If you’ve been following my blogs you will know that I am a strong advocate for financial planners and the importance of seeking professional advice. However, financial advice is not a ‘set and forget’ exercise. You should still retain an element of personal responsibility for your own finances and you should definitely keep your adviser accountable for their ongoing service.
Here’s a really good example of why you should meet with your adviser at least once a year…
A client (let’s call him Raymond) was recently referred to me by an accountant friend. Raymond was concerned that his superannuation balance was much lower than he anticipated and he was highly anxious about his retirement.
Speaking with Raymond, I learnt that he had first sought financial advice back in 2012. At the time, the adviser recommended that Raymond roll his superannuation into one account (which gave him a balance of around $100,000) and then to take out $500,000 life and TPD cover and $1,500/month income protection cover inside superannuation.
This all sounds relatively straight forward, until you scratch the surface.
Raymond told me he originally only wanted $250,000 of cover which would have been sufficient to pay out his debts at the time. Because I do not have access to the previous adviser’s file notes or the Statement of Advice (which sets out an adviser’s reasons for their recommendations) I don’t know why the cover amount was double what Raymond requested and there could have been a very good reason for this. Similarly, I don’t know where the figure of $1,500/month for income protection came from, but the figures would suggest that, at the time of the advice, Raymond was earning around $25,000 per annum. (Income protection replaces approximately 75% of your income and is calculated as a monthly benefit based on your salary).
However, the premiums for this level of cover worked out at approximately $5,000 per annum. Based on the income calculation above, that means 20% of Raymond’s income was going towards his insurance premiums. In other words, he was paying twice as much out of his super for his insurance as was going into his super via the SGC each year.
Raymond didn’t question any of the recommendations because he thought he could trust his adviser to do the right thing for him. He gave the adviser the go-ahead to make the changes and didn’t think anything more about it. He also did not have any review appointments with his adviser in the years that followed.
It wasn’t until COVID hit that Raymond began to worry about his superannuation again. He saw a vlog that his accountant had shared about superannuation and the impact of COVID on account balances. Raymond decided to check his own super balance and was horrified by what he found.
Like most Aussies, Raymond’s super balance had dipped because of COVID. However, he also realised he was paying $25,000 each year in insurance premiums! To make matters worse, Raymond was only earning around $400/week (or just over $20,000 per annum). His insurance premiums were more than his annual earnings!!
This feels like a good time to point out that yes, insurance premiums typically increase over time, as we age. Superannuation is an investment, which means that when markets fall (like they did at the start of the COVID crisis) our earnings are often impacted and we can see our super balance take a bit of a negative turn. However, our personal needs also change over time. It is highly unlikely that your level of debt remains the same over 8 years, or that your income doesn’t change. These are all factors that mean you should take a look at your financial position regularly and adjust your financial plan to suit your current needs.
By the time Raymond got in touch with me his superannuation balance had bounced back and was sitting around the $90,000 mark. However, his calculations (based on the initial advice given back in 2012) led Raymond to believe he should have around $150,000 saved. A look back at the previous 8 years of premiums paid showed he had spent almost $90,000 on insurance. He had also paid $4,000 in advice fees, despite not having seen his adviser at all in that time.
Again, I don’t know the circumstances around the original advice and you could certainly argue that the adviser didn’t do anything wrong – they most likely told Raymond what their fees were and how much the insurance premiums would be. But it is also the responsibility of the adviser to schedule annual reviews with their client to make sure the recommendations still align with the client’s circumstances.
Like I said, financial advice is not a ‘set and forget’ exercise. You should review your plan with your adviser every year. If you have seen an adviser in the past and they haven’t made an effort to contact you again, follow them up! Ask them why you haven’t had an annual review. Or, find a new adviser who will get your plan back on track and who will ensure it stays that way with regular catch-ups.
And don’t forget to read all your documentation carefully. As financial planners, we are legally required to tell you how much you will pay for our services and what you can expect in return. If you aren’t getting what you’ve paid for, speak up! (We are currently working with Raymond to seek compensation from his previous advice provider under the grounds that he paid a fee for no service.)