Financial planners provide four distinct services. A lot of Kiwis don’t need them all.

Sonnie Bailey

20 November 2020

To my mind, financial planners offer four distinct investment services. These services have traditionally been offered as part of a single package, for good historical reasons.

For a lot of people, the bundling of all these services together is ideal, and this service model will continue even though the historical reasons for this state of affairs no longer apply. However, this isn’t the case for many people. I believe that many clients would benefit from these services being decoupled from one another.

Before I explain, I will get this out of the way: I have some strong biases. These biases have informed the way I set up my business because, in my heart of hearts, I think it is the best way of serving thoughtful, switched-on Kiwis.

Although I have a dog in this fight, I am open to counterarguments. One of the reasons I write this article (and many others like this) is to interrogate my own ideas, and expose them to good faith scrutiny and debate. My mind can be changed.

Another caveat is that this article is directed towards financial planning in the context of investing, and more specifically, financial assets. This doesn’t cover everything that a financial planner does.

The four type of financial planning services relating to investments

The investment services most financial planning businesses offer are:

  1. Advice – or more specifically, helping people develop a financial plan that helps them achieve their financial and lifestyle goals, and manage the risks to which they’re exposed.
  1. Implementation – helping clients implement some or all of this advice, particularly in relation to financial assets.
  1. Portfolio management – ensuring that the client’s investment portfolio is managed in line with the initial advice on an ongoing basis.
  1. Reviews (periodic advice) – this is an extension of the “advice” service, but it represents advice given later, usually after some period of time, or when the client’s circumstances have changed.

It is great that many financial planners offer this package of services. This package is ideal for many clients.

But I don’t think that’s necessarily the case with all clients. Just because this is the way it has always been done, doesn’t mean it’s the best approach.

Why do most financial planners operate this way?

I believe this is the dominant form of how financial planning services are provided for two main reasons:

  1. Historical accident.

 The financial planning industry as we know it is still fairly young. This paradigm of servicing clients was not inevitable, and there’s no guarantee that it will continue. In fact, I believe a time will come when the current paradigm is no longer dominant.

My understanding is that the profession of financial planning evolved largely from insurance advice sales. Not that long ago, many insurance policies had an investment component as well as a risk-management component.

When investment-only options became available and eventually became the dominant approach, the traditional insurance advice model was the natural distribution model, which is one of the reasons commission was such a common form of remuneration.

Over time, commission has given way to fees paid by clients, via a “funds under advice” model. This is usually calculated as a percentage of the clients’ investment portfolio.

Some people would say this is pretty close to commission (in each case, we’re talking a % of the clients’ investments), although I would defend it as being slightly different, since it’s the client paying this fee in exchange for a service, and not the product provider as an incentive for selling a product. This means that remuneration for advice is not so strongly tied to specific product recommendations.

Having said this, the “funds under advice” model still creates conflicts of interest, like an incentive to recommend financial products (as opposed to, say, repaying debt or investing in other ways such as property or in direct business ventures) and to encourage clients to accumulate as much wealth as possible, even if spending it might be the best decision from a quality-of-life perspective. Despite this, I think the model is much more consumer-friendly than a sales-oriented advice model.

  1. It is lucrative for planners.

 Historical accident has been favourable to many financial planning practices.

Most established financial planning businesses aren’t going to follow my business model (fixed-fee, one-off engagements) because it is far less lucrative.

I’ll go into this in more detail later.

My position

The most important service is the ADVICE.

To my mind, a financial planner should, first and foremost, be a professional adviser for clients. A financial planner is a type of financial adviser, and a defining feature of what they do is that they provide ADVICE.

Keep this in mind in relation to the other services, such as implementation and portfolio management. These aspects of the services should support the advice service, not the other way around.

If the advice is secondary, there is a risk the relationship is more like a sales relationship.

Implementation is great, but do clients need someone to implement on their behalf?

 The way most financial planners operate is that they provide you advice, and if you decide to proceed, they will implement that advice by investing funds on your behalf on a platform such as Aegis or FNZ. These platforms allow your planner to buy and sell financial assets on your behalf.

A decade or two ago, it was hard to invest on your own behalf. If you wanted to invest in financial assets, and wanted to diversify widely, then you needed someone to help with this.

A lot has happened in recent years. As a consumer, it’s now extremely easy to invest on your own behalf.

Did my description of the Aegis or FNZ  platforms sound familiar? If you’re aware of InvestNow or Sharesies, it should. Because that is very similar to what these services provide, except the service is direct-to-consumer rather than via an intermediary (the adviser).

It’s no longer the case that you need to work with a finance professional to invest in an appropriate way.

