Financial advice can often add real value to your life. However, to decide if you need advice, to get the most out of the advice process, and protect yourself, you need to arm yourself with lots of information beforehand. I’ve written two articles to help you do this, This is the first.
This article is laid out in the following sections:
What advisers can help with
Before beginning the process of finding an adviser, you should have an idea of what an adviser does so you can figure out what exactly you want from them. If you don’t know what you want, you are likely to end up being sold on paying for things you don’t need, or missing out on things you do.
These are the main areas advisers help with:
- Defining lifestyle and financial goals. Clear goals form the basis for creating a plan to achieve those goals.
- Setting up a budget to consistently allocate income towards achieving your goals.
- Managing debt.
- Investing to achieve your long-term financial goals.
- Retirement funding, including projections to make sure you’re saving enough.
- Super, government support, and aged care funding strategies.
- Life insurance.
- Tax planning. Not all advisers are registered to provide tax (financial) advice, which is tax advice as it relates to financial advice (e.g. tax savings associated with salary sacrifice, insurance ownership, debt management, etc.). Being registered to provide tax (financial) advice helps in the decision-making process of your broad financial plan, and opens the door for a lot more strategic advice, and strategic advice is where the real value add is. Frankly, I don’t see the point of paying for a financial plan by someone who isn’t qualified to give tax advice. You can find this on the Financial Advice Register (from Feb 1, 2023, or later if they’re slow).
- Estate planning. An adviser cannot provide legal advice on estate planning advice, that requires a lawyer, but they can explain estate planning concepts that will help in the decision-making process, and they can advise where it overlaps with financial advice, such as funding your estate, superannuation death benefit nominations, structuring, and most often, they have a lawyer they can recommend for this where they work together.
You don’t need to get help with all of this. You can get what is called “scaled advice”, which is advice on a specific area — e.g. debt recycling, tax-efficient investment structuring, whether you can afford a mortgage. With scaled advice (and really any advice), think carefully about whether you need ongoing advice or just the initial advice and setup. As explained below, many advisers make it sound like ongoing advice is just the standard way of doing things, so you will have to think about whether you really need ongoing advice or whether you can have them help you set it up in a way that you can manage it yourself. If so, you will have to explicitly say you want it set up in a way that you can manage it yourself and without ongoing advice.
Additionally, the first three parts (defining goals, setting up a budget, and managing debt) don’t even need to be done by a certified adviser. You may be able to get enough information by reading books or websites, or a financial coach may be cheaper and just as capable.
What the financial advice process involves
The financial advice process will look something like this.
Once you have a shortlist (which we will go through shortly), you’ll want to interview each of them. An interview is often a short conversation (15-20 minutes) and can sometimes be a phone call. This is often at no charge, but sometimes there can be a charge where the adviser would like to have a full 60-90 minutes understanding your situation to assess whether and how they can provide value to you.
This is where you and the adviser decide if you are a good match to go ahead.
You tell them what you’re looking for, and they should tell you how they can provide value to you. They need to justify why you should pay them for advice, what it is they add, and why what they add is suitable for your specific situation. They should also tell you their fee structure (more on this below).
You should be asking lots of questions (we’ll go through a list of things to ask below). Their responses to your questions and from telling them what you’re looking for should give you a sense of their approach and philosophy so you can see if it aligns with yours. For instance, if you want to retire early, some advisers will talk to you like you don’t understand how life works. Or they may suggest they can earn a higher return by managing your investments rather than focusing on strategic advice.
Strategic advice is where the real value add is (rather than investment product advice). Other than minimising investment fees, the actual investment product advice is almost the lowest on the list of where value is added by a financial adviser.
Also, with money being an emotional matter, it is important not to overlook the connection you have with an advisor. How well do you get on with them? How well do they listen and understand your issues? Do they align with your beliefs and values? Ask who their primary customers are and if they have given advice to people in a similar situation to you. If you are in your 20s or 30s and most of their customers are in their 50s or 60s, they might not. Similarly, if their customer base is mostly the younger crowd and you are looking to wind down your career, they may not be best placed to understand your needs.
