Despite having had a love-hate relationship with the finance services sector for decades, a growing number of Australians are perceived to have a need for financial advice that remains largely unfulfilled. Based on recent Treasury research, 80% of Australians aged 45-54 need financial advice because they can’t afford it, while over two thirds of Australians aged 18 to 34 have unmet advice needs.
Then there’s Investment Trends data which shows that financial advice is needed more than ever. The researchers' latest numbers suggest that around 10.2 million Australians plan to seek financial advice. Given that the average cost of financial advice continues to increase – which Investment Trends pegs at $5,500 annually - Azzet has provided some guardrails to help you select the advice firm and adviser that’s right for you.
Filter for independence
To kick things off, it’s helpful to know that you’re not ready to properly pressure-test advisers until you’ve filtered for independence. That’s why it’s imperative to understand what entity owns an advice firm, and what potential conflicts of interest they may create for their advisers to provide you with the right advice.
The industry is typically divided between advisers who work in what’s often referred to as IFA-land – members of the Independent Financial Advisers Association - and advisers owned by large financial institutions, mostly banks. However, the regulator is uncomfortable with advisers bandying around the term independent. Even by the IFA’s reckoning less than 1% of financial advisors in Australia are deemed legally independent.
So with that in mind, it’s wise to examine both the adviser and the firm they work for.
What you need to understand is the culture of the firm that drives its advisers’ behaviour. You need to ascertain any conflicts of interest they might have, and whether the adviser can only offer solutions based on a limited range of preferred in-house products. There’s a strong view held in IFA-land that only truly independent advisers can be relied upon 100% to put your financial interests ahead of their own.
Assuming you subscribe to his view, weeding out those who work for a dealer group controlled by a large financial institution will eliminate a whopping 85% of the country’s rapidly dwindling supply of advisers.
Based on a tighter compliance and minimum qualification regime – implemented since the ugly findings of the Hayne Royal commission in 2017 - financial advice ranks in Australia have plummeted 47% to 15,600 over the past six years. What you need to filter out of your adviser universe are those who, by virtue of working for firms owned by or aligned with large financial institutions, have varying conflicts of interest.
That doesn’t automatically mean the remaining pool of advisers who don’t work for large financial institutions are above reproach. They still need to satisfy the all-important compliance test, and the Future of Financial Advice (FoFA) reforms have attempted to raise the bar on both conduct and remuneration practices.
Don’t overlook compliance
Start scrutinising advisers by getting straight answers to basic “housekeeping” stuff. That means getting would-be advisers to talk about their qualifications and experience, including any dismissals for misconduct, plus disclosure about the licensee that authorises them to offer advice.
Remember to check ASIC’s (Australian Securities and Investments Commission) online register of banned or disqualified advisers (see asic.gov.au). The website also has a valuable tool kit for understanding financial advice.
If an adviser isn’t a member of a professional body, ask them why not. If they are, find out if this actually helps govern their conduct. It is equally critical to ask advisers where they have worked before and be especially wary of short periods of less than one or two years.
Alarm bells should ring if advisers become flustered or defensive when explaining their work history.
Given that the ASIC register won’t identify advisers who have been moved on due to “borderline” practices that aren’t serious enough to take action against, ask advisers if they have been the subject of any client complaints to their licensee and/or to the Financial Ombudsman. Similarly, check the ASIC register for any disciplinary actions, as well as the website adviserratings.com.au or their LinkedIn profile to see if they have any client recommendations.
There’s no better way to check whether an adviser’s (or the firm’s) experience and expertise are compatible with your requirements than checking their website for client testimonials and asking to speak with a couple of their past or existing clients.
Advisers should be comfortable providing similar statements of advice (SOAs) prepared for other clients with any references to their names blacked out. Remember, if you haven’t done your homework on what you’re looking to achieve financially, you risk engaging the wrong adviser by default.
Compliance aside, any advice still has to pass the “sniff” test. With any advice revolving purely around shifting your current accounts to your employer’s platform and/ or investments, you want to be 100% confident it’s in your personal interest. You want to have compelling documented reasons as to why.
