Six questions for your financial planner

On Monday we detailed the shortcomings of the financial planning industry, which suffers from a deficit of trust due to the deliberate confusion of selling products and delivering advice. Trouble is, most investors need reliable financial advice. The problem is in finding it.

That’s the issue we’ll address here: where should you look for a financial planner and, once you’ve found one that you think looks okay, how do you know whether they’re any good?

The first rule of thumb is to fish where the fish are. According to the Ripoll Report of 2009, a parliamentary report into the selling of financial services that ultimately led to the Future of Financial Advice reforms now under threat, there are about 18,000 financial planners in Australia. About 85% are associated with a major bank or AMP, which means they either work for these organisations or are remunerated by them in some way.

Whilst there are good, capable, honest planners within these companies, you’re chances of happening across them are relatively small. The vertical integration of the industry, where the manufacture of financial products seamlessly slips into the selling of them under the guise of advice, all but ensures you’ll be sold well rather than advised sensibly. The big banks and AMP aren’t good places to fish for advice.

Dealer group problem

But just because the planner’s office doesn’t sport a Commonwealth Bank logo that doesn't mean it's independent. Most of the major financial planning firms are associated with the big banks but don’t advertise the fact.

A few examples; Count Financial is owned by Commonwealth Bank, Hillross and IPAC Securities by AMP, millenium3 by ANZ Bank and Garvan Financial Planning by NAB. Known as dealer groups, these practices are licensed by the big product manufacturers, which see them as distribution outlets, not as havens for independent advisors. The adverse, systemic influence of rebates and commissions means they’re best avoided.

The small print in the Financial Services Guide should reveal the relationship but if your planner comes up with a list of recommended products sourced mainly from one provider, there’s every chance you’re being sold. That’s something best avoided.

To its credit, the Financial Planning Association recognises the lack of trust and transparency and is urging the Government to break the nexus between advice and sales. It has about 7,500 practising advisors bound by a code of practice that is more demanding than current laws. Still, that’s no guarantee of good advice. What we’re really looking for are planners with no links at all to product manufacturers and no commissions or payments of any form from them. And we’d prefer to avoid advisers paying asset-based fees (fees levied as a percentage of your asset base).

That’s where the Independent Financial Advisers Association of Australia comes in. But in a sign of how laughably compromised the industry has become, membership numbers just 12 planners. From a pool of 18,000 planners, that’s a scandal. The industry has grown so fat and lazy sucking on the fee and commission money pump for so long it can no longer see things any other way.

So the phrase ‘caveat emptor’ is more germane in this industry than any other because you really are on your own. Always ask a planner what company owns their advice licence and whether they or their employer receive any benefits from recommending their products. If they do, walk out.

When you find one not conflicted, here are six questions you should ask before accepting their advice. Whilst they aren’t a guarantee of trust or competence they will increase your chances of getting it.

1. Are they a certified financial planner? – It’s easy and inexpensive to become a qualified, RG146-compliant planner. The face-to-face course run by the Monarch Institute for example, cost $1,425 and last for eight days or 16 evening classes. Once you’re licensed by ASIC with an AFSL, you’re good to go. Entering a profession like accountancy or law can take years but here you can knock it over in a few weeks.

Becoming a certified financial planner – an internationally recognised qualification consisting of four modules, each run over a three-month period – is a little more demanding and expensive. About 5,000 FPA members are CFP-qualified and you’re almost certainly better off with one of them.

2. Have you ever recommended a managed agricultural scheme? – As Richard Livingston notes in his post The one question you should ask your adviser, this is a big red flag. Some of these schemes paid advisors fees of 10% or more. If they succumbed to that temptation, no matter how reformed they claim to be, leave immediately.

3. Do you put your clients into your own firm’s funds and products? – If the answer is ‘yes’ – and a randomly picked planner should overwhelmingly answer this question in the affirmative – ask two follow-up questions: what steps have you taken to source non-conflicted alternatives and minimise the conflicts of interest? If you get a lot of spluttering and prevarication instead of a clearly enunciated reply, then you have your answer.

4. Can you show me your investment portfolio? – It’s a good rule of thumb that those proffering advice should eat their own cooking. How would it look, for example, if Share Advisor analysts weren’t following their own Buy recommendations? After the look of surprise on the adviser’s face has subsided, explain that just a list of products with percentage allocations will suffice.

You’ll probably have quite different circumstances to that of your planner so don’t expect to see a list of products similar to those recommended to you. But if they own vastly dissimilar investments, ask them to explain the reasons it. If they don’t stack up, that’s a good sign to go.

5. Do you offer flat fee-for-service pricing? – If the adviser answers ‘no’, their remuneration is very likely tied to product sales in some form or other, making the chances of genuinely independent advice less likely. Money does an awfully good job of skewing incentives. If the adviser offers a ‘percentage of an asset-based fee’, expect service akin to having your own fund manager. If that’s not the pitch, forget it.

6. Can you show me a sample statement of advice (SOA)? – ASIC’s 2012 shadow shopping of retirement advice – worth a read if you’re in the market for 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.

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. If the document seems impenetrable or difficult to understand, the advisor is missing the point. Again, time to leave.

These six questions should help you find a good planner but don’t think the job ends there. After you get your SOA, use the same process to get a second opinion on it. ASIC’s 2012 exercise revealed that whilst only 3% of the plans examined were deemed ‘good’, 86% of participating clients felt they had received high-quality advice and 80% trusted their adviser ‘a lot’. This shows how easy it is to prey on people’s retirement nest eggs.

Share Advisor members are a smart and savvy bunch but financial advice is too important to leave in the hands of a conflicted and slack industry. Be sceptical, seek out a second opinion and use these six questions to weed out the shonks.