Developing a financial plan to build and improve your future can be a rewarding activity. Many people are willing, able and even welcome the opportunity to undertake this task themselves.
Others prefer to engage with a licensed financial adviser to offer guidance through the decision making process. If you’re inclined to seek the services of an adviser, here are some tips so you don’t end up spending your hard earned money on unnecessary or poor advice.
The key point is to understand how financial advisers earn a living.
Many advisers earn product sales incentives, especially in the form of commissions, bonuses and profit shares (sometimes called ‘conflicted remuneration’).
These incentives cause so-called ‘conflicts of interest’ which may improperly influence advisers to promote and sell financial products whether or not you need them. This has been shown to be a long-standing and widespread problem, not just the behaviour of a few ‘bad apples’.
Many unsuccessful attempts have been made by governments to reform the financial advice industry so as to remove these conflicts of interest. The latest attempt is a compulsory Code of Ethics. Time will tell whether the Code improves the industry’s behaviour. In the meantime, you should be aware that when you consult a financial adviser, incentives and ‘conflicts of interest’ are likely to influence the adviser’s advice.
The main form of so-called commission used in the industry is often called an ‘asset fee’. This is a percentage paid by clients on their investments. Some advisers misleadingly call this form of commission a ‘fee for service’. This causes many people to believe that it’s not a commission at all.
Here are some common examples, sourced from ‘real life’ in consumer financial education, demonstrating how asset fees can lead to poor outcomes for consumers due to the impact of conflicts of interest:
A client inherits $100,000 and consults a financial adviser who charges asset fees. The client seeks advice on whether to pay off a mortgage or invest in an investment product recommended by the adviser. The adviser is inclined to recommend investment of the inheritance in a product from which an asset fee can be earned, rather than reducing debt on which nothing can be earned;
A client is thinking of using an industry superannuation fund and asks a financial adviser for a recommendation. The adviser who uses asset fees cannot easily charge them on an industry superannuation fund, but can readily do so if the client uses a superannuation fund promoted by the adviser;
A client is a military retiree thinking about how much of a government-guaranteed defined benefit pension entitlement should be taken as a lump sum. The client seeks advice from a financial adviser who uses asset fees. The adviser cannot charge asset fees on a government-guaranteed defined benefit pension, but can charge them on certain private sector products. As a result, the adviser recommends that the client should take the maximum lump sum and invest in those products;
A client has $250,000 in term deposits with a bank, maturing next month. The client asks the adviser for a recommendation about where to invest. The adviser can’t charge asset fees on the rollover of term deposits, so recommends the use of an investment product on which an asset fee can be charged;
A client has $250,000 in a retail share fund through a financial adviser who uses asset fees. The adviser believes it would be in the client’s best interests to move some of the money into cash at a bank (noting the $250,000 government guarantee), but is not inclined to offer that advice because the asset fee cannot be continued if the money were to be moved into cash; and
A client has $500,000 in savings and seeks advice about investing it in direct real estate. The financial adviser is inclined to persuade the client to move the money into a range of investment products on which an asset fee can be charged because moving it into direct real estate will not allow that fee to be charged.
The list goes on. On each occasion, the financial adviser who uses asset fees has a conflict of interest because unless an asset fee is charged the adviser earns nothing. Other types of incentives that may lead to poor outcomes for clients include bonuses, profit shares and commissions on life insurance, mortgage broking and direct property sales.
The key point to understand here is how incentives are designed. If they are designed to encourage product sales, this should cause a client to ask:
In whose interests is the advice being offered?
There is a growing number of financial advisers who have no remuneration-based conflict of interest. They only charge genuine ‘fees for service’ calculated on an hourly rate or a flat fee. There are no percentages or product incentives, ever. By appointing such an adviser, clients have the best chance of receiving advice that provides value for money, can be trusted to be free of conflicts and is in their best interests.
Unfortunately, the bulk of the financial advice industry is not structured in such a way that the average Australian can obtain reasonably priced advice that suits their relatively simple needs and limited means. Therefore, it’s important to be realistic, sceptical and to take your time. Make a point of understanding the costs and conflicts involved in the services that are being offered. And understand the costs in dollars, not just in percentages which can sound misleadingly low.
Finally, you should remember that just because an adviser has no remuneration conflicts of interest doesn’t necessarily mean the adviser will be comprehensively knowledgeable about military employment conditions and entitlements. These are things the adviser can readily research, sometimes with your assistance.
However, freedom from remuneration-based conflicts does mean that the financial advice is much more likely to be given in your best interests which must surely be the most important feature of any trusted professional relationship.
Super can be much harder to quantify if you are a member of MSBS or DFRDB, known as defined benefit schemes. This is because the bulk of your super benefit will likely be in the form of a lifetime indexed pension, based on your years of service and final average salary. The longer you stay in Defence, the larger your lifetime pension. This cannot easily be compared to a standard accumulation super fund. Please contact the Commonwealth Superannuation Corporation (CSC) for an estimate or your current benefit.
If you have an accumulation super fund, like ADF Super, it’s much easier to compare the superannuation you get from Defence with that of a civilian employer. Generally employers pay super at a rate of 9.5% of your ordinary salary and allowances, Defence pays super to accumulation fund members at a rate of 16.4%, well above the minimum requirement.
You may not appreciate the value of your generous superannuation benefits now, but you certainly will in years to come.
ADF members receive, statutory death and invalidity cover, and rehabilitation services if needed. To replace this cover in civilian employment, you may need to take out personal insurance, such as death, disability, trauma and income protection. The cost would depend on your age and personal circumstances but could cost thousands of dollars a year.
The ADF offers free education and training and/or study assistance schemes. If you’ve been receiving tertiary education at no cost or received any form of study assistance, consider what it might cost to continue your education outside Defence.
