Will Your Financial Planner Be Here in 2025?

Dear Reader,

‘I’m done. It’s just getting too hard these days. Time to sell…if I can.’

That’s the gist of a conversation I had with a veteran financial planner the other day.

Compliance costs up. Professional Indemnity premiums up. Flatlining revenues.

Practices valuations down.

None of this comes as a surprise. The changes in the industry today were set in train more than a decade ago…which is why I opted to sell our financial planning practice in 2008.

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At that time, Storm Financial was a $2 billion disaster in the making. Knowing that Storm was destined to blow up — and ruin many lives — meant the authorities would need to come down hard on the industry. Greater compliance was in the industry’s future.

Insurers would also need to increase premiums to cover massive compensation payouts.

Percentage based revenues (commissions) would be replaced by fee-based structures.

And, in time, the conflict of interest arising from institutional ownership of planning firms would need to be addressed.

The airing of the industry’s dirty linen at the Banking Royal Commission completed the transformational change that began all those years ago.

In the post-2008/09 world, the one saving grace for the industry has been the performance of markets.

Charging fees when performance is positive is a whole lot easier than when clients are losing money.

My veteran planner friend has been around long enough to know that an extended period of positive returns is inevitably followed by an equal and opposite period of negative returns.

Mate, if markets don’t deliver, then keeping clients is going to be tough and getting new ones even tougher.’

The issue of fees was a topic of discussion in my book How Much Bull Can Investors Bear?:

There’s a Fraction Too Much Friction — High Costs and Low Returns Don’t Mix

“Beware of little expenses. A small leak will sink a great ship.”

— Benjamin Franklin

In the good times, generosity abounds. Everyone gets to share in the spoils. The financial ship stays afloat thanks to the ballast of high returns.

Investors, fund managers and financial planners all get to make money when markets are performing well. It’s only when the good times stop, that a sharper focus is placed on the value derived from fees.

In tougher times, when returns are low and capital is lost, the question of “am I getting value for money?” is never far from the everyday person’s mind.

There are generally three layers of fees in the investment industry. The fees vary depending on the amount invested, services offered, type of investment recommended, and type of administration service. The following are indicative fee ranges offered by the industry:

  1. Financial planner — 0.5% to 1.0%
  2. Investment manager — 0.2% to 1.2%
  3. Administration — 0.3% to 0.5%

The total level of fees can vary from 1.0% to 2.7%.

In my experience, the average bundled fee (whether calculated on a percentage basis and/or hourly charge out rate) for the average client tends to be in the 1.5% to 2.0% range.

Fees and taxes act like friction on your investments. They slow down the compounding rate of return you can achieve. Where possible, it’s imperative to minimise both.

When the share market is firing on all cylinders and returning 15% per annum, paying up to 2% per annum in fees is acceptable. It’s a different story when the market starts producing single figure returns or negative results. Clipping 2% from your ticket cuts a little too close to the bone.

Even if my negative outlook for shares is incorrect, it’s difficult to imagine markets providing an encore performance of the 15% per annum achieved from 1982­–2007. The record-breaking level of credit expansion that fuelled these returns is just not there.

In my opinion, it’s reasonable to assume an optimistic outlook would be one of a low-growth, low-return era in all major investment markets — shares, cash, fixed interest and property.

That low-return era took a little longer than I anticipated to announce itself to the world.

But it is well and truly here now.

If you get nothing else from today’s Rum Rebellion, please, please, please realise the importance of this message…the returns you have experienced from your balanced fund ARE NOT necessarily what you’re going to experience in the coming years.

Yin and yang.

Will your planner still be in business in 2025?

Being in a fund that has returned seven, eight or even 10% per annum DOES NOT mean it will deliver those returns in the future.

The conditions that created those returns are in the past. As an investor you MUST look to the future…what’s happening on the road ahead, not what’s in the rearview mirror.

John Hussman’s highly predictive forecasting model (with a 90% accuracy) provides us with an over the horizon view of what most likely awaits investors in the traditional balanced fund (60% shares, 30% fixed interest and 10% cash).

The blue line is the forecast 12-year return. The red line is the actual 12-year return.

As you can see, the correlation between what was forecast and what actually occurred is fairly tight.

Divergences — like at present — occur when markets are at extreme peaks. But eventually, the red line finds its way back to the blue line.

Port Phillip Publishing

Source: Hussman Strategic Advisors

[Click to open in a new window]

The model forecasts a return of MINUS 1% per annum for the next 12 years…that’s even less than the predicted return at the height of the 1929 market.

If we assume the forecasting model continues to be reasonably accurate, then the life of a financial planner in the 2020s is not going to be easy.

How long do you think clients are going to pay up to 2% per annum in fees for the privilege of losing 1% per annum?

Two or three years?

Let’s be generous and say five years.

What I’m seeing now is reminiscent of when the industry’s future became apparent to me in 2007/08.

In addition to an environment of lousy returns, further fee pressure is coming from robo-advisers and other fintech initiatives.

The exodus from the industry that began after the Banking Royal Commission is likely to increase in number.

In a few years’ time I expect we’ll see an industry that’s trimmed down to a core of professionals. Those who’ve adapted their business models to suit the challenging and highly competitive conditions that are in our future.

Planners are facing some tough decisions, but so too are their clients.

Will your planner still be in business in 2025?


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion