There are a lot of people out there calling themselves “securities dealers”, “financial planners”, “investment consultants” or “financial advisors”. But just what do these titles mean, and how do you know who you can trust with your money?
You may have recently received a superannuation payout or redundancy package. You might want to get involved in the share market, or start to develop a savings plan. Regardless, the chances are you will want financial advice. The important thing to remember is that good financial advice can make all the difference to the results of your investment strategy.
Unfortunately, finding a good financial advisor is not as simple as it should be. The problem is that around 80 percent of the financial services industry is owned and controlled by the financial institutions that produce the products, i.e. the major banks, insurance providers and fund managers. Additionally, most financial advisors work on a paid by commission structure, so you can see the conflict of interest and why the industry has such a bad reputation.
Both the Financial Planning Association and the Investment and Financial Services Association have called for a move away from commission based remuneration in favor for fee-for-service. This way the advice will be more transparent and means advisors can provide other recommendations in other areas that are not linked with commissions, such as industry super fund or direct property.
Before you hand over your money to any financial advisor, remember not to be intimidated, it is your money and don't be afraid to walk out if you don't feel the advisor has your complete interest at hand.
Where Do I Look?
One of the first barriers to finding a good financial advisor is knowing where to look. An excellent source of information in this regard is to ask your friends, colleagues, union or the personnel section at your work if they can recommend an adviser to you. However, these references should be used as a starting base only. You should always do your own research when considering taking on the services of a financial advisor. Make yourself responsible for checking the advisor's background, credentials, areas of expertise, methods of practice and means of payment for services.
When you decide to contact an advisor, make sure you have all of your questions answered satisfactorily, as this will help you to come to a more solid conclusion about which adviser can best provide you with the services you need.
Questions to ask
Are you licensed? If so, what are you licensed to advise on?
Before you seek any advice from a finance advisor, be sure that they are licensed, check ASIC (www.asic.gov.au).
For a person to advise on securities (shares, bonds, debentures etc.) they must either be:
- an Australian Financial Services (AFS) licence holder (often referred to as an AFS licensee),
- a director or employee of an AFS licence holder,
- an Authorised Representative of an AFS licence holder.
An AFS licensed holder (or Authorised Representative) may be an individual or a business. If the Authorised Representative is a business, then all the directors and employees that are offering you advice about financial products must hold a separate authorisation to represent the license holder.
It is important that the person or business that you deal with is licensed with the Australian Financial Services as this will offer you protection if something goes wrong.
After you have established the licensing status of your potential advisor, make sure that the terms of their license allow them to advise on all types of investment vehicles. For example, some licenses may restrict advisors to only advising on shares quoted on the Australian Securities Exchange. A license is not a guarantee of good advice, but it is a step in the right direction.
How much will your services cost me?
This includes understanding how the financial advisor is paid, and what benefits they will receive from your investment. Advisors can be paid in a number of ways:
- They can charge fees for work done such as producing a written financial plan or providing an ongoing monitoring service
- They can receive a commission (or brokerage) from the entry fee you pay to the investment institution. These advisors earn nothing until you invest
- They can charge a scale of fees based on the total funds you invest
- They can be paid by a combination of fees and commission
Reputable advisors incur considerable costs in providing you with soundly researched advice and are entitled to reasonable payment for their professional services. Whatever the costs are, advisors are by law required to tell you how you are charged, i.e. commission they will receive from your investments, and what you get in return. Generally the more complex the plan the higher the costs, in most cases more complex means more money.
At the first interview with a potential advisor, find out how your advisor will be paid and estimate the cost of the services to be provided.
Most importantly, if you are in doubt or uncertain about anything a financial planner says, seek a second opinion.
Financial advisor fee structure
Initial plan fee
fee for service : $100- $400 an hour flat fee
commission based : % of total invested (around 4%)
Ongoing management fee
fee for service : $100- $???00 an hour
% of total, some of which can
come out of trail commissions
paid by fund managers.
Protecting yourself from financial scams
To protect yourself, and your money, from unprofessional operators within the financial advising industry, it is wise to seek a second opinion and act with caution if you find yourself being given any of the following 'advice'.
Be especially cautious if...
Your advisor recommends an investment product without properly establishing your financial position and your goals. Remember no product suits everyone. Your advisor needs to know you so he or she can determine what investment plan will best meet your needs.
Your advisor suggests only one institution's products without first clearly informing you about his or her connection with the institution, or fails to explain in writing the reasons why the investment recommended is best suited to you and how it spreads your risk.
Your advisor recommends you borrow money to invest without fully explaining the risks associated with 'gearing up'.
Your adviser starts quoting rates of return based on historical figures. Nobody can predict with certainty the future economic environment. Nobody can guarantee you a particular rate of return. Advisors quoting high rates may only be trying to convince you to sign up. Don't buy inflated promises. Projected returns and growth should be adjusted for inflation to show the true worth of the accumulated sum.
You receive unsolicited telephone calls, mailings or read newspaper advertisements promising high returns but offering little or no detail of the investment concerned, and not clearly stating who is the licence holder or authorised representative or which is the investment institution. These investments are always risky.
Your advisor recommends an investment which does not have a FSG (Financial Services Guide) which explains the nature of the investment, the risks and rewards, and your rights and responsibilities. This is a must by law.
Remember, if it sounds too good to be true, it probably is . So deal only with reputable advisors and institutions that have a sound track record.