Take some time to think about these and any other benefits provided to you by Defence to get a better understanding of the real value of your employment package.
As an ADF member you will usually receive subsidised housing or rental assistance if you are not living in your own home. If you buy a home to live in you may be eligible for a range of other assistance schemes.
If you are receiving rental assistance you can calculate the value by multiplying the fortnightly assistance amount by 26 to get an approximate annual benefit.
If you’re in service housing you can estimate your benefit by deducting the rent contribution taken out of your pay, from the amount of rent you would pay each fortnight for a similar property in the same area. Multiply the result by 26 to estimate your annual benefit.
Housing assistance schemes for members buying a property include the Defence Home Ownership Assistance Scheme (DHOAS), Home purchase assistance scheme (HPAS) and Home purchase or sale expenses allowance (HPSEA)
Serving ADF members receive a range of healthcare benefits, including free medical and dental treatments, rehabilitation services, psychological support and access to fitness facilities like gyms, pools and sporting fields.
To put a value on these benefits, think about what you might be paying for if you were not an ADF member. For example, what would it cost you for private health insurance, prescriptions, physiotherapist, dentist, specialist visits, gym membership or other fitness related costs?
Medicare covers the costs of being admitted to hospital as a public patient, some of the fees charged by GPs and other medical professionals, and subsidised prescription costs for medicines listed on the Pharmaceutical Benefits Scheme (PBS). ADF members don’t pay the Medicare levy, currently 2% of taxable income.
Private health insurance covers some or all of the cost of a range of services not covered by Medicare, for example, a private hospital and the doctor of your choice, as well as ancillary services such as dental, optical and physiotherapy, not covered by Medicare.
Your pay consists of a base salary, with the addition of employment-related allowances. Your base salary can be found at the top of your payslip on the right, listed as ‘Annual salary’. If you need help reading your payslip, see the ADF guide on Pay and Allowances.
Note: From 13 May 2021, service, trainee, reserve and uniform allowances will be rolled into a single ‘Military salary’.
The earnings section of your payslip lists any allowances you receive. The amount in the ‘Current’ column is the amount you get every fortnight for each allowance. You can add allowances by typing in the name of the allowance in the ‘Add allowance’ box and clicking the + symbol.
A deployment provides some ADF members with additional allowances that are not part of regular pay. We have not included these allowances in the calculation of your remuneration package, however, you may want to take the additional deployment allowances into account if you are comparing your ADF remuneration with civilian employment.
Medium-term goals are those that you want to achieve in 3-6 years. This could include saving for a home deposit, paying off your car or paying down all your loan debts. Having a budget and your goals written down.
Long-term goals are plans you want to achieve in around 7 years or more. This could include buying a home or paying off your mortgage, paying for your children’s education or saving for retirement.
For long-term goals think about investing some of your money. Get some financial advice to work out a good investment strategy to reach your goals.
MSBS is a hybrid defined benefit and accumulation super scheme which closed to new members on 30 June 2016. If you are an MSBS member, your benefit will consist of a lifetime indexed pension (employer component) based on your final average salary and years of service. Some or all of this benefit can be taken as a lump sum when you have met a condition of release (the defined benefit). The scheme also has a member component made up of your compulsory and voluntary personal contributions, ancillary contributions and investment returns, that you will also receive as a lump sum when you have met a condition of release (the accumulation benefit).
The pension component can be taken from age 55. If you are retiring or resigning from the ADF after reaching age 55 or are entitled to a Class A or Class B invalidity pension, you will be eligible for a pension when you leave the Service. For all other members, your employer benefit will freeze and be preserved, increasing with CPI each year, until you are eligible to receive it.
The member component of your benefit may be left in MSBS, where it will increase with investment returns each year until you access it, or it can be rolled over to another complying super fund.
For more information contact the Commonwealth Superannuation Corporation (CSC).
If you joined the ADF for the first time after 30 June 2016, you will fall under the ADF superannuation arrangement, and will be a member of an accumulation fund, such as ADF Super. If you had previously served, and are a member of MSBS, you will be re-entered into MSBS on rejoining the Service.
For accumulation fund (eg. ADF Super) members, your benefit will be a lump sum based on contributions and investment returns. When you leave Defence, your money can be left in the fund, where it will continue to grow with investment returns until you meet a condition of release, or it can be rolled into another super fund.
If you’ve been in the Service for more than 12 consecutive months, you can keep your ADF Super account when you transition out and your new employer can contribute to ADF Super. In this case your insurance cover will change so contact the Commonwealth Superannuation Corporation (CSC) to find out what you need to know.
DFRDB is a defined benefit super scheme which closed to new members on 30 September 1991. If you are a DFRDB member, you will receive a lifetime indexed pension based on your final salary and years of service. Part of your benefit may be commuted into a lump sum, and you may receive an additional lump sum from your MSBS ancillary account, made up of voluntary personal contributions, amounts transferred in from other funds and other contributions, plus investment returns.
For more information contact the Commonwealth Superannuation Corporation (CSC).
Short-term goals are things you want to achieve within the next couple of years. These goals could be to pay off your credit card debt, buy a new TV, go on a holiday or buy a car. Whatever you have in mind, set yourself a realistic timeframe. The best way to save for short-term goals is to reduce your spending on non-essential items, like entertainment, dining out, memberships or subscriptions. It is often easier to stay on top of your spending if you use cash, EFTPOS or a debit card when shopping instead of using your credit card.
Make your savings work for you by putting your money into an account where it will grow. Savings accounts are great because you can earn compound interest on your savings. If you’re on a low income, you may qualify for one of the savings programs offered by some charitable organisations.