Finding a (half) decent financial planner: 7 questions to ask

It is a mark of the ineptitude of regulators and the raw avarice of the big banks and AMP that, almost four years after penning The financial planning quagmire, the industry's reputation has plummeted yet further. The message emanating from the Royal Commission nevertheless remains the same; if you need financial advice you are on your own, rowing without oars.

This wouldn't be so much of a problem were it not for the fact that Australia's mandated superannuation system effectively outsources the responsibility for important financial decisions to millions of people ill-equipped to make them. Their vulnerability makes them easy prey for an industry predicated on the widespread misunderstanding of compound interest and the belief that 1% is a small number.

Among the more financially literate mistrust has taken root. Over the years we've asked members whether they use the services of a financial planner. On average, only about one-in-four do, a remarkably low figure given the complexity of tax laws and their constant state of flux. Then again, if you don't know who to trust with your retirement savings, why trust anyone except yourself?

And yet the fact remains that most of us will need financial advice at various stages of our lives. That was the point of 2014's Six questions for your financial planner, a filter of sorts, one that members could use to weed out the bad advisers, or at least reduce the chances of ending up with one. Given the latest revelations, it deserves a reprise.

Below, I've listed two sets of question, each with an accompanying explanation. The first should reduce your chances of selecting an overly-conflicted advisor. The second set aims to establish a level of confidence in those that pass the first test, setting an expectation of honesty and transparency. Neither will eliminate the possibility that you'll end up with a dodgy advisor but they will reduce the chances of it.

Filter #1 - Weeding out the salespeople

1. What are your industry credentials?

The industry would have us believe it's like any other profession. CPA Australia's website makes it clear it is not. ‘There is no specific qualification to become a financial adviser.' All one needs to hang out a shingle is a relationship with an Australian Financial Services licensee and to be RG146-compliant (check if your adviser is registered here).

That can be obtained from CPA Australia over a two-day workshop, or via distance learning, for a cost of $640 (or $540 for CPA members). If only becoming a lawyer of doctor were this easy. Becoming a certified financial planner is more demanding and expensive. About 5,700 Financial Planning Association members are CFP-qualified and you're probably better off with one of them (although please read the note below, provided by a member that qualifies this number).

2. Do you offer flat fee-for-service pricing?

A better qualified planner does not necessarily make for better advice in your interests because a financial planner's remuneration is typically tied to product sales in some form or other. ASIC finally woke up to the consequences earlier this year, finding that big bank financial advisers preferenced bank products, ignored the best interests of customers three times out of four and left investors in a worse position on one-in-ten occasions.

Money does an awfully good job of skewing incentives. Most advisers offers a ‘percentage of an asset-based fee' because it's a more lucrative business model. That's why 85% of financial planners are associated with a product manufacturer, paid by ongoing commission or asset fees.

To avoid the fee merchants you could try the Independent Financial Advisers Association of Australia, which practices ‘the gold standard of independence'. To qualify, the adviser must have: No ownership links or affiliations with product manufacturers; No commissions or incentive payments from product manufacturers and; No asset-based fees.

3. What sources of revenue will you generate from advising me and what conflicts of interest do you have?

The problem with the IFPAA is that you could fit most of its members into a minivan. There are just 10 ‘Gold Standard' advisers in New South Wales, 13 in Victoria and 6 in Queensland. Transporting IFPAA members in the smaller states requires only a scooter and sidecar.

I'd imagine these advisers are quite busy right now, which means if you need advice you're probably going to have to grab a tiger by the tail. The best approach here is to establish their sources of remuneration and conflicts so you can make a judgement call about how much the financial incentives might influence their advice. Here are some specific questions to ask:

*  Do you receive any remuneration from the providers of the products you might recommend to me?

*  What is the nature and extent of that remuneration?

*  Do you take part in sales promotions or awards offered by product providers? If so, please explain their nature and extent.

*  Would you earn a fee for referring me to a specialist like an estate planner or insurance agent?

*  Can you itemise all your fees and bonuses in writing?

This last point is important. Division 2 of Part 7.7A of the Corporations Act 2001 stipulates that an adviser must act in the best interests of the client and prioritise the client's interests over their own with appropriate advice. Getting them to commit to this in writing uses the commitment principle in your favour. It might not stop them from acting against your interests but it should make them think twice about it.

4. Can you show me a sample statement of advice (SOA)?

ASIC's 2012 shadow shopping of retirement advice revealed that only 3% of the plans reviewed were of good quality and almost 40% were poor. Neither of the ‘good advice' examples were provided by planners incentivised by product manufacturers, whereas 83% of the poor advice examples were. No surprises there.

According to ASIC, an SOA should have a ‘clearly defined scope' with ‘multiple strategies compared and evaluated'. It should also include ‘good budgeting' and ‘cash flow projections' and a sensible discussion about what the client can realistically fund in retirement. That sounds sensible, even for ASIC. If the document seems impenetrable or difficult to understand, the advisor is missing the point.

Filter #2 - Finding an adviser that suits you

1. Can you show me your investment portfolio?

It's a good rule of thumb that those proffering advice should eat their own cooking. A list of products with percentage allocations will suffice. You'll probably have quite different circumstances to those of your planner but if they own vastly dissimilar investments to your own, ask them to explain the reasons. If they don't stack up, that's a good sign to skip.

2. Will your advice help me beat the market?

This is a trick question. Anyone that answers ‘yes' without caveats or caution is probably more intent on getting your business than explaining mundane things like risk and returns. The ideal answer is ‘no'.

As in most areas of life, under-promising and over-delivering is a better modus operandi than the other way around. This question should weed out those that over-promise. A variation might be: What do you think might be a reasonable return over the next five years? Anything over the inflation rate plus real GDP growth plus a few percent is probably over-promising.

3. What is your personal investment approach?

If you're reasonably confident in your investing style you probably want an advisor that thinks like you do. If they talk about momentum investing or charting and trade frequently that's probably not a good sign.

Advisers should also be inherently conservative, which would suggest they'd be happy with market returns over the long term, helping you to stay invested and take advantages of market weakness. If they don't seem of that ilk in answering this question, again, steer clear.

There are probably many more questions you could ask. If you have any suggestions please let other members know about them in the comments section below. In the meantime, tread carefully and good luck!

Note: A member has emailed me with the following qualification to the CFP numbers: "John, many of the 5,700 Certified Financial Planners had their qualification handed to them by the FPA and did no study to attain it or even hold an undergraduate degree. They have done no more formal study than the 2 day course you quote. Most of the advisers highlighted in the Royal Commission case studies had these 'grandfathered' CFPs. I suggest you update your article to reflect this, as there is a big difference in the two. Most newer CFPs (who studied to achieve their CFP) are anti the grandfathering provision as it reduces the value of the qualification." Seems like it would be wise to check with your CFP whether they have been "grandfathered or not."