The Dollars and Cents of Conflict Free Advice

​You are forever hearing me talk about the value of independent or conflict free financial advice.   While it is not all about the money, here is what it can mean in pure dollar and cents terms. 

These are two case studies of actual clients that I have been helping in the last month.

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Case Study 1

Three business partners in their fifties are expanding their operation.  They have just had a loan approved to fund this expansion. A requirement of the loan was to purchase insurance to repay the loan if any of the partners were to die prematurely or become disabled in some way. The quote they receive from the bank was $29,829.  Yes, it’s a big loan. 
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They were, perhaps quite rightly, shocked by the size of the premium and decided they should shop around. They spoke to their accountant, who referred them through to me for an impartial view.

Now, there is something that you need to know about insurance and that is that many policies have different premiums, depending on from whom you buy them

For example, the most common price is the retail price, which is the price you pay when you deal directly with the insurer (or bank) or through one of their sales people, your regular financial adviser or even a life insurance broker. The retail price includes not just the cost of the insurance but also commissions and costs for other sales and marketing incentives.

Then there is the price you’ll pay if you purchase from a conflict free financial adviser. By conflict free, I mean a fee only adviser who does not accept commissions or other sales incentives and has no other connections with product providers. You just pay for the cost of the insurance.

Now the insurer we are talking about here is one of the biggest names in Australian Financial Services. The difference between the commission version of the product and the cost I was able to source the same product, was a whopping 37.81% less. $18,550 versus $29,829.

Man, that’s a big difference.

Yes, we charged a fee for our initial advice and implementation of our recommendations, but their savings over the next 5 years we estimate to be more than $50,000, which takes in to account our fee.

Now that’s the value of conflict free financial advice.

And of course, those buying new insurance from us enjoy these savings from Day 1

There’s a few caveats:

• Never move without getting advice. Determine if there will be a loss of benefits.
• If you do decide a move is best for you, never cancel your existing insurance until your new insurance has been approved and the policy document is issued.
• Not all insurers offer those discounts but most do, including the majors. The amounts vary and can be between 5% to nearly 40%. The average is around 30%.
• You can’t knock on their door and get this price. You’ll generally have to go thru a nil-commission adviser.
• Many super funds (like industry funds) don’t pay commissions, so there’s no discounts available there.
• Depending on how much insurance you are paying, the fee may outweigh the cost reductions.
• You need to be healthy enough to qualify for new insurance. Some of the clauses reset, like the death by suicide exclusion.

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Case Study 2

We’ve all been annoyed at some time by the admin fees we see on our annual super statements. Unfortunately, there’s no way around them, our super administrators can’t do it for nothing.

That doesn’t mean you should pay a cent more than you have to though.

The rules around commissions on investment products changed on the 1st July 2014, there are no longer commissions built in to these products. But existing products weren’t affected so if you bought a product before 1/7/14, chances are you are paying more than you have to.

Something else you should know is that some investment and superannuation products, is that like insurance, they can have different pricing structures, depending on who is promoting it.

For example, one major Australian bank has 14 different variations on their one basic investment platform. It works a bit like mobile phones. Amaysim use the Optus system, and the Amaysim pricing is different to Optus. Virgin uses the Telstra system, and their pricing is different to Telstra's.

My client is retiring and has contributed a lot to super. He has a pre-1/7/14 superannuation fund from a major Australian bank. His annual administration fees were in excess of $4,000 per annum.

We were able to provide virtually the same product from the same provider for a little less than $2,000. That’s quite a saving and over time, it really adds up - that’s money better with him than with the bank.

There’s a few caveats here as well:

• Never move without getting advice. Determine if there will be a loss of benefits.
• Every situation is different. Depending on your provider, the savings could be less, or even none at all. For example, nil commission funds like industry super were not affected by the changes, so their pricing probably hasn’t changed.
• Some funds have exit fees, so it may not be worth changing
• Super generally has insurance. You have to make sure you are healthy enough to qualify for new insurance before you can move.
• Selling investments will generally mean capital gains tax, that may outweigh any benefits
• Moving your Aged Based Pension means you buy a new pension. This could alter Centrelink assessment for the worse.
• These fees are for administration. Funds management and advice fees are extra.

Of course, there is more to it than just the dollars and cents.

The most important thing about being independent is that we are able to explain all the options available and help you decide which option makes most sense to you.

If you want us to check out any potentials savings for you, just contact us for a free introductory meeting.

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​​IMPORTANT This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each individual and investor are different and you should not act on this information without speaking to a financial, tax or legal adviser, who can consider if the financial product and strategies are appropriate for you. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. See full Terms and Conditions here.