Given the media bashing the financial planning industry has received over the past few years, many people have come up to me and openly expressed their distrust in financial planners. Closely followed by, “Of course, I’m sure you’re not like that…” along with stories of things that didn’t work out for them.
Almost every single time, after appropriate questioning (thanks to years of training), I discovered that most people don’t really know what financial planners do and that they knew even less about what outcome they actually want to get out of the relationship! Of course, this isn’t a one-sided problem, many planners struggle to articulate their value proposition.
This brings me to question whether people understand how to fairly price financial advice. During my years in financial planning, we in the industry struggled with pricing advice and with the consumers unwilling or unable to pay for the price we determined, commissions played a large part in paying for advice. Of course, there are pros and cons with the commission model, and since this model has come under attack, it is vital for the consumer to understand how to determine the value of good financial advice and whether they’re paying a ‘fair price’.
How can you shop for something when you don’t even know what you’re looking for?
Engaging a planner is a long term commitment, not a one-night-stand. Before shopping around, have you asked yourself these questions?
- Why are you looking for a planner?
- What would you like your relationship with your planner to be like?
- Are you prepared to listen and take on board things you don’t like to hear?
- Have you already set your mind on a solution and are simply looking for an implementation partner or are you looking for an objective diagnosis?
- Have you a solid understanding of what value you have assigned to paying for this service (this could be a saving of time, effort and/or money)
The three things a financial planner should be able to do really well are:
- Understand who you are and your current circumstance
- Help you work out what you really want out of life and how they fit into your plans (no, this isn’t all about guaranteed % returns or even number of houses you wish to own.)
- Tell you if you’re dreamin’
Have you gone through these questions when choosing a planner? If not, just know this, they have certainly gone through a checklist of their own when assessing whether to take you on as a client.
How can you determine a fair price for something you don’t understand?
Like anything in life, if you don’t know what you’re looking for, then you have no benchmark for a fair price (at best you have a moving goal post).
Without an appropriate benchmark, two things will happen:
- Just about anything will sound good (after all, you will hear many well-rehearsed sales pitches)
- There’s always a “better” deal and you suffer buyers remorse
That puts you, as a consumer, in a highly vulnerable position because you have no way of determining the fair value of the service.
Some news articles have published that the upfront financial plans would start at around $500 and should cost you no more than $4,000. I personally don’t understand what they’re trying to communicate. For example, did they mean that if you had a complex situation that involved months of work to save you thousands of dollars that you should walk away if the advice cost more than $4,000? Did they mean that a $500 starting price is okay even if all it addressed was a savings plan? I certainly hope not.
Your best bet is to go through the process stated earlier and thoroughly understand the why and what you want out of advice along with how much it’s worth to you. Understand this isn’t an exact science, but the insight it provides is very useful.
For example, how much would saving hundreds of hours learning about investments, companies and how to manage your own portfolio to maximise tax outcomes be worth to you? Is it worth:
- Your normal hourly rate (current employment) multiplied by the number of hours saved?
- Time you could be spending with family and friends?
- Amount in dollars it would cost you if you mismanaged your own portfolio?
- The cost of not knowing what you don’t already know because you lack the appropriate industry networks?
- The cost in taking all the appropriate courses?
- The cost of times taken away from progressing your own career?
- Times lost in learning from trial and error?
- The cost of doing nothing at all?
So before you jump on the next media bandwagon slamming financial planners, ask yourself whether you really know how to tell whether you’re getting value for money. Good advice is out there and many charge a fair price. The important question is…
Could you tell whether it’s good and fairly priced advice if you tripped over it?