Telling hits from myths about financial advisors
Trusted moneymen can seem as rare as unicorns when it comes to finding someone to guard your cash... so it pays to know the golden rules.
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FINANCIAL advisers are often in the news for the wrong reasons: forgery, stealing from clients, ponzi-style schemes, and other assorted scams.
Now there’s a full-blown scandal under way in Australia, where one of the major banks was reportedly charging dead clients for advice, and another company misled regulators up to 20 times about charging clients for advice they never received.
There are calls for a similar inquiry here in New Zealand. While it remains to be seen whether the local players are as bad as the Aussies, there are definitely some shenanigans going on.
As one wag commented on last week’s column, if you’re trying to find a trustworthy financial adviser, ‘‘look for the one who rides in on a unicorn’’.
Cynical, but not too far off the mark. There are some excellent financial advisers out there, but most advisers do not have your best interests at heart.
Something like 80 per cent of advisers work on a commission model. That means they get kickbacks to funnel your money into certain investment products. How do you know they’re choosing the best investment for you, rather than just feathering their own nest? You don’t.
Now, some advisers might honestly believe they always do the right thing. There are even new rules coming in that will give them a duty to put clients first. It doesn’t matter. Commissions create a fundamental conflict of interest, and they’d have to be superhuman not to let it affect their judgment.
What about taking advice from bank or KiwiSaver staff? At least they’re on salaries, and the new law means they can’t be offered bonuses that encourage them to give bad advice. But again, it’s hopelessly biased. These in-house advisers aren’t even allowed to offer advice on products offered by other companies. Can you imagine someone on ASB’s payroll honestly saying you’d be better off with Westpac, or vice versa?
The Australian regulator looked into banks advising clients to switch across to one of their own products. In a full 75 per cent of the files it reviewed, the move wasn’t in the client’s best interests. If you believe the local banks and KiwiSaver schemes are immune to this temptation, I’ve got a bridge to sell you.
That leaves the independent advisers. Rather than taking money from the industry, they’re on your side. Of course, that means you have to pay them a fee, like you would any other professional.
You could be looking at anything from a few hundred dollars for some very simple advice, through to several thousand dollars for a comprehensive financial plan. If you don’t have a lot of money to manage, this is not going to be worth your while.
The good news is that some advisers do take on small clients, or provide simple one-off advice on the likes of KiwiSaver. The bad news is, there are not that many of them out there. The FMAhas a list of advisers but even once you’ve found some candidates to interview, you’ll want to run through the following checklist: 1. Are they registered? Check the database at fspr.co.nz. If not, there’s a problem. 2. How are they paid? They should disclose this upfront, in writing, without having to be asked. If they don’t, there’s a problem. 3. How broad is their scope of service? In other words, can they help you with everything you need advice on, or only some specific areas? 4. How much do they charge? Are there any hidden fees at the end of the contract, or ongoing costs? Are the fees spelled out in dollars, not hidden behind percentages? 5. Do they listen to you, and understand what you want?
If you manage to check off all these items, congratulations – you might just have found yourself a unicorn. Got a burning money question? Email Budget Buster at richard.mead[email protected]dish.org, or hit him up on Facebook, where you can also find links to previous Budget Busters.
Making the most of your money means learning how to choose a good financial advisor.