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Royal flush: 15 questions to ask a financial adviser now

The Royal Commission has highlighted some appalling financial advice practices.  Transparency, greater professionalism and higher standards are required. Corruption, cronyism and incompetence must be weeded out.  A torrent of new regulations is a racing certainty, although how that will look is still to play out.

Hopefully, we will look back in a few years and say the Royal Commission was the best thing that happened to the financial planning profession. Financial planning matters. It matters because quality advice has the power to transform lives. It matters because poor, unethical advice has the power to destroy lives.

Start with two quick checks

How do you find a good financial adviser from more than 24,000 licensed Australian advisers? In November of 2017, I wrote this article for Cuffelinks on the 25 questions you should ask your financial adviser. This is an updated version in a post-Royal Commission world.

First, as before, start with the pamphlet, entitled Questions To Ask A Financial Adviser compiled by our industry regulator, ASIC.

Second, conduct a search of your adviser on the ASIC register. This provides a list of their qualifications and records any banning orders or disqualifications made against them in the past.

Then, insist on getting answers to the following questions in writing. They won’t guarantee you a good adviser, but they will reduce the odds of a dud or a crook.

The questions to ask

1. Who owns your business?

Most advice firms are owned by a handful of individuals. Be wary of those with institutional ownership, especially when those institutions also manufacture financial products, encouraging massive conflicts of interest.

2. Who provides your licence (AFSL) to operate?

You might prefer firms who have their own licence, but there are plenty of shoddy independent operators (as the RC showed), and there are plenty of excellent advice firms who are licensed by a major financial institution. You want to learn about potential conflicts of interest that might compromise your best interests. The one key advantage of being self-licensed is that these firms are free to recommend a broader universe of funds and insurance products.

3. What percentage of my portfolio is invested in funds owned by your licence provider?

It should be close to zero.

4. How many insurance providers are on your Approved Products List?

It should be a lot more than one. This gives sufficient diversity and an ability for an adviser to add value through choosing the most competitive policy.

5. Is there any connection between the investment platform you have chosen and your licence provider?

There might be. This may be ok, but it’s a potential conflict as this may be the only platform offered to you as a client. Ask why they selected that particular platform for you.

6. May I see your last Compliance Audit please?

Every adviser is audited annually by an independent team. Ask to see the last three audits as they could be quite revealing.

7. How do you charge your clients?

Fees should vary depending on the job you want done. For specific project work, an adviser might bill by the hour, but not for ongoing advice. Hourly charging encourages inefficiency. Nearly all advisers will increase their fees in line with the assets to manage, but the relationship should not be linear. Managing $2 million is not twice as involved or complex as managing $1 million. Charging clients a fee-for-service is becoming more popular and, in our opinion, will eventually replace percentage-based fees.

8. Are your fees negotiable?

We believe fees should not be negotiable. Clients should be charged by the same methodology. Existing clients should not subsidise new clients (unlike certain cable TV providers we could mention), nor should those with superior negotiating skills receive favourable terms.

9. Do you receive an annual bonus?

Most advisers are paid an annual bonus for a job well done. Nothing controversial about this, but ensure that the bonus is not solely driven by introducing new clients to the firm. It should reflect exemplary client service, a spotless compliance track record, a team ethic and a commitment to ongoing education and training.

10. Can you tell me about your conflicts of interest, orally and in writing?

These must be disclosed orally and in writing. Ask to see their Conflicts Register. Some conflicts of interest are inevitable and may not be a problem, provided they are disclosed.

11. Do you pay referral fees to generate new clients?

Many advisers pay referral fees to lawyers and accountants to refer new clients. Provided this is fully disclosed, there is no conflict. It’s more an issue for the referrer than the adviser.

12. What are your professional qualifications?

The Certified Financial Planner (CFP) is the gold standard in the US and Australia, but there is difference between those CFPs that were ‘grandfathered’ and those that were earned by hundreds of hours of hard slog. The CFP is now a difficult examination to pass. It doesn’t guarantee great advice, but it reduces the odds of engaging a dud. Make sure to ask for the qualifications of the Investment Committee too. The Chartered Financial Analyst (CFA) is the certificate of excellence for portfolio analysis.

13. Who manages my money?

Financial advisers are not money managers. They are not trained to do this. Look for a professional Investment Committee run by an experienced CFA.

14. How do I exit this relationship if I don’t like it?

There should be no lock-ins. Financial advice firms are not mobile phone companies. Account portability is essential.

15. Can you provide me with testimonials of clients in a similar situation?

Always ask for this. We would recommend checking out a website called Adviser Ratings. It contains testimonials from the adviser’s clients and a rating.

Choosing your financial adviser is a significant decision

We suggest asking people in your life whose financial opinions you respect. These might be your accountant or an educated friend. And meet plenty of advisers during your due diligence. A good adviser adds value. We hope this list will help you in your search.

 

Jonathan Hoyle is Chief Executive Officer at Stanford Brown. This article is general information and does not address the circumstances of any individual.

