If you're planning on buying a house, hoping to set some long-term financial goals or wondering what to do with a lump sum of cash, you might be in need of some professional financial advice. Financial planners and advisors can make managing your money a whole lot easier, but it's important to know who you're dealing with, what they can do for you, and what's in it for them.
What's the difference between a financial planner and a financial adviser?
Basically, there is none. A financial planner and a financial adviser are both professionals who (hopefully) know more about how to invest, manage and save your money than you do. In most cases they know their stuff, but in plenty of other cases the planner or adviser may have little formal training and be learning on the job under a more experienced professional. Or, they may have no expertise whatsoever, but talk a good game and look pretty impressive in a coat and tie in a rented office.
The good news is that the know-how for financial advisers is on the upswing. In December 2015, legislation was introduced to raise educational and professional standards for financial advisers – at long last.
What's in it for them?
Some financial planners and advisers may recommend investment, savings or insurance products based on how large a commission they stand to receive. We call that conflicted advice, and it's something CHOICE has opposed since the early 1990s.
The Future of Financial Advice (FoFA) reforms are aimed at getting rid of commissions and other incentives that may motivate an adviser to put their interests above the clients. At a minimum, make sure any adviser you employ is FoFA-compliant.
Future of Financial Advice (FoFA) reforms
FoFA became mandatory on 1 July 2015. In basic terms, the FoFA reforms can be broken down into four key elements:
Best interest duty – A financial adviser must act in the best interest of the client, not in their own best interest. Practically speaking, this means an adviser can't recommend products or strategies that increase revenue for the adviser but may not be appropriate for the client.
Opt-in – Financial adviser clients who started receiving advice on or after 1 July 2013 must be given the opportunity to opt-in to ongoing advice rather than having to opt out, as was previously the case in most instances. The opt-in clause is designed to prevent you from receiving and paying for advice that you may not need and didn't ask for. Opt-in notices have been required since 1 July 2015.
Fee disclosure statements – It is now mandatory for all financial adviser clients to receive fee disclosure statements, including those who started receiving advice before 1 July 2013.
Conflicted remuneration – The ban on conflicted remuneration – or commission-driven advice – applies to all financial product advice (also called general and personal advice). Advisers shouldn't be recommending products and strategies that earn them high commissions; they should be making recommendations based on your best interests. End of story.
Here's a quick checklist of what you should ask for:
- Full disclosure about which financial institutions the adviser has a financial relationship with, if any.
- An explanation of why the adviser is recommending products through which they receive a commission, if applicable. They may still be valid recommendations, but the adviser should be able to clearly explain why the advice suits your circumstances – which, by the way, he or she legally has to do under FoFA's best interest duty.
- An annual statement outlining the advice you have received, why it was given, and how much it cost if the adviser charges on an ongoing instead of a fee-for-service basis (which we strongly prefer).
Do I need a financial adviser?
If you're just trying to save money or sort out your superannuation account, you probably don't need to hire a financial adviser. You can talk to your super fund about your investment allocation and what it means, and you can devise your own simple savings plan, either through a high-interest savings account, term deposit or other straightforward savings strategy.
But if your financial life has gotten complicated, a good adviser can be a major asset when it comes to making the right long-term financial decisions.
When it's a good idea to seek professional financial advice
- Planning for your family's long-term financial health, in particular buying a home.
- Considering your options if you've been retrenched.
- Planning for retirement.
Types of advice
The different types of financial advice available can be roughly broken down into three categories.
A one-off issue
You may have come into a bit of money or want to figure out the best way to consolidate your super funds. A one-off, fee-for-service visit to a financial adviser should cover this.
A long-term plan
If you're at that point in your life where you want to establish a specific strategy for a healthy financial future – including investing in the share market or bonds, tax advice or buying a house – an experienced and knowledgeable financial planner can provide some very valuable tips.
Unless your financial life is complicated, a single visit that you've prepared well for should set you on the right course. If things become unclear or uncertain in the future, you can make another appointment, but you won't need to start the plan all over again.
This is only necessary if you have substantial assets and a sizeable investment portfolio. If your financial life has lots of moving parts, you'll want ongoing advice about the best strategy to meet your goals.
We don't think consumers should be charged according to a percentage of their assets - after all, one per cent of $200,000 is a lot more than one per cent of $100,000, and the adviser arguably doesn't have to work any harder to give advice on the higher amount.
In any event, make sure the adviser is not making recommendations based on commissions and make sure you receive regular statements that clearly outlines what you're paying for. The FoFA reforms require this in most cases, but it's always a good idea to double check and keep your adviser honest.
How do I find a good financial adviser?
As a starting point, always ensure a planner is licensed to provide advice or is the authorised representative of a financial services licence holder. All licence holders have to register with ASIC.
CHOICE has compared the quality of advice provided by banks, large financial planning chains, small planning companies and stockbrokers. Our results should help you narrow down your options.
