use consumer debt (that is, debt that's not your mortgage).
2. Maximise your Superannuation contributions
3. Save another 5% of your income in your own name
4. Invest in low cost, index-based domestic and international ETFs, both inside and outside Super
5. Do that every single payday from now until retirement
6. Insure your home, vehicle, income and life, based on age and dependents.
7. Draw down your Super, in retirement, at no less than 5% of the balance, per year, and no more than 10%.
That's it.
Not even a page. You could use the rest of that page for your shopping list, and still have room left over.
(For the record, I'm not saying any of the above would be mandatory. People who want to save or invest differently would be welcome to do so, including in shares, property or anything else. But for the average person, who just wants a simple 7-step financial plan… that'd be it!)
But, today, such advice would be too simplistic. There are too many alternative options. Too many, yes, boondoggles.
And so we also have too many (sorry guys and girls) financial advisors… because they're necessary.
And that's not good for our society or economy.
But – and this is important – financial advisors are necessary in a couple of really vital ways.
First, getting the structure and expectations right. Working out the right insurances, saving and investment vehicles, estate planning and the like.
Second, as a coach, for those who need one. In my experience, most people join The Motley Fool for the stock picking. But many, maybe even most, stay at least in part for the support and coaching they get along the way. The reassurance is, well, reassuring. And having someone to (virtually) walk beside you when markets and economies get rocky is very valuable for many people. Financial advisors, as financial coaches, can be really important for those people, too.
If our pollies really are interested in our long term financial wellbeing – as individuals and as a country – they'll make the changes I've suggested, above.
But I'm not holding my breath, thanks to a combination of aforementioned special interests, and a lack of policy vision. And no, that's not a comment on the Government, but on our Parliament as a whole, whichever side sits on the Treasury benches.
And so?
Well, I'll keep plugging away, perhaps in vain, to raise the profile of the 'one page financial plan' idea.
In the meantime, how much is a fair price to pay for a financial plan?
I'd start, as I do with investing, not with the price, but with the quality.
Do you feel good about this person? Do they have your best interests at heart? Does the plan feel like it's about you, or about them?
Do they, or their organisation, benefit from the advice that's being given? Are you investing in their products? Do they make more money from you?
Then the cost: Are you going to benefit from the advice by more than the fee will cost you?
Me? I'd pay for advice to ensure I'd set up my financial affairs in an optimal way. Then, unless I needed their advice for investment selection on an ongoing basis, I'd just pay once and implement the advice myself.
Generally, the value of the 'set up' advice is pretty high. But after that, the fee you pay, usually yearly, for a 'financial check up' is often hard to justify.
Of course, you may feel, or find, differently. And that's perfectly okay.
The bad news is that advice, in 2024, doesn't come cheap. Partly that's market forces, and partly that's because of the compliance burden on advisors.
Did I mention the laws were far too complex?
Fool on!