You should interview at least three advisers.
2. You give them your information — often in advance via email
They will send you a Fact Find document where you give information about yourself and your finances. They need this to know your whole financial picture to make recommendations on things you may not be aware you need, or that may impact other parts of your life.
3. You have a face-to-face meeting with them
They will ask you lots more questions about things that weren’t in the fact-find. This should include helping you set specific goals if you don’t have any yet because their recommendations will be based directly on achieving each of your financial goals.
It should also include discussing your current financial situation — cash flow (income and expenses) and financial position (assets and debts, including super and other investments) — so they can use that after the meeting for projections to see what recommendations can help you reach your financial goals most effectively and whether your goals are realistically achievable or talk you through alternatives.
By the end of the face-to-face meeting, they should tell you how they can help and you will need to decide if you will proceed and agree to a financial commitment because it’s unreasonable for them to put in several hours of work before knowing they will get paid.
At the end of this meeting, it is a good idea to ask them “will I be in a better situation if I agree to these fees and follow your recommendations” and see how the adviser reacts. If they talk about investment performance — this is not a good indication. If they focus on how potential strategies can help manage risk, manage tax flow, help with cashflow and address your goals and concerns — that’s a good sign.
What you are looking for is an adviser who focuses on strategic advice, not product advice. Product advice is almost the lowest on the list of where the value add is (outside of getting investment fees down). Advisers who focus on product advice are generally product salesmen and one of the most important red flags to look out for.
4. They may call, email, or have additional meetings before creating their recommendations to get your input
It is important that the advisor takes a collaborative approach when developing the advice (i.e. recommendations) with you, rather than just one face-to-face meeting and then a big reveal during the meeting where they present their documented recommendations (in the following step).
In the previous step, I mentioned that the adviser will get your financial goals and your current financial situation (assets, debts, income, and expenses). They will need time to create recommendations and projections with those recommendations, and ideally they should provide different options for you to consider (such as whether you want to contribute more each year to achieve some of your goals sooner, or which goals should take priority) and you want to be included in the decision-making process since it is your financial plan.
Ask what the adviser’s approach is to developing the advice. You will get the most out of your advice if the adviser looks at a few different scenarios and discusses them with you while they are developing the strategies so you are the one deciding what strategy best fits with what you want to get out of your advice.
5. You will meet with them to see their recommendations presented in an advice document called a Statement Of Advice (SOA).
The SOA doesn’t necessarily have a standard format, but ASIC recommends it is done in 3 sections:
- A summary overview
A brief explanation of your situation and reasons for seeking advice.
A table listing each specific goal, and their recommendations of what to do to achieve each of those goals.
This section is typically no more than a few pages, and you should be able to understand the crux of their recommendations from this.
- A more detailed section expanding on the topics in the summary.
More details on your situation. More details on the goals. More details on each recommendation, including why it was chosen, any other recommendations considered, why they were not selected, and any risks to be aware of with the recommendations. This will typically be quite a lot longer due to the level of detail.
- An appendix of all the figures and charts used in the recommendation
If you agree with the recommendations, you will be asked to sign an Authority To Proceed (ATP) document.
You should take the SOA home and have a full read of it so you can digest it and write down questions you have and any changes you would like done before you sign the ATP agreeing to go ahead with the implementation of the recommendations.
These documents are often in the 20-50 page range (split into sections and sub-sections), and since you’re likely paying $3,000-5,000, you should spend a few hours going through it to get the most for your money.
Once you have signed the Authority To Proceed, they will layout an implementation schedule listing each action, who is to complete it (them or you), and a date to complete by. This is to make sure it all gets done.
7. Ongoing services
If you want and agree to ongoing services, you will need to sign an Ongoing Service Agreement (OSA), and they will set up a payment method. Often this will be paid from your investments if you have any.
