So you think you’re pretty good when it comes to managing your money?
You stick to a budget, understand where your money is coming and going, and you’ve invested time in building a secure future – investments, retirement savings and wealth accumulation.
To top it off, you also have a financial advisor to guide you through the trickier parts of managing your money. Things like legislative changes to super and complex tax strategies.
But without knowing it, this could actually be the biggest financial mistake that you are making – no matter how savvy you think you are.
Why you ask? Well, according to the Australian Securities and Investment Commission (ASIC), the financial services regulator in Australia, there are a lot of financial planners who fail to act in their customers’ best interests.
When ASIC reviewed files from a number of leading banks and major financial institutions it found that advisors were more likely to recommend products by their parent companies. In other words, their advice was compromised by their role.
Additionally, when it looked specifically at customers who were advised to switch their superannuation to a fund run by their advisor’s employer, ASIC found that 75 percent of this advice wasn’t in their clients’ best interests, and in about 10 percent of cases, left them worse off.
The Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry also recently revealed that Australia’s largest wealth manager AMP has been charging clients fees for financial advice they did not receive.
So how do you know who you can trust? And what can you do to avoid costly financial mistakes?
How you pay counts
While these figures may be alarming for those outside the industry, particularly clients of financial planners, it doesn’t come as any great revelation to those who know the financial advice landscape well.
The reason is that over a number of decades, the value that consumers place on financial advice has been on the decline, largely driven by the industry’s practice of charging nothing, or very little, for the advice that is dispensed and relying instead on commissions for payment.
On face value, the commission-based service is a win-win for client and advisor alike. The client doesn’t pay, but the advisor still gets paid. However, it instead leads to compromised advice and poor product selection for the consumer, and detracts from the value that good financial advice can deliver.
When someone came up with the old saying ‘you get what you pay for’, they could have been referencing commission-based advice.
Although commissions on new investments and super products were banned in 2013, on some products they remain. One of the ways that many financial planners have replaced this income is by offering ‘ongoing service packages’, which ensures a regular income from a client, while providing very little value in return.
Ongoing service packages shouldn’t be confused with regular review services that are offered by financial planners. Regular review advice is based on the idea that regular checkpoints of your financial position will ensure it remains aligned to your needs. It isn’t a ‘monitoring’ fee adding no real value.
The consumer is not to blame
Financial advice should be a simple proposition. Someone wants to build wealth for the future and to achieve all the things they want from life, and they seek expert advice to help make that happen.
So when you consider the ongoing controversy that has plagued the financial advice sector in recent years, you can’t help but wonder how we’ve reached the point of royal commissions and widespread reforms.
One of the issues is that personal finance products and the management of them, things like banking, superannuation and insurance, have become incredibly complex. Perhaps in part, driven by a desire to make basic financial advice more specialised than it is, and hence, by the safeguards that have been implemented to protect consumers.
The point here isn’t that financial advice isn’t specialised, or valuable. The fact is a financial advisor with the appropriate qualifications and knowledge can provide significant value, helping their clients to grow and maximise their wealth, and navigate the more complex areas of finance like tax and superannuation.
But the point is that some who don’t hold the highest industry recognised qualification of Certified Financial Planner (CFP), have been dispensing advice and it’s within their interests to confuse and confound their clients.
A better way
When you engage an architect to design your house, do you expect them to produce those plans at no charge?
Alternatively, do they offer their services at no charge, instead being paid by a supplier using substandard products that you would never agree to use? Or would you agree to them being paid a percentage of the capital gains in the property down the track?
The answer to all of these is of course not. So why would you accept these practices from a financial advisor.
That’s why I believe a fee for service model is the most transparent and productive way to work with a financial planner. You pay upfront for the expertise of that advisor, and in return they provide you with trusted and advice free of commissions or compromised products.
If they feel that they can’t add value, then they should tell you this and not offer their services.
With that in mind, here’s my top five tips for choosing the right financial advisor:
- Choose an advisor with the CFP qualification: A Certified Financial Planner (CFP) qualification is the highest industry recognised qualification for advisors. It’s a mark of the trust, expertise and knowledge of that advisor, so look for it.
- Pay your own way: The user pays model means you’re getting uncompromised advice. Yes, it means you will have to fork out money upfront, but it’s likely to save you big in the long fun. Look for a true fee for service financial planner.
- Make sure you like and trust your planner: You share some very personal information with your financial advisor, and you may have a very long relationship with them, so it’s important you feel comfortable with them. Think of them as another family member or friend, and assess them that way.
- Show you respect: Your advisor should recognise your financial skills and knowledge, and as such, take the time to explain what they are doing. At the same time, they should give you the opportunity to manage elements of your plan if you so desire.
- Cut through the jargon – Financial advice doesn’t have to be complex. A good financial advisor should be able to cut through the jargon and explain things to you in simple terms.
Mark Bastiaans is an Authorised Representative #296627 of Guideway Financial Services Pty Ltd ABN 46 156 498 538 AFSL 420367.
The information provided above contains general advice that does not take into account your financial situation, specific needs or objectives and is not intended to be personal financial advice and should not be relied upon without written advice from Guideway Financial Services Pty Ltd.