Tough markets test the value of advice

Super fund statements showing the first negative returns for many years will do that.

For some advisers this will be a testing time - because like their clients it will be the first bear market experience they have had to work through. For others it will be a case of reminding investors where they are on their financial planning journey and that storms every five to seven years are to be expected.

These type of markets underscore the real value that a good financial plan and adviser can add. It also exposes the misconception that many investors have about financial advice and why people struggle sometimes to appreciate the real value of advice.

In a week when the Minister for Superannuation and Corporate Law, Senator Nick Sherry, put the issue of the cost of advice firmly on the super agenda it is timely for investors to consider what it is they are paying for when they visit a financial planner.

Many of the financial planning industry's leading practitioners would happily rewrite history if they could change just one thing - that the industry was built on selling investment products rather than providing strategic advice.

The trap that the industry fell into was in essentially giving away for free the advice while being paid for the product sale usually by some form of commission payment.

So a generation of investors has grown up with the notion that advice was worth what was being charged for it - nothing. Rather the value was seen to be in the performance of the products sold. So advisers were often judged - for better or for worse - on the performance of products they had no influence over.

Now the industry is struggling to convert investors into paying and understanding the value of strategic financial planning. The good news is that the fee for service argument is gaining momentum within the financial planning industry and more advisers are basing their business on providing strategic advice around a client's long-term goals, risk appetite, tax position, insurance and estate planning needs.

The investment products are the building blocks used to implement the portfolio that is the outcome of that work. It is in the tax structuring and portfolio construction where the core value of good advice lies.

Senator Sherry is right to demand greater transparency around the cost - and value - of advice. But the government has a role to play in lowering the cost of advice. Not everyone needs a comprehensive financial plan because their affairs simply are not that complicated. Many people need basic asset allocation advice within the super fund they are a member of. But the regulatory regime - with the solid consumer protection ideals in mind - provides a heavy compliance burden which is both costly and time-consuming and effectively makes it uneconomic for financial planners to service investors who do not have substantial assets.

Reduce the complexity and compliance burden and Senator Sherry will have every right to expect the cost of advice to fall for average investors.

For investors understanding the costs of the whole process is crucial. This is an industry that is masterful at turning simple things into opaque complex structures. There are three basic components in the cost/value chain: funds management; administration/trustee services and advice. Straightforward disclosure around those three components will not only help investors make valid comparisons but also put a real value on the advice delivery.

That is a level of transparency that will help both investors and advisers when the next bear market happens along.