This case study is based on an actual client presentation in August 2017. Names and other identifying details have been changed for obvious reasons, and figures have been rounded to allow for easy computation. However, all other details are as they were experienced.
Gary and Jasminder are aged in their late 50s. They have been married for 25 years and they own a small retail shop close to a capital city. They do not have children and expect to continue working for at least the next 10 years.
Gary and Jasminder come to see their financial adviser with a simple ambition: to be able to retire as comfortably as possible, when the time comes. This is the first time they have seen a financial advisor. Their accountant recommended they do so because they brought their ambition of a comfortable retirement up with her.
Business is good but not great. Between them Gary and Jasminder earn about $90,000 per year. They also pay themselves the compulsory superannuation amount of 9.5%, or $8550 per year. Happily, they own their home and they also own an investment property with a loan worth approximately 30%. Combined, they have approximately $200,000 in superannuation. The total level of asset means, if they were to turn 65 and retire tomorrow, they would not be entitled to the aged pension. But life would not be a picnic.
Unfortunately, while business is going okay, it is heavily dependent on the owners and Gary and Jasminder are not comfortable that it would have a market value.
Gary and Jasminder have never paid much attention to superannuation. When they took out a loan years ago, they were encouraged by their bank to join a retail super fund affiliated with that bank. The first thing their adviser does is check their existing super. He is somewhat aghast to find that it charges an investment fee of 2.4% as well is a buy-sell spread of 0.55%.
Ignoring the buy-sell spread for a moment, this means that Gary and Jasminder are paying approximately $4800 per year to manage their superannuation.
Gary and Jasminder have no interest in running their own superannuation fund. Given how lazy they have been about managing their superannuation in the past, this is probably for the best. Therefore, the adviser decides to investigate industry superannuation funds as an appropriate place for them to hold their superannuation.
The adviser identifies industry superannuation fund with a good reputation. This fund charges a flat administrative fee of $125 per member and an investment fee of 0.45%. This means that Gary and Jasminder could have their existing $200,000 managed for $1150 per year. Here is how it all looks in a table:
|Superfund name||XYZ retail super||XYZ Industry Fund|
|Investment fee||$1,800 (2.40%)||$338 (0.45%)|
|Total ongoing fees||$1,800||$463|
|Superfund name||XYZ retail super||XYZ Industry Fund|
|Investment fee||$3,000 (2.40%)||$562 (0.45%)|
|Total ongoing fees||$3,000||$687|
Simply rolling their superannuation benefits over from the existing fund to the new industry fund will save Gary and Jasminder $3650 every year. As they continue to make new contributions, the saving will increase as they avoid the buy-sell spread on new investments. These new contributions, as well as simple growth in investment value to be expected over the long term, means that the amount to which the investment management fee is applied will also increase.
Given their ages, it is likely that at least one of Gary and Jasminder will live for another 30 years. Both of them are likely to live for another 20 years. Extrapolating out over that 20 year period, is not difficult to see that simply switching their superannuation benefits from a very expensive retail fund to a very low cost industry fund may well save them a six-figure sum.
Preparing and writing this advice was a very task for the adviser. He needed only to download and read the product disclosure statement for the existing fund and compare it to the most recent benefit statement to ensure that the fees stated in the PDS were actually being imposed on his clients. He then needed only to read the PDS for three well-known industry funds to ensure that he was recommending an appropriate one. Remember, the best interests’ duty does not mean the advice must be absolutely perfect. It means that the advice must leave the client in a better position as a result of seeking advice. So, the adviser does not have to pick the very ‘best’ industry fund – just one that is good enough to warrant rolling over benefits from the existing retail fund.
The adviser then used RODO to prepare a statement of advice. Altogether, including a conversation with the client at the beginning, advising this client couple took just three hours.
You can view a copy of the SOA here.
Implementing the advice was ridiculously simple and the clients did it themselves. To do so, they needed simply to download a rollover form from the industry fund, fill it out and send it back to the fund along with their application to join the fund.
The clients had never sought financial advice before and were used to paying a relatively small fee to their accountant to prepare and lodge tax returns for their small business. Therefore, the adviser charged just $1500 plus GST for the advice. This fee could be paid out of the couple’s superannuation benefits.
Remember, the immediate benefit to the client will be to save $3650. It is very easy to ask a client pay $1500 when the advice provides an immediate return with more than twice that. Any rational person would happily pay such a fee, especially when they realise that the first year saving will be at least repeated in the second and subsequent years.
What’s more, because the benefits to the client are in terms of an amount saved, the benefit will definitely happen – the adviser is not relying on investment markets performing in a particular way for the advice to benefit his client. If the market is to perform well, the clients will get an even greater benefit. But even if the markets perform badly, the client will still be better off.
The adviser has managed to create a very satisfied client who will sing his praises when next they are talking to their accountant or discussing financial planning to other people.