That’s pretty much it. It may differ a little, for instance, some might combine the interview and the face-to-face meeting by getting you to send the fact find before any conversation. Some might have an additional face-to-face meeting before agreeing to proceed with them creating the recommendations if there is more information they need from you.
Independent vs aligned advisers
Advisers can be independent, aligned, or independently owned (a hybrid).
Financial advisers are only legally allowed to call themselves ‘independent‘ if they do not receive any of the following:
- commissions (unless rebated in full to the client)
- volume-based payments (i.e., payments based on how much business they send to a financial product issuer)
- other gifts or benefits from a financial product issuer.
The benefits of using an independent financial adviser are:
- As they do not receive commissions from any of the products they recommend, there is less conflict of interest.
- Without volume-based payments, there is no incentive to recommend one particular product over another.
- Most independent financial advisers operate with an open Approved Product List. This means they are not limited to only being able to recommend a small subsection of the investment products available.
- If they help with personal insurance, the premiums can be 20% cheaper than through an adviser that takes commissions.
Due to these strict requirements, less than 1% of advisers can claim to be independent.
At the other end of the spectrum are aligned financial advisers. These advisers are employed by banks, financial institutions, fund managers, super funds, or insurance providers.
They generally charge commissions, asset-based fees and have a limited Approved Product List (APL).
Advisers tied to a financial institution are bound by their terms and restricted to an approved product list (APL) provided by that financial institution. When being restricted to an approved product list from an institution that manufactures and sells financial products, the adviser is more likely to ignore better insurance policies and better investments or superannuation funds because of incentives or in-house bonuses for recommending preferred products, which is a massive conflict of interest.
3. Independently owned
Independently owned advisers are a hybrid of the two. They are independently licensed and have a less restricted Approved Product List as they’re not aligned with financial institutions, and they charge a combination of commissions, asset-based fees and fee for service.
You don’t need to restrict yourself to independent advisers, but take a look at how independent advisers are able and unable to be paid, and ask any other advisers how they are paid. For instance, ask any non-independent adviser if they offer a payment option on insurance where commissions are rebated in full after a fixed fee is paid. If they push you towards ongoing commission-based insurance, something is up. If they charge a fee based on the percentage of your assets, find another adviser. Ask them if there are any conflicts in their remuneration, they are legally required to tell you. If yes, don’t use them.
So it is not so much that all independent advisers are good and all non-independent advisers are not, but more so that independent advisers are already restricted by many of the dodgy ways advisers charge. If you know the questions to ask to sus out non-independent advisers, you can find good ones regardless of whether they are independent or not. The following article will help you with those questions and what to look for.
Finding an adviser
Some ideas on how to find an adviser.
1. Start by asking people you know if they have an adviser — family, friends, work colleagues — as that recommendation comes from someone you trust. However, don’t assume anything about their adviser. Most people don’t know how to assess an adviser and choose an adviser because the adviser is friendly and personable. This step is just to get leads.
2. For independent advisers, you can find them on the following lists:
- Profession of Independent Financial Advisers (PIFA)
For members to join PIFA, in addition to not taking commissions or receiving volume-based payments, they also must have no ownership or affiliations to any products, and they cannot charge asset-based fees.
- Superguide has a relatively comprehensive list of all independent advisers
- ADF Financial Advice Referral Program
These advisers have undertaken, in writing, to the Australian Defence Force that they offer professional advice to their clients without remuneration conflicts of interest.
3. Independently owned financial advisers can be found at AIOFP.
To be an AIOFP member, practices must not have any ownership from a financial institution and must operate their own Australian Financial Services License.
4. If you’ve joined an online finance forum, you might see advisers answering questions there, but you will need to assess whether they are posting helpful information and answering questions or if they’re just there to try and find customers.
The next step is to learn what to look out for with advisers so that they are working in your best interest, not theirs. This is covered in the next article: