A 12 per cent spike in the cost of financial advice may be a deterrent, but have you thought about how much money your adviser could be saving you?

The banking royal commission, AUSTRAC scandals and the eye-watering compensation payments and increased compliance and training costs they spurred hit advisers' hip pockets. And those higher costs are, of course, flowing on to everyday Australians like you in the form of higher fees.

The median fee for financial advice jumped 12 per cent to $2800 per client annually in 2019, says finance and consumer information group AdviserRatings.

Australia's big banks have now paid out $1.5 billion to compensate for bad financial advice and fee gouging, according to the watchdog's tally of financial penalties.

The compensation payments by AMP (ASX: AMP), ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) have been trickling in since the Hayne royal commission delivered its final report early last year.

Source: ASIC

But Morningstar maintains its belief in the value of financial advice. Morningstar US's David Blanchett suggests a good planner could increase your wealth - or save you from losing – by about 2 per cent.

Morningstar Investment Management US has produced a huge volume of work seeking to quantify the value a financial planner can add.

What's good advice worth?

David Blanchett, Morningstar's head of retirement research shows the 2 per cent in added value can be derived from the following core activities:

  • Creating an adaptable withdrawal strategy
  • Allocating more to guaranteed income products
  • Utilising total wealth to build portfolios.

"It's really the behavioural piece, which is helping investors make good decisions over long periods of time," Blanchett says.

"That includes savings advice, that includes staying in the market and other things that vary by investor. I mean, it's tax strategies. It's estate planning. It's really just helping someone accomplish a goal."

He uses the term "gamma" to describe the additional value an adviser can add to an investor portfolio.

Despite the 2 per cent figure, Blanchett insists there are wide differences in the services provided by financial planners.

"Some advisers just build portfolios,” he says. “They want to perceive themselves as advisers, but they're not doing financial plans.

"They're not doing all that hard work that comes with planning. So, I think that in reality that the true value of each planner varies, but people like numbers, and it's just hard to quantify."

Source: Fidelity, CoreData 2020

And in terms of fees, he is reluctant to single out a business model – such as commission-based, asset-based or fee-for-service – as superior.

"I'm less concerned about the fee model, as I am them being fiduciaries and providing holistic services.

"I think that normally that's more conducive to do in a fee-based environment. But I think that in theory, you could provide someone with a financial plan and get paid a commission and still do a great job."

The price of risk

You also need to consider the intangibles such as the risk-adjusted value of financial advice, says Mike Furey, managing director of Delta Research and Advisory, a quantitative research firm.

Consider the following:

Let's say the ASX 200's performance returned 20 per cent to an investor holding five large-cap stocks.

Or a financial adviser's suggestion for a broader portfolio of 15-20 stocks from various sectors and some bonds, which might have returned 15 per cent over the same timeframe.

"You'd think the ASX 200 outperformed here, but on a risk-adjusted basis, it is a far superior portfolio when you factor in what may have happened if just one of those five companies collapsed," Furey says.

"And in addition to diversification benefits, there's also things such as the co-ordination of life insurance, estate planning and other things you can't measure easily."

Fees, commissions and value

Beyond the content of what financial advisers bring to the table for their clients, how this advice is paid for, and the transparency of terms and conditions, are core to the ongoing regulatory scrutiny.

We've written at length about the effect of the royal commission on the above banks and their shareholders. Late last year, CBA and then Westpac were caught up in AUSTRAC investigations into money-laundering by child exploitation rings.

And since then Treasurer Josh Frydenberg kicked off a rapid review of the controversial "stamping fee" listed investment company issuers charge.