Financial advice: Mark Story
Follow a stringent checklist to ensure your hard-earned wealth is managed properly
Despite recent Future of Financial Advice (FoFA) reforms, investors continue to have a love-hate relationship with the financial services sector. If recent Investment Trends research is any proxy, confidence in the advice community isn’t much better than during the litany of scandals that plagued the sector.
Adding to this jaundiced view of advisers, formal complaints lodged with the Financial Planning Association (FPA) and the industry regulator, ASIC, have also been up in recent years, not down. So much for reform.
There’s clearly a lot more to rigorously pressure-testing financial advisers than their ability to operate within a stricter compliance regime. Not even ASIC could prevent dodgy financial planners, sacked for providing dishonest advice during scandals, from resurfacing elsewhere.
As a case in point, Commonwealth Bank planner Stuart Jamieson was caught forging customers’ signatures and subsequently expelled by the FPA. However, the decision by the bank to let him resign – rather than be fired – meant he was able to go on to two further jobs in the finance sector without clients knowing anything about his past.
Filter for independence
In light of the CBA and other scandals, it’s equally important to run the same ruler over the firm an adviser works for, and the culture that drives its advisers’ behaviour, says Michael Roberts, of the Bailey Roberts Group.
According to Roberts, you’re not ready to properly pressure-test advisers until you’ve filtered for independence. He claims only truly independent advisers
can be relied upon 100% to put their clients’ 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 20,000plus advisers.
What investors need to filter out of their adviser universe, says Roberts, 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 3000 advisers who don’t work for large financial institutions are above reproach. They still need to satisfy the all-important compliance test, and the recent FoFA reforms have attempted the raise the bar on both conduct and remuneration practices.
Start with compliance
Guy Thompson, of advice firm Rise Standards, recommends investors start scrutinising advisers by getting straight answers to basic “housekeeping” stuff. He’s talking about qualifications and experience, including any dismissals for misconduct, plus disclosure on the licensee that authorises them to offer advice.
Remember to check ASIC’s online register of banned or disqualified advisers (see asic.gov.au). The website also has a valuable tool kit on understanding the financial advice process.
If an adviser isn’t a member of a professional body, Thompson urges investors to ask why not. If they are, find out if this actually helps to govern their conduct. He also suggests investors 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,” says Thompson.
While the ASIC register won’t identify advisers who have been moved on due to “borderline” practices that aren’t bad enough to take action against, Sue Viskovic, head of Elixir Consulting, suggests asking 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, says Wayne Leggett, of Paramount Financial.
He says advisers should be comfortable providing similar statements of advice (SOAs) prepared for other clients with any reference 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, Viskovic also reminds investors that any advice still has to pass the “sniff” test. “With any advice revolving purely around shifting your current accounts to their employer’s platform and/ or investments, you want to be 100% confident it’s in your best interest, with compelling documented reasons why,” she says.
Conflicts and remuneration
In the wake of the FoFA reforms, advisers are required to be upfront with you on 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, says Thompson, is 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 broking fees, the regularity of adviser reviews and updates, how they’re communicated, plus proposed access to your portfolio via online platforms or similar.”
It’s equally important, says Thompson, to find out what administrative support an adviser has behind the scenes. Insufficient support could significantly delay the average two weeks it typically takes to receive advice. If an adviser lacks control over service delivery, he also recommends finding out who is ultimately responsible if systems or procedures fail.
Administration aside, Thompson urges investors to find where advisers obtain their research, which services they outsource (and why) and whether they’re able to 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 nonaligned, Roberts also urges investors to find out what their true relationship is with product providers and how well it has been disclosed. “You 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,” says Roberts.
If a firm professes to be non-aligned, it’s just as important, claims Roberts to find out what investment structure they use and recommend for your investments, and why.
While commissions paid on any insurance products should be the same regardless of the adviser, what matters most is that any decisions are “remunerations agnostic”, says Paramount’s Leggett.
Whether an adviser is charging a fee for service and dialling the commissions back to zero or taking commissions in lieu of fees, he says it’s important to check that they aren’t in effect double-dipping. “Given that clients wouldn’t know if they’re better off under either option, it’s important to get advisers to spell it out,” says Leggett. “Dialling down commission is usually not as economical for the client as the scenario where the adviser gives the client a fee ‘credit’ for the commission paid.”
Other boxes to tick
Roberts also reminds investors that compliance criteria alone should only ever provide advisers with a ticket to the game. Rogue financial advisers aside, he says investors need to be equally wary of the financial carnage that honest rookie advisers – who at face value look credible – can cause due to inexperience, insufficient fiduciary responsibility and/or insufficient interpersonal skills.
“While the vast majority of Australia’s financial advisers were honest well before FoFA reform, that hasn’t always been reflected in the quality of their underlying advice,” Roberts reminds investors. “Mediocre advice is potentially conflicted, highly priced and biased advice, especially if it unduly influences investors to buy a particular product.”
Instead of fixating solely on advisers getting ticks in all the right boxes, he says investors need answers to another layer of questions that the entire advice profession is seldom confronted with.
What Roberts is talking about is the probity of an adviser’s relationships 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 space.
Roberts recommends asking advisers how the complex investment vehicles they propose work – and the associated risks and potential for loss within 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 contracts before committing to any investments.”
Interestingly, he says the lengths to which an adviser is willing to go to answer your difficult questions often offers meaningful insights into the duty of care they’re likely to provide once you’re a fee-paying client.
He says 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 and how they address them within their advice, their investment performance track record, and who is responsible for the performance of the recommended investments.