In fact, in many cases I don’t think that financial planners add much value by implementing advice on your behalf. All you’re doing is adding a middleman into equation. You still need to provide the same information to a platform, to confirm your identify and establish that, among other things, you’re not laundering money or financing terrorism.

I’d rather deal directly with the platform than have to do this via a third party, wouldn’t you?

Added to this is that you’re exposing yourself to additional risk. You may be familiar with the Dunedin financial planner Barry Kloogh, who recently pleaded guilty to obtaining by deception, forgery, and theft by a person in a special relationship. Personally, I don’t like the idea of handing the keys to my financial life to more people than I need to.

It’s all well and good for advisers to say that they are fiduciaries and put their clients’ interests first. But fiduciary duties only exist when there is a relationship of vulnerability between one party and another. Why put yourself in that position of vulnerability in the first place?

Portfolio management is a separate speciality

The biggest objection that some people bring up with my business model is a concern about how the investment portfolio is managed on an ongoing basis. The reasoning being that having a financial planner in the loop means that the portfolio will be managed proactively.

Most financial planners fall into two main camps when it comes to investing on behalf of clients:

  • Some of them act fairly proactively as portfolio managers, including buying and selling individual shares, or buying or selling units in specialised managed funds, on behalf of clients. A portion see this as the central part of their role.
  • Others tend to recommend managed funds on behalf of clients and tend to be more hands-off.

Both types of planners tend to charge in a similar way: by charging clients as a percentage of their investment portfolio.

I’m being a little blunt, but in each case I don’t think consumers get a terrific deal.

With the planners who are recommending managed funds and are being hands-off, the client is paying twice for portfolio management. They end up paying their planner, and they end up paying the fund manager, which builds investment management fees into the cost of the products. As an example, you could end up paying your financial planner around 1% of your portfolio, plus the fund manager another 0.3% to 2%; perhaps higher if you add in platform fees. Fees of 1.3 to 3% or more present a pretty high hurdle towards achieving good outcomes.

With the planner who is working as a portfolio manager, at least they are providing more in exchange for the fees they are charging, and hopefully saving their client unnecessary additional management fees.

The problem with this is that providing financial planning services and proactively managing a portfolio are quite distinct services. Fund managers who do the latter full-time struggle to outperform the market. It’s hard to be half-pregnant: an individual or organisation trying to do both at once is probably going to struggle even more. So again, in most cases I can’t see consumers winning from this arrangement.

My approach is to recommend that clients invest in managed funds that already do this portfolio management on their behalf. All the funds I recommend rebalance in one way or another. In the majority of cases, there simply isn’t a need for more than one party – ie, a fund manager and a financial planner – to be involved with doing this.

In most cases, doing this via a managed fund is the most cost-effective approach, because you have a single team of investment managers assisting a huge number of clients, meaning the cost is spread across a large number of investors. This results in significant fee savings.

Reviews (advice)

 A traditional financial planner might say I’m being unfair by saying that clients are paying 1% for a portfolio management service. They are also getting the benefit of periodic reviews.

That’s awesome!

I agree: it’s important to review your financial plan periodically. Unless your circumstances, needs and objectives have changed substantially, I don’t recommend going through this process too often – it should be as “set and forget” as possible. But every year or two, it’s worth interrogating your plan to make sure it’s still appropriate for you.

It can be great to work with an adviser in order to do it.


  • Is this going to be a significantly more detailed process than the first time? Unless your circumstances have changed profoundly, the process is more likely to consist of tweaks than massive changes. It’s usually the first plan that provides the most value.
  • How much are you paying for this service, and is it worth the price?

A worked example – my approach versus a traditional approach

Let’s take a client with a $500,000 portfolio. They want financial planning advice.

Let’s say the financial planner doesn’t charge the client to prepare the initial plan, treating the service as a loss leader. But incorporated in the plan is advice that requires the planner to implement the advice on the client’s behalf. The financial planner offers a service that involves implementing the advice, as well as ongoing portfolio maintenance and regular planning reviews. They charge 1% on the portfolio per year.

1% of $500,000 is $5,000. Let’s also say that platform and investment management fees on the portfolio come to 0.8%. (I’m probably being generous; in a lot of cases it’s much higher.) 0.8% of $500,000 is an additional $4,000 per year, coming to annual fees the client has to pay of $9,000 per year.

The client probably won’t notice this, in the same way that they would if they had to pay $9,000 per year via an invoice. This is because the product fees, and the adviser fees, are paid directly from their investment. These fees are also disguised because it’s easy to think that they are just coming from the investment returns that are being generated. All of these factors serve to anaesthetise the client regarding what they’re actually paying.

But let’s call a spade a spade: in absolute terms, they are paying $9,000 per year. That’s about $175 per week.