Conflicts and remuneration
In the wake of recent reforms including FoFA and the more recent Delivering Better Financial Outcomes (DBFO) reforms, advisers are required to be more upfront with you about how they’re remunerated, so don’t be afraid to ask. Any potential conflicts of interest should be included in an adviser’s financial services guide.
What should also raise alarm bells are those advisers who aren’t absolutely honest about what commissions they receive, what fees they charge and any other influences or conflicts of interest on how they’re managed.
In addition to commissions and fee disclosures, the financial services guide should highlight whether a client’s portfolio is actively or passively managed, any other arrangements, including any brokerage fees, the regularity of adviser reviews and updates, and how they’re communicated, plus proposed access to your portfolio via online platforms or similar.
It’s equally critical to know what administrative support an adviser has behind the scenes. Insufficient support could significantly delay the one to four days it typically takes to receive advice.
If an adviser lacks control over service delivery, find out who is ultimately responsible if systems or procedures fail. Administration aside, find out where advisers obtain their research, which services they outsource (and why) and whether they can select investments for you using their own methodology.
The trouble with relying on their licensee to do the research and make recommendations is it may be insufficiently tailored to meet your individual needs. Regardless of whether an adviser works for a financial institution or a firm purporting to be non-aligned, find out what their true relationship is with product providers and how well it has been disclosed. You also need to know if there’s a direct link between an advice firm’s preferred product list, and the financial institution they’re controlled by.
If a firm professes to be non-aligned, it’s just as important to find out what investment structure they use and recommend for your investments, and why. While commissions paid on insurance products should be the same regardless of the adviser, what matters most is that any decisions are remuneration agnostic.
Whether an adviser is charging a fee for service and dialling the commission back to zero or taking commissions in lieu of fees, it’s worthwhile to check that they aren't double-dipping. Given that clients won't know if they’re better off under either option, it’s key to get advisers to spell it out.
Dialling down commissions is usually not as economical for the client as the scenario where the adviser gives the client a fee ‘credit’ for the commission paid.
What else you need to check
While getting the compliance criteria right is vitally significant, it’s also crucial to remember that it should only afford a would-be adviser one foot in the door. Rogue financial advisers aside, you need to be equally wary of the financial carnage that honest advisers on training wheels – who may look the part – can cause you due to inexperience, insufficient fiduciary responsibility and/or insufficient interpersonal skills.
Instead of focusing solely on advisers getting ticked in all the right boxes, you need answers to another layer of questions that the entire advice profession rarely confronts. What we’re talking about is the probity of an adviser’s relationship with other third parties, especially product providers, plus the right disclosure about the types of investment vehicles they recommend.
That’s especially important given the growing popularity of highly complex investment vehicles, especially in the corporate bond, private capital and/or private debt space. Ask advisers how the complex investment vehicles they propose work – and the associated risks and potential for loss in certain markets – and where you sit within the capital structure if the underlying security goes bust.
The best way to do that is to take nothing for granted, undertake sufficient homework so you can second-guess an adviser’s recommendations, and read all contracts before committing to any investments. The lengths to which an adviser is willing to go to answer your difficult questions should offer meaningful insights into the duty of care they’re likely to provide once you’re a fee-paying client.
Any adviser worth their salt should have no difficulty explaining:
- How they can ensure you receive best-quality service at a reasonable cost.
- The particular challenges confronting your demographic.
- How they address them within their advice, their investment performance track record.
- Who is responsible for the performance of the recommended investments.
Know when to walk: 10 traits to be wary of
At face value it’s tough to distinguish between the “honest and good”, “honest yet fundamentally incompetent” or “down right rogue” financial advisers. However, with that in mind, alarm bells should ring if you experience any of the following 10 behavioural traits during an initial meeting with a financial adviser:
1. You were polite and they became defensive at innocent remarks.
2. They can’t explain products and investments simply.
3. They can’t connect on a human level.
4. You feel you’re being sold products from day one.
5. They’re technically proficient but lack empathy.
6. Their relationship with product providers isn’t disclosed.
7. They become overly friendly and paternalistic.
8. What they’re proposing seems too good to be true.
9. They use scare tactics.
10. They become overly emotional, judgmental and idealistic.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