12 Comments
John
May 07, 2018

ANZ obviously read Cuffelinks last Thursday.No more product-linked bonuses for advisers:

http://www.afr.com/business/banking-and-finance/financial-services/anz-scraps-productlinked-bonuses-for-financial-planners-20180506-h0zoxv

Simon
May 04, 2018

This quote from the man himself is gold:
“To be honest, building a media profile is not easy and takes time. You start off chatting to various journalists and gradually become better known. And working with journos means you can’t bluff your way through. So, before you open your mouth, you need to do the research and make sure you know your topic inside out. That’s something I certainly have learnt over the years,” he laughs.
Refer https://www.imap.asn.au/publications/perspectives-magazine/89-perspectives-autumn-2018/755-sam-the-money-man

Jonathan Hoyle
May 04, 2018

carikku, my point is that having your own licence is no guarantee of a rock solid adviser, as Mr Henderson proved.

And neither is being fee for service. There are plenty of outstanding advice firms that charge an asset-linked fee.

carikku
May 04, 2018

There are not "plenty of shoddy independent operators (as the RC showed)", but there are a couple of journalists who don't understand what independent means and so call financial planners such as Sam Henderson "independent" when actually he was not (and I don't think even he called himself that?).
There are non-aligned and fee-for-service financial planners caught up in the RC, but my understanding is they charged asset-based fees and accept commissions, which means they do not fit the strict definition of independent.
Jonathon, if you're editing your article for the points about CFP I think to be fair to truly independent advisers you should amend that comment.

Jonathan Hoyle
May 03, 2018

Ivory Tower, re-read point 11. 'provided referral fees are fully disclosed, there is no conflict.'

We offer our clients the choice of having their funds invested the traditional way or via a discretionary Managed Account.

Jason
May 18, 2018

Disclosure of referral fees and other conflicted income does not eliminate the conflict, it merely discloses it. The conflict remains. This is important as many in the financial advice community kid themselves that by disclosing conflicts everything is OK.

The RC is serving to confirm what most already knew, that disclosure is largely ineffective. It is also highlighting something many refuse to acknowledge, that the conflicts do undoubtedly impact on behaviour, just as they are designed to, and they are the source of the problems. You can't disclose them away.

Jonathan Hoyle
May 03, 2018

Gen Y - the CFP and the CFA are the gold standards of advice and investment respectively.

See my comment above for grandfathered CFPs - a very misleading practice that the FPA still permits. I don't know why because it tarnishes an otherwise excellent designation.

Jonathan Hoyle
May 03, 2018

David, thanks for your comments.

i) You make a good point about the difference between those CFPs that were ‘grandfathered’ and those that were earned by hundreds of hours of hard slog. The CFP is a rigorous and tough exam to pass. I will edit the article to reflect this. I wish the FPA would clear up this misleading practice.

ii) My understanding is that most dealer groups outsource the annual adviser audits to independent firms. Clearly not all do this. I understand your point about audits but I would argue strongly that having a copy of your adviser’s compliance audit is far better than not having it. Even if the audit process itself is flawed. This is an area that ASIC must fix.

Gen Y
May 03, 2018

Jonathan you can remove number 12 from the list. Most of the advisers quoted in the RC for poor advice we’re CFPs, a designation handed out by the FPA for anyone prepared to pay the fee a number of years ago. As a result a huge number of the industries advisers with our ‘Gold Standard’ have nothing more than a 2 week diploma as their education. I would much rather receive advice off an adviser with a relevant Uni degree than an inherited CFP any day.

Ivory Tower
May 03, 2018

Wow - glass houses there Jonathan
page 9 and 10 of your FSG speak about inhouse products and referral fees!
https://s3-us-west-2.amazonaws.com/sb-main-website/Financial+Services+Guide+-+Stanford+Brown+V5.6.pdf

David Smith, Darwin
May 03, 2018

Jonathan,

I read your list of 15 questions to ask a financial adviser with interest. I tick 13 of the questions, but have concerns about two of them.

The CFP designation should not be promoted by anyone who understands it, as anything other than a hopelessly flawed association designation. Using the term “Gold Standard” to describe it, is outrageous. All of us should know that some CFPs undertook a regime of rigorous, credible study, and some undertook none. How would the public know the difference? They don’t and they can’t find out. Until the FPA resolves this, please don’t promote it to the unsuspecting public. There are enough challenges for them to negotiate in finding a professional to assist them with their needs. (If I am not mistaken, John Doyle, of Royal Commission infamy was a CFP.) My SSA and GAICD designations are much more meaningful accreditation than the CFP designation, as they both have rigorous, challenging education standards to pass.

The CFP designation should be removed as a criteria on the Adviser Ratings website too.

Question 6 causes me concern.

“Every adviser is audited annually by an independent team” is a false and misleading statement.

ANZ Bank own my licensee, so they can’t be construed as independent of my practice. They conduct my audits which is ironic given that our practice spends every minute of every day acting in our clients best interests, and ANZ Bank have proven themselves incapable of doing that. Their audits involve box-ticking for the sake of box-ticking. If I act in my clients best interests, but don’t tick a meaningless box, my audit score suffers. So it is of no value to the public in trying to determine whether our practice acts in clients’ best interests. If anything, it will add to their confusion.

If you fix (remove) those two questions, I think you’ve nailed it. The list would be genuinely helpful to the public in finding a truly professional adviser.

David
May 03, 2018

I'm sure Sam Henderson would have aced these questions.

 

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