How to get value for money from a financial adviser
If your not-for-profit (NFP) board is seeking support with investments or capital management, financial advisers can offer valuable expertise to help you make sure every dollar works as hard as possible. But, when you’re considering which adviser to work with, be aware that the nature of financial advice fees varies considerably, making them hard to compare.
Make sure you understand what you’re paying for – and how the pricing model works.
Figure out your fee structure
Depending on the nature of the work and the complexity of your needs, financial advisers may charge you:
Flat advisory fees – Your adviser may charge you a set fee for reviewing your investment policy and its governance mechanisms. This will include clarifying your investment objectives and ensuring your investment policy is designed to meet them. Your adviser will delve into your policies on liquidity, diversification, markets, passive vs. active management and strategic vs. tactical asset allocations. They’ll help you to think about ethical overlays, which can expand the good your dollars do as they are growing. And they’ll also ensure your investment policy uses the tax benefits available to NFPs from the franking structure in Australian equities, without ending up being too overweight in this asset class, eroding the benefits of diversification.
This level of detailed work is essential to your NFP getting high-quality investment advice. Your adviser will then use all this information to recommend the most efficient solution to make sure your objectives are met at the lowest risk, while complying with your investment policy guidelines. Their fee will reflect the time and expertise required to do this.
Monthly fees – If your NFP has a very conservative investment policy aimed at preserving capital at all costs, you’re likely to end up with a straight forward solution, like a portfolio of term deposits. In this case, your adviser is likely to charge you a relatively small fixed fee to run the solution for you.
Percentage of funds under management (FUM) – If you’re a larger NFP, you might have two or three funds, all with different investment objectives - perhaps a short-term fund for working capital and cash flow, and medium-term fund with an investment horizon of 2-5 years. The medium-term fund might well use a wide range of different underlying investments to meet your objectives. With this type of solution, which takes considerably more work than a term deposit, your adviser is likely to charge you a percentage of FUM. This rate will vary. Typically, the more assets you have under management, the lower the percentage charged. At the high end it might be % per year; at the low end 0.5% per year. The point of this fee model is that as the fund’s investment value grows your adviser will make more money, aligning their interests with yours.
Combination – sometimes, advisers will charge a percentage of FUM up to a certain threshold and then a capped monthly fee for anything above this. It’s a good option if your NFP is likely to have a large injection of funds from a big donor or from selling an asset. Once the investment has been built and the governance work is done, pushing additional funds into the solutions doesn’t necessarily add much to the work. So capping the fee is a fair way to reflect the work being done by your adviser.
Underlying investment fees
Advice fees aren’t the only costs your NFP will incur while investing. Depending on what you invest in, the underlying funds themselves may charge a Management Expense Ratio, which can be as high as 1 or 2% of the funds invested. Active managed funds tend to charge higher fees than passive index funds, which have portfolios constructed to match or track the components of a particular market index, such as the Australian All Ordinaries Index.
You’re not necessarily looking for the cheapest fees but the best value.
If you’re investing in equities, your fund will also have to pay brokerage fees and bank fees, which are reflected in a buy/sell spread. The buy/sell spread is the difference between the entry unit price (buy price) and exit unit price (sell price) of the fund and represents the costs of brokerage and other transaction costs of the underlying assets being purchased or sold. You’ll find this expressed as a percentage of the fund's net assets.
Your adviser will help you to understand what all these fees are and to find suitable investment solutions that keep them to a minimum.
Make an informed decision
Always ask a financial adviser for a clear explanation of their fees before you hire them. Look for total transparency and an honest, straight-forward answer. You’re not necessarily looking for the cheapest fees but the best value. Choose a pricing model that you understand – one that you think is fair and reasonable for all parties.