Everyone values good financial advice but the reality is not all advisers are up to scratch. Annette Sampson provides six warning signs.
Is a financial adviser worth the cost? The bad news is that it can be difficult to tell. Many of us only realise we have received bad advice when those highly recommended investments turn out to be lemons, those clever strategies land us in strife with the taxman, or we take a hard look at our annual investment returns and find they're being eaten up by high fees and charges.
But by then it is generally too late. The damage has been done.
One of the more disturbing findings in the Australian Securities and Investments Commission's recent shadow shopping of retirement advice was that even when they received poor advice, most clients were inclined to trust their adviser.
ASIC reviewed 64 pieces of advice obtained by 50 to 69 year olds and found that while it rated just two of those pieces of advice as good, and 39 per cent as poor, the vast majority of clients thought they had got the real deal. Eighty-six per cent felt they had received good-quality advice and 81 per cent said they trusted their adviser "a lot".
It's not hard to understand why. Investment, particularly retirement planning, can be complex and an adviser who appears to be professional can easily win a client's trust. Successful advisers also tend to have good interpersonal skills and are adept at putting clients at ease.
But how do you drill down past these attractions to determine if your adviser is any good?
A senior executive for ASIC's MoneySmart website, Robert Drake, says it is often a question of what is missing from the advice or the long-term consequences that haven't been explored. But consumers can help the process along by being prepared.
"If you've done a bit of preparation and given some thought to what your goals are, you're better able to ask sensible questions, like what will happen to your retirement plan if you have to retire early because you're sick," he says. "Good advisers appreciate that. If you can do your preparation and think about 'what if' scenarios and are prepared to discuss the pros and cons of different strategies, you're more likely to get good advice."
There are clear warning signs of bad advice that consumers can look out for.
Probably the simplest way to avoid bad advice is to check out an adviser's licence and qualifications. If they don't stack up, don't go near them, Drake says.
He says you can determine whether a company holds a financial services licence, and search for other details, on the MoneySmart website at moneysmart.gov.au.
The chief executive of the Financial Planning Association, Mark Rantall, says you should ask planners about their qualifications, licence and what training they have done.
He says the highest qualification is a certified financial planner, a designation all planners should strive to attain. He says it also means they have signed up to ongoing education.
Are they a member of a professional association with a code of ethics? To whom is the financial planner licensed? What limitations are there on the advice they can give? Do they have specialist areas of expertise?
"Put your recruiter's hat on and know what experience you're looking for in an adviser," a director of Hewison Private Wealth, Chris Morcom, says. "If you're looking for someone to manage your self-managed super fund, find out if the adviser is an SMSF specialist. Make your own assessment of the person as you would when hiring an employee, or business partner."
THE COOKIE CUTTER
Drake says alarm bells should start ringing if the adviser hasn't spent time learning about your goals and situation and instead offers up "cookie-cutter" advice - the sort of pre-programmed advice they've given to their previous 10 clients. He says a good adviser will spend time learning about you and your goals, and take account of what might happen in the future.
A good financial plan, Rantall says, should state what your needs and goals are, and explain how you are going to achieve them.
"It is critically important for both parties that the plan should capture the discussion you had with the adviser," Rantall says.
"Often the question of whether advice is good doesn't surface for five years or more and it can be hard to remember what was said at the time."
He says consumers should be worried if there is a lack of information or if they don't feel what they're being told meets their goals and objectives.
THE HARD SELL
Drake says another sign that you should run for the door is if the adviser seems more focused on selling you a product than forming a strategy to meet your financial needs. Rantall says the real value of a good financial plan is the strategy products come at the end of the advice process.
"If there's any pressure to implement a plan and you don't feel comfortable, the alarm bells should go off," Rantall says.
He says consumers should be wary of an adviser who seems to be focused on a single product that isn't diversified - whether it's something such as an agricultural scheme or the latest hedge fund that will get you rich quick.
TOO GOOD TO BE TRUE
While good advice should allow you to sleep easily at night, Drake says you should beware of advice that promises high returns and low risk.
If it promises the world and you're told you don't need to worry about it, you probably should.
He says another bad sign is if the adviser avoids the frank discussions about the tradeoffs that are an essential part of any financial plan.
"A good adviser will say, 'Here are five things you've told me you'd like to do, but you can't afford all of those,"' he says. "They will help you set priorities and realistic expectations."
FEES AND CHARGES
A very simple sign of bad advice, Rantall says, is if the fees and charges appear excessive and you're not sure what you're getting.
There has been plenty of debate about how planners should charge in the lead-up to the Future of Financial Advice reforms, which will ban commissions and other forms of conflicted remuneration from July 1 next year. But Drake says no matter how you're being asked to pay, you should look at what you're getting in exchange and whether the nature of the fee gives the adviser any incentive to lean one way over another.
While the legislative ban on commissions will only apply to new advice, Drake says existing clients should certainly ask to move to a more transparent fee arrangement.
Rantall says 70 per cent of his association's members have already moved to fee-for-service. This gives consumers control to stop paying if they're not happy, he says.
A senior analyst for Investment Trends, Recep III Peker, says his firm's July 2011 Planner Business Model Report, based on a survey of 1394 financial planners, also shows planners have been moving towards fee-for-service. In 2006, he says, planners derived 70 per cent of their revenue from commissions. This is now down to 51 per cent and planners estimate that in three years' time they will receive 34 per cent of their revenue from commissions.
He says fees currently constitute 45 per cent of revenue and the fastest-growing type of fee is a fixed-price fee. This has grown from 9 per cent in 2006 to 17 per cent in 2011, and planners estimate 30 per cent of their revenue will come from fixed-price fees in three years' time.
Peker says preliminary findings from the 2012 report also show planners have reduced their upfront advice fees by 20 per cent from what they were charging in 2011. The average planner said they charged the latest client they saw $1690 in upfront fees, down from $2100 in 2011.
"There's a lot of debate about the best way to charge but it's more about the quantum of the fee in my opinion," Rantall says. "What's important is the dollar amount of the fee and whether you're getting value for that."
CONFLICTS OF INTEREST
Unfortunately, there are very few advisers who don't have some potential conflicts of interest. With the majority of planning groups owned by financial institutions that regard planners as their distribution network, there is obviously going to be pressure on planners to recommend in-house products.
The Future of Financial Advice reforms will require advisers to act in their client's best interest.
Drake says advisers should be very candid and upfront about these conflicts. "They should have an open discussion with you about them and discuss where they can add value for you," he says. "The good ones will tell you if they can't add value, rather than just moving you from one super fund to another."
Rantall says advisers should canvas the relevance and appropriateness of any products recommended and explain why they are in your best interest.
While some advisers will recommend you switch products for their own administrative convenience (often by moving to a wrap account or other platform used by their company), Drake says they should demonstrate that there will be no cost to you from this move, or a small cost that will easily be recovered from other benefits obtained. If the adviser is only talking about a narrow range of products and they are owned by the company, you're unlikely to be getting broad-based independent advice.
Drake says a good financial plan will also answer questions that might not involve selling product, such as whether you're better off paying off the mortgage or putting money into super.
Scan the golden apple to see a video
with Annette Sampson