There is no doubt about it, Financial Advice is taking a hammering at the Royal Commission into Banking and Financial Services. With advisers charging fees for no service, making recommendations with the purpose of meeting sales targets and even charging to accounts of customers who have died it is clear that there is some work to be done to restore the reputation of financial planners in general.
As a relative newcomer to financial services and as an adviser who is not licensed through one of the big institutions, I feel like I am sitting off to the edge of all the furore. I am not alone out here either, there are a growing number of us keen to promote our business models and service offerings in direct contrast to those being so devastatingly exposed during the Royal Commission hearings.
So, how can a prospective customer tell who is who? Here are 5 suggestions of questions that you might like to ask your financial adviser:
1. Do you have sales targets?
Sales targets by their nature have a short term focus. If your adviser is basing their interaction with you on what they can charge you or sell you quickly, then it just becomes a matter of convincing you, in the moment, that it is a good idea to sign up.
This scenario can happen all too easily and there have been a number of reports published by the regulator (ASIC) that show that clients are often unable (at the first instance anyway) to tell whether the advice they are being given is good advice. If they like and trust the sales person, they are likely to go ahead.
2. How do you personally get paid?
Advisers can be either employed or self employed. Employed advisers may be paid a salary, commission or a combination of the two. Sometimes they may have incentives where they can be paid extra for meeting revenue or other short term targets.
Self employed advisers are typically operating their own small businesses. This means they are likely receiving most of any fees or commission income. However, they may have a longer term focus as the value of the business itself is usually based on clients continuing with them over the long term.
3. How do you charge for advice?
There are some financial advisers who offer advice services at no charge, or at a very low cost to their clients. Rather than being altruistic individuals who are offering to help pro-bono, the chances are they are receiving commissions from financial institutions for the sale of financial products.
Whilst it may seem like you are getting a bargain, this inherent conflict of interest may result in you missing out on opportunities to improve your situation. Areas like budgeting and cashflow, debt reduction or maximising Centrelink benefits are unlikely to be covered under a no fee arrangement.
4. How do you charge for on-going service?
The first possible red flag here is if the adviser is not interested in establishing a long term relationship with you. Good financial advice involves a commitment from adviser and client to strategies that will play out over time. If an adviser is not interested in hanging in there to see how it all turns out, then they may only be focused on their own short term goals!
Again, free on-going service probably implies that the adviser is receiving some kind of trailing commission from a financial product sale.
Most advisers who charge for on-going service will do so by means of a retainer style payment on a monthly basis. Some months you may receive no service and others you may receive lots of service. (The definitions around this arrangement have caused a lot of discussion at the Royal Commission in terms of “fee for no service”).
The key is to understand any service agreement you sign in terms of what you will be paying as well as the minimum amount of service you can expect to receive in exchange. It is then up to you to determine if that represents value for money.
5. How will you be meeting the new minimum education standards in 2024?
As part of the transition of financial advice into a fully fledged profession, advisers will soon have to meet a minimum level of education. For existing advisers this has to be achieved before 2024. Whilst it may seem a long way off, it is only just enough time for an adviser with no relevant qualifications to complete a degree on a part-time basis.
It is predicted that there will be significant numbers of advisers who will retire or otherwise exit the industry rather than go to the time and expense of getting qualified. Since a good adviser relationship is a long term one, it is probably worth checking that your adviser plans to stick around.
If you would like to know my answers to the 5 questions, please be in touch. I would love to have a chat.
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© Summation Strategies 2018.
Please note that all information provided is of a general nature and does not take into account your current financial situation, needs or objectives. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. We recommend those seeking insurance or making an investment obtain financial advice specific to their situation and consider the Product Disclosure Statement prior to making any financial investment or insurance decision.