How To Choose an Financial Adviser

How To Choose an Financial Adviser

A question I am often asked is "How do I find an honest adviser who will work for me, and not for themselves?" Sadly, the investment and insurance industry has built up a reputation as being full of shonks flogging product to people for commission.

The problem with this is that commission varies dramatically from product to product and, if your adviser is paid on this basis, there is always an uncertainty about whether the product recommended is the best product for you - or pays the most commission to the adviser.

Let's look at an older-style life insurance company savings plan, for example. After five years, it's likely to have a cash value of less than your total contributions. These plans usually take 10 years just to get back what you have put in, let alone getting in front. If the plan called for a $10 per week contribution, and instead you put that $10 per week into your mortgage, you'd be much better off.

So, why didn't the adviser recommend this course of action? The answer is painfully simple. By putting $10 a week into your mortgage, the adviser earns nothing. By selling you a long-term savings plan, the adviser would have made around $500. In this instance, the way the adviser is paid makes it very hard for them to give you the advice that's best for you.

So, what's the solution? Well, you money is really important to you, and a good adviser can really help, but you have to be tough and up-front with your concerns and questions.

My advice, if you need an adviser, is to do the obvious things. Ask family, friends and work colleagues for a referral. Keep an eye on the money sections of newspapers and see who the journalists talk to.

Once you have a name, make an initial appointment. At the meeting, ask the following questions.

How long have you been giving advice?

This is most important. You can't beat experience. Also remember to ask how long they have been working for their current employer. You don't want someone who switches jobs all the time.

What are your qualifications ?

A degree in economics or business is a good start, but especially keep your eye out for ASIA (Associate of the Securities Institute of Australia) or DFP (Diploma of Financial Planning). The best adviser are likely to have the letters CFP (Certified Financial Planner) after their name.

Tell me about your company. Do you own part of it and who are the shareholders?

You need to know how long the company has been around and its background. I am always a keen student of who the company directors are - a solid group of directors makes me more comfortable. Also, if your adviser owns all or part of the company, they are not likely to leave too quickly.

What type of client do you specialise in?

Some advisers tend to deal with smaller clients, other with larger clients. If you are not the type of client the adviser wants, you won't get looked after well.

What resources does your company have in terms of investment research?

Investment is complicated. Your adviser will need technical support, so find out how strong this support is.

Do you give independent advice?

The company may be owned by a big institution, but still give independent advice, meaning they don't flog only their own products.

How do you charge?

I prefer 'fee for advice' advisers, meaning they charge you for their time and either don't take commission or brokerage, or give it back to you. If they do charge commission, make sure that they disclose this to you and the amount they get.

Do you hold a licence?

To give broad investment advice the adviser will need to hold an authority to operate under his or her company's licence. Have a look at the authority and also the company licence. You are looking for restrictions on the type of advice they can give. For example, many companies cannot give advice on direct share investments. While this should not be a major drama, you should know about it.

Do I get my advice in writing?

If you don't, leave straight away! Getting your advice in writing is essential, because this will help to protect you if things go wrong.

Describe your ongoing service. What does it cost?

You'll need ongoing advice. Find out how the adviser does this. I'd be very concerned if it's free. Free ongoing advice is usually worth what you pay for it - absolutely nothing!

Are you a member of the Financial Planning Association (FPA)?

In my admittedly biased opinion (I am a member and was its President in 1993-4), the FPA is the premier body for financial planners. Its Code of Ethics, Commission Disclosure Rules and Disputes Resolution system help to protect you.

Now, I know it's a pain asking these questions, but you must. Invest 20 minutes in getting satisfactory answers and while I can't promise that everything will be perfect, at least you'll be on the right track.

Also, while you are talking to the adviser, please be aware of the environment. Is it a professional workplace? Files lying everywhere always worries me. Does it feel efficient and comfortable? Were you greeted by the receptionist in an appropriate fashion? Did you adviser take phone calls during your meeting, or race out to get a cup of coffee - these are bad signs.

Also, be fair to the adviser; at the end of the meeting ask, "Am I the sort of client you want? Please be honest about this or I'm sure we'll both be disappointed." No point starting this important professional relationship if it does not suit both of you.

To finish on a positive note, there are now many good advisers but, in the final analysis, your money is your responsibility. Treat the job of finding the right adviser seriously.