Wills and Estate Planning Adelaide: Financial Planning … one of the important elements of Estate Planning

How much money will you need to meet your retirement goals? Have you allowed for share-market contractions, inflation, and unexpected emergencies?  In the event of death or disability, will your family be able to maintain a comfortable lifestyle, or will everything you have worked-for be at risk? These are just a few of the many issues that need to be considered in a formal Financial Plan, which is one component of an integrated Estate Plan.

You should sketch out a “mud-map” of your goals, and the steps needed to achieve them.  You also should put in place monitoring safeguards to check that your investments are performing up to expectations.

So how do you determine your financial goals and develop a plan to reach them?

Most people need help to do this, and this is why there is a whole industry of people and companies fighting for your business, to help you develop and implement your financial plan. Just look in the Yellow Pages under Financial Planners, and you’ll see dozens of listings.

All banks & insurers, and most accountants, have Financial Planners on staff.  Many of them will have a separate financial planning division.  There are also lots of specialist financial planners in their own businesses.  So who should you choose to help you with your financial plan?

Since March 2004 Australians have enjoyed the protection of the Financial Services Reform Act, which imposed high standards designed to protect you whenever you deal with banks, building societies, credit unions, insurance companies, superannuation and managed funds or with stockbrokers, financial planners and insurance brokers.

All of these businesses that offer ‘financial services’ must hold an Australian Financial Services Licence (‘AFS licence’). You can run a free check on the official government Australian Securities and Investment Commission (ASIC) website http://www.fido.asic.gov.au/fido/fido.nsf to see if a business you’re thinking of dealing with is properly licensed.

All licensed businesses must:

• operate efficiently, honestly and fairly

• ensure staff and representatives are properly trained and supervised

• have proper complaints handling procedures and must belong to an independent complaints scheme that you may use at no cost.

On-staff advisors may provide their services as part of the investment package being offered by the investment company they recommend. But remember that there is no such thing as a “free lunch”.

The advisor may not charge you directly but the advisor’s fees have to be paid somehow. Frequently, the investment or insurance company pays the agent a commission to sell you the product.

That advisor is not truly independent if he relies upon commission from the sale of that financial product to you for his income.  History and human nature tend to suggest that the products with higher commission for the agent will be recommended to you more than other products.  Does this mean these recommended products are in your better interests?  Maybe, maybe not – so be cautious about just taking it on faith that the advisor is there solely for your benefit. They are also earning their living from the commission. In truth they are more like sales agents, representing one or more of the big investment and insurance companies (Colonial, MLC, Macquarie etc).  Like all sales agents, some agents are better, more honest and more sincere than others, and some may be more interested in helping you than helping themselves.

There are also individual professionals who will help you for a fee.  Do your research, and you should be able to find truly independent financial advisors, who are not paid on commission for the products (insurance and investment) they recommend.

These people are charging a fee for service as opposed to getting commission from the sales. It is considered that these people are more objective and not affected by the lure of the commission when they make their recommendation to you.

Often the real cost to you as investor is less than a “free service” from a commission agent.  This is because independent advisors will generally rebate (ie pay back to you) any commission paid to them by the investment company.

These commissions are included as part of the entry fees that fund managers charge which can be as high as 10% of the value of the investment.  The advisor gets a “finder’s fee”, which comes out of that entry fee.  However, after the initial entry fee, most managed funds will also pay ongoing “trailing” commission fees to the advisor.

Trailing commissions are ongoing fees charged to your investment funds (including your superannuation & allocated pension accounts) and are based on a percentage of the value of your investment. They are paid to the financial advisor who originally set up your account or policy. If you established the investment or super account directly with the super fund or investment provider, the trailing commissions are retained by the investment managers – they are not simply waived just because you did not purchase their product through an agent.  This is a deliberate tactic by the investment companies, to not compete unfairly with their own agents.  It is therefore very difficult to avoid trailing commissions on managed investments. They are built into and paid out of the management expense ratio (MER) of your investment regardless of how the account was set up or who it was set up by.  So it is just a question for you as to who ends up pocketing them!

The amount of trailing commissions charged to your super or investment is usually between 0.4% – 1.2% of your investment or super/pension account. This may not sound like much in percentage terms however a 1% p.a. trailing commission fee on an average-sized super fund of $200,000 or similar investment is $2,000 per annum or $166 per month. You would be effectively paying a bill for this amount every month, so you’d want to be sure you’re getting pretty good value for it.

You should make sure your financial planner advisor provides a formal written financial plan, so that you and your lawyer can discuss it ahead of time, before you commit to implementing it. Investment and tax planning are essential components of a comprehensive plan and there are likely to be other important issues to consider such as saving for a major purchase, overseas travel, child’s education or retirement planning.

It is important to realise that financial planners are not lawyers, and care should be taken when selecting your investment vehicles (trusts, super funds, joint property etc) for their ability to help you meet your long term personal and financial goals.  For this reason it is sensible to have your specialist estate-planning lawyer review your proposed financial plan BEFORE you commit to making the recommended investments.

Financial planning, like estate planning overall, is a process rather than a one-time event. It should not be set-and-forget.  Today’s financial plan may not provide for changes in your life and in your goals over time.  Your family, financial and personal circumstances are likely to change, and so should your plans.  It is recommended that you monitor the performance of your financial plan portfolio 1-3 monthly, supplemented by an annual meeting with your financial planner.

Death & taxes, illness & share-market corrections may be unavoidable … but they don’t have to ruin your family or your business.  Make the effort to protect the people you really care about.  Call Genders & Partners to create an integrated estate plan. And do it NOW … before it is too late.

Rod Genders is a senior Australian lawyer specialising in accident compensation and estate planning in Adelaide. His boutique specialist law firm is one of the oldest and most respected in Australia – visit it at www.genders.com.au . Rod is also a prolific author and speaker.  Some of his articles and books on Wills, Probate, Trusts, Estate Planning, Asset Protection and Retirement Planning may be found at www.genders.com.au/adelaide-lawyer-blog.