Finance Your Budget How to get the most out of your financial advisor
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How to get the most out of your financial advisor

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Let me tell you a story about something that happened to me a while ago – some time last century, in fact. I’d been working for about 10 years as an accountant, and life was treating me pretty well: I had a healthy bank account, no debts, a pretty good second-hand car, and a tidy nest-egg stashed away in my employer’s super fund.

One day, out of the blue, I received a call from a bloke who told me that he’d like to help me manage my money better. Upstart young bean-counter that I was, I have to admit that I was curious. I asked him to tell me more.

Unfortunately – for him, at least – we hadn’t been chatting for too long before a few things became clear. Firstly, he wasn’t interested in what I did for a crust. Secondly, he was intent on dismissing all of my successful investments as misguided. Thirdly, what he really wanted was my money to manage as he saw fit – and not for my benefit, I might add, because all the funds he recommended were the ones that paid him the highest commissions.

OK, so let’s fast-forward down the track a bit. Years later, following decades of this sort of behaviour from rogue financial planners, the government acted to put a stop to those cowboys who risked giving a bad name to the entire profession.

A series of changes to the rules setting out how advisors must deal with their clients, known as the Future of Financial Advice (FOFA), was introduced by the previous Labor government in 2010. The FOFA reforms impose a duty on financial advisors to act in the best interests of their clients – ahead of their own.

The new regulatory framework was created in response to a government inquiry in 2009 following the collapse of several big financial advisors – among them Storm Financial and Opes Prime – that saw thousands of small investors lose hundreds of millions of dollars.

Two of the main areas that came in for criticism were:

  • Clients were sold high risk financial products that earned the advisors big commissions; and
  • The lack of financial knowledge among ‘mum and dad’ investors who were caught out.

In short, the investors didn’t understand the products and strategies they were being sold – and the advisors had a financial motivation to act against their clients’ best interests.

The FOFA reforms seek to ensure that your money manager is obliged to give you advice that’s suitable to your financial situation, and to make sure you understand that advice.

In the consumer’s best interest

The government agency overseeing the introduction and application of the new rules is the Australian Securities and Investments Commission (ASIC).

Even though financial advisors have strict obligations under the FOFA regime, it’s not all one-way traffic in favour of investors. The new rules also include a ‘safe harbour’ for advisors. That is, an advice provider can show they have acted in their clients’ best interests if they take certain steps, including:

  • Identifying the objectives, financial situation and needs of the client;
  • Setting out the subject matter of the advice sought by the client – whether specifically told, or by implication;
  • Basing all judgments in advising the client on the client’s relevant circumstances; and
  • Any other steps that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client.

An ASIC spokesman told The New Daily that his agency was determined to improve consumer confidence and trust in the financial advisory industry.

“We want to encourage more people to seek financial advice, because we can see how much better off people can be from receiving good advice,” he said.

One area of reform that’s causing consternation on both sides of the table is the change in the way financial advisors are paid. From now on, clients will be required to pay a fee for the advice received, rather than allowing their advisor to recommend products with fees and commissions attached.

Financial planners react

Dante De Gori, a general manager of policy and conduct for the Financial Planning Association of Australia (FPA), said that the FOFA reforms were intended to remove potential conflicts of interest.

“It’s always the minority that do the wrong thing by their clients, who cause lawmakers to make life harder for the majority who do the right thing,” he told The New Daily.

“For all the discussions about why commissions were bad, there are many clients who would have rather have that option than to put their hand in their pocket. Equally, there are many who are prepared to pay, but want to know what they’re paying for. The better advisors have been able to have that conversation and demonstrate their value.”

He added, however, that value for money could be difficult to judge for consumers who had never been to an advisor before.

“If you’re seeing an advisor for a first meeting, they should start the conversation by asking about you: what you do for a living, what are your wants and needs and to talk about looking after your family.”

“If there’s any indication at the first point of the discussion about products, or promises of returns and benefits, it should be a warning sign to go elsewhere. It’s the advice you’re paying for, not product recommendations.”

Mr De Gori advised potential clients to write down a list of questions ahead of the meeting, and outline what they wanted to get out of the meeting beforehand.

“Maybe see a couple of advisors and go with the one you feel more comfortable with,” he said.

“That way – if you do want to compare one advisor with another – you’re comparing apples with apples.”

The crucial question you should ask is whether the advisor is a member of a professional body.

“You can then check if they are genuine, be assured they have been trained to a high standard and you can check if they have had any disciplinary problems or clients’ complaints in the past,” Mr De Gori said.

Bernard Kellerman is an independent finance writer, bank-watcher and ex-accountant.

TOP TIPS FOR DEALING WITH YOUR FINANCIAL ADVISOR

1. Take notes of meetings and phone calls with your financial advisor.

Keep a log of the following:

  • Where each conversation takes place
  • The time and date
  • Who was present
  • What was said – and who said it

Your notes will help you understand the advice you’re given – plus you’ll have a record to refer to down the track, if necessary.

2. Ask about the services that are available to you and the cost of each one

Financial advisors provide different levels of service and charge different fees for each type of service, so it’s a good idea to find out as much as you can and then make a decision about what’s best for you.

3. Be realistic about your retirement goals

You won’t be able to earn a low-risk $50,000 each year with $300,000 in retirement savings, so it pays to keep a level head about your potential investment returns.

Depending on your circumstances, your financial advisor may recommend the following:

  • Receive less income from your retirement savings
  • Retire later than planned
  • Put more money towards your retirement
  • Take on more risk
  • A combination of these strategies

4. Provide full, accurate information

Your financial advisor can’t give you suitable advice unless you are open and honest about your personal financial situation, your goals and objectives. Incomplete or inaccurate information may lead to unsuitable advice and financial loss.

5. Don’t invest in any financial products or investment strategies you don’t understand

If your advisor hasn’t been able to clearly explain, in terms you understand, how a product or strategy will make you money, then you shouldn’t agree to invest in the product or to take up that strategy.

6. Make sure the statement of advice (SOA) is understandable and accurate

The SOA is a written record of the advice you have been given. If you don’t understand the SOA, it’s likely that you won’t understand the advice you’re being given. Ask for it to be re-written if you need – and don’t be afraid to ask questions.

7. Don’t sign documents on the same day you receive them

Take the documents home, read them and note down anything you don’t understand, then ask your advisor to explain further.

8. What if you have a problem with your financial advisor?  

If you’re still unhappy with the response you receive from your financial planner, or if you do not hear back from them, you can lodge a complaint at fos.org.au via their online dispute form. The customer service team is available on 1300 78 0 08 between 9am and 5pm, Melbourne time.

Source: Financial Ombudsman Service