- Stockbrokers: They had significantly lower scores than other industry sectors. Approximately 69% of their plans were graded 'borderline' or worse. Brokers tended to concentrate on recommending shares and overlook other essential issues such as assessing the client's needs and goals.
- Method of payment: Planners who worked for a fee or a combination of fee and commission often provided better advice than those who worked on a commission-only basis. Again, FoFA has put the brakes on commissions in many respects, but it hasn't eradicated them altogether. Life insurance, for instance, is a notable exception, and recent investigations have found that commission-driven life insurance advice had led to poor consumer outcomes.
- Market segmentation: One size doesn't fit all in financial planning, so shop around to find a planner that's right for you. In particular, ask if the planner provides comprehensive advice or if they're an investment and placement service only. In short, make sure they really have expertise in the area in which they're offering advice.
How do I prepare for a financial planning session?
If you need to create a full-scale financial plan, doing your homework in advance will make all the difference in how the session turns out. It'll also help you get the best out of your adviser.;
Here's the checklist:
- Prepare a household budget detailing all sources of income and summarising your living expenses.
- Make a list of all assets and their value, and all liabilities (credit cards and other loans).
- Make a list of your financial needs and goals for the short, medium and long term.
- Learn as much as you can about different investments and markets.
- Think about how much risk you're prepared to take when investing.
- Make a list of all existing investments, including information about their current value, past performance and fees.
- Get up to speed on information your planner may not have access to, such as whether your employer is able to channel more of your salary directly into super ('salary sacrifice') or options within your existing super fund.
The all-important first meeting
The planner should use the first meeting to analyse your needs, goals and risk profile. We suggest you use it to analyse the planner's professionalism and ability to meet your requirements.
- Request a copy of their Financial Services Guide (FSG) to be sent via email, fax or post before your first meeting – and be sure to read it.
- Discuss the planner's background and qualifications.
- Give the planner as much information as possible about your personal situation, needs, timeframe and attitude to risk.
- Discuss whether there are any limits to the advice they can provide.
- Find out exactly who the planner represents and ask if they have any preference for a particular type of investment or fund manager - if so, ask them to justify it.
- Find out about their professional indemnity insurance, what it covers and to what amounts.
- Ask if they have their own 'wrap' account or master trust and if these are likely to be recommended over other investments and, if so, why.
- Gauge the planner's attitude to strategies like gearing (borrowing money to invest). Does it match yours?
Negotiate your price
Find out exactly what you'll pay for the advice given. Don't assume the fees and commissions outlined in the FSG or described by the planner are set in stone. Planners don't usually tell their clients that pricing structures are flexible, but you can and should negotiate.
There are several components to the overall cost of financial advice:
- Plan fee: Our research indicates you'll get better advice if you're prepared to pay a reasonable fee for preparation of the financial plan.
- Upfront commissions: Product fees and, therefore, commission levels aren't fixed and can be negotiated.
- Ongoing charges: Ask the planner what else you'll pay if you go ahead with their recommended investments. Costs may include fees for regular adviser reviews, the management expense ratio (MER) for any managed fund and master trust portfolio service fees. Even an extra 1% in fees makes a big difference over the years.
Be wary of planners who say their service is 'free'. This can mean they work for a commission that will come out of the money you invest, and commission-only planners have consistently performed poorly in our survey research. FoFA has addressed this issue to some extent, but the financial planning world is hardly a perfect one.
Assessing the plan
A comprehensive financial plan should be easy to read and understand. It should clearly explain how the recommended action will meet your goals, and why this option is better than others.
The comprehensive plan your financial adviser gives you should contain the following:
- Page numbers, table of contents and executive summary.
- Accurate and thorough representation of your current financial situation, future needs and goals.
- Accurate and thorough representation of your risk profile and investment time frame.
- Assessment of your current investments and justification for any recommendation to sell or keep them.
- Information about your current tax position and an explanation of how the advice will change that position.
- Assessment of your retirement needs.
- Assessment of your insurance needs.
- Assessment of your estate planning needs.
- Easy to understand information about what the planner will earn from your investments.
- Independent and up-to-date research on any products recommended.
- Explanation of how any strategies or investments recommended match your goals, needs and risk profile.
- A spread of different investment types from a range of providers.
- Explanation of how recommended investments compare with similar products in terms of fees and performance.
If a plan fails to provide any of the above, ask the planner to fix it until you're satisfied, or reject it.
Most planners offer ongoing reviews (usually annually) and portfolio management. No plan should be 'set and forget', but a simple review for an agreed modest fee is usually adequate unless your circumstances have changed.
Beware unprofessional planners who want to change your investment mix more than necessary (to earn commission). And remember, you can negotiate the fees and terms of any ongoing service – there's no need to accept the planner's initial offer.