Let’s put it another way: for lots of wealthy clients, one of the single biggest sets of expenses they pay each year are investment-related fees. It’s more than electricity; it’s more than rates; it’s more than insurance; it’s more than petrol. They just don’t see it.

My approach, on the other hand, is different. I charge my client for the financial plan, because that’s where the value is. I charge a one-off fee of $3,000 including GST. I provide advice the client can implement on their own behalf. This might seem like there’s additional work, but I’d argue that they still need to provide the same information, and I would just be a middle-man complicating things. It’s usually not that hard.

I might recommend one or more low-fee investment funds that have fund managers who will be managing the client’s investment while they are invested in the fund. Invariably, I recommend funds that have lower fees than many other advisers recommend. But for the sake of argument, let’s assume I recommend a fund with the same level of fees (0.8%). This comes to product fees of $4,000.

In the first year, the client will pay advice fees of $3,000 plus product fees of $4,000 = $7,000. Depending on your thoughts on the matter, this is a “small” saving of $2,000 (~$40 per week).

The real difference accrues over the long-run, because I don’t lock clients into a 1% service and fee arrangement.

With a traditional engagement model, the client is paying 1% for the planning service. Let’s be generous to other planners and assume that the portfolio isn’t growing, so the client is paying 1% on $500,000, or $5,000 per year in addition to product fees.

With my model, clients only engage me when they need. Let’s assume they engage me annually and pay for my full review service of $1,000. (It’s usually less often, and the price is often less.) Instead of paying $5,000, they pay $1,000. That’s a $4,000 difference.

I’m not sure whether $4,000 a year sounds like a lot to you. It’s around $330 per month, or $75 per week. Over the course of 10 years, the difference adds up: $2,000 in the first year plus 9 years x $4,000 = $38,000.

This understates the difference:

  • This assumes that the client’s portfolio doesn’t grow in value. If it grows, this would result in the fees being paid to the planner increasing as well. 1% on $600,000 is $6,000; on $800,000 is $8,000; on $1 million is $10,000; etc.
  • It doesn’t factor in the compounding effect of fee savings (which hopefully translate into investments that are reinvested and generate returns on returns on returns).
  • I am very focused on ensuring clients don’t pay unnecessary fees, so the fee discrepancy compared to most advisers tends to be higher. I often save clients thousands of dollars in what I believe are unnecessary fees.

Granted, the client might be getting a more hands-on service compared to working with me. Or at least, they might feel that way.

However, all financial decisions need to weigh the costs and the benefits. This includes the cost of financial planning services. If you were paying fees of this level for almost any other service, and the way you paid it wasn’t disguised, you’d be second-guessing whether the service was worth the cost.

The traditional model isn’t incentivised towards client empowerment

For most people, it’s not that hard to manage your financial affairs. It’s not rocket surgery.

Once you understand the basics, and you develop comfort and confidence in what you’re doing, then you don’t need to pay someone to hold your hand. Of course, this might not be true of everyone, and it might not be true in every situation, but it’s true in most cases for a good portion of people who accumulate a decent amount of wealth. It’s true for the people who tend to approach me to provide financial planning services.

If my business model was predicated on taking a cut of ongoing fees from a client, this would disincentivise me from empowering clients. My financial incentives would be to encourage them to believe that they can’t manage their own financial affairs. My incentive would be to create a sense of learned helplessness. That doesn’t sit with me.

Where is the value?

In my view, the financial plan (and the planning process in general) is where the value for clients is, so that’s what I charge for. I don’t use it as a loss-leader to lock clients into an ongoing service (and fee) arrangement. This would probably be more lucrative for me, but I don’t want to divorce the fees I charge from the value I deliver.

Whereas a traditional financial planner provides recommendations that the client will need to engage them to implement, I provide advice that the client can implement by investing with a fund manager directly. That fund manager diligently manages the client’s money, and charges the client a reasonable fee to do that – I don’t need to charge for this service as well.

The client then has complete freedom as to whether and when to engage me again. It might be every year, or six months, every couple of years, or not at all.

The client has one less person who can touch their money, reducing Barry Kloogh-type risks.

With most thoughtful people, I find that after just a few engagements they have a good degree of confidence in their ability to manage their financial affairs, without having to pay me, or anyone else, to do it for them. At the very least, they’ll know when they need to chat to someone.

This sort of arrangement is fairly new. It has been made possible by recent developments allowing clients excellent investment options they can implement on their own behalf. This wasn’t really an option a decade or more ago. But now that it’s possible, and the services are there, my bet is that more Kiwis will start to take this more engaged (and much cheaper) approach to managing their financial affairs.

In other words: they might not want to pay for a Porsche when a Toyota will do.


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