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Newsletter: What is the value of financial advice?

Very often people wonder whether they have sufficient assets to make the cost of seeing a financial adviser worthwhile. Put another way, there is a view that a financial adviser can only help the ‘mega-wealthy’.

When preparing advice for clients, I often find that I can add significant value to their situation – and the value of the advice can be far greater than the cost of obtaining it.

The following example of a real client of mine, demonstrates this nicely. Let’s call her ‘Natalie’. By the way, Natalie has approved release of this article and I have de-identified the data, but all figures are actual.

Natalie came to see me at age 62. She is divorced and working. She earns $45,000 a year. Her over-riding goal was to cease work as soon as possible. However, in her words “if I have to work for another 5 years to be able to afford retirement, I will - but I really don't want that to be the case”.

Natalie has sensibly managed her income during her life. She owns her home. She had bought two investment properties in 2001 for $80,000 each. A chat with a real estate agent revealed these are now worth $275,000 each. She still owes $52,000 on these investment properties. Whilst they have appreciated well, they do not provide a significant net income. Her super fund has a balance of $142,000.

My advice to her was simple.

Firstly, I did a comprehensive review of her super fund. This showed that she was paying $1,540 a year in insurance premiums. She did not have a need for the insurance. She cancelled the cover and saved $1,540 a year.

Secondly, she wanted to sell the investment properties before she retired. This was partly because she ‘wanted to get my affairs in order before retiring’, and partly to get the proceeds in to an asset form that was more accessible. 

So, I looked at the capital gains tax (‘CGT’) impact if she did this. She would have a total CGT bill of $85,723. 

However, the amount of CGT you pay is based on your other income in the year of sale. So, I calculated the CGT if she: (a) sold one property a year (instead of both in the same year); and (b) was not working when she sold them and (c) made a tax-deductible contribution to super in each year (to lower her income). Just doing this, saves her $41,775 in CGT – almost half! As I said to Natalie, the CGT tax saving alone is actually more than your net income for a year of work. That met her desire to retire earlier, and effectively at no cost to her.

Thirdly, Natalie and I discussed what level of income (in today’s dollars) she would like in retirement. Her ideal income after tax was $40,000 a year. We looked at the level of risk she was prepared to take with her super fund. This showed she is a moderately conservative investor. We agreed that a prudent average annual return assumption was 6% per annum for a moderately conservative portfolio. My model demonstrated that she could receive (from all sources) this level of income to just beyond her life expectancy, at which point it would then drop to the full age pension. Knowing this, gave her piece of mind.

Fourthly, I compared a number of options for her super fund. Her existing fund was an industry fund. The trick here is that industry super funds often look cheap. In her case, the admin fee was only $1.30 a week plus 0.1% per annum of her balance. But, the fees paid to the investment managers contained within the fund were not cheap. So, by changing super fund I was able to save her $697 a year.

So, I had the pleasure of presenting my advice to Natalie and demonstrating I could save her $2,237 a year plus $41,775 in capital gains tax. I told her she can retire early. 

What was the cost of this advice to Natalie? I had provided her with a capped fee quote of $2,750. Money well spent.