How to choose a financial planner

This is a 'must read' for anyone choosing to deal with a financial planner!

Below I set out 5 important issues to consider when obtaining financial advice. There are some fantastic financial planners out there. However, just like any industry, there are some poor ones as well. I believe that if you follow these 5 points, it will put you miles in front and infinitely increase the chances of you receiving excellent financial advice. Here goes....

1. Most financial planners are paid via the receipt of commissions from fund managers, insurance companies and dealer groups. Receiving a commission creates a huge conflict of interest. Firstly, planners are incentivised to only recommend investment products that pay commissions. There are some excellent investment products which don't pay planner commissions (e.g. index funds). Secondly, planners may be compelled to recommend products which pay higher commissions. Fund managers pay financial planners over $1 billion in commissions in Australia each year. Ultimately, investors are paying for this in the form of higher fees. Now, there's nothing wrong with this as long as investors are getting valuable, balanced and honest financial advice in return – often they are not.
2. Many financial planning firms charge clients a fee based on a percentage of funds you have invested with them (often 1% of assets invested). This isn't a lot different from taking a commission as it still creates a conflict of interest. For example, what if the best advice after someone receives a large cash inheritance is to repay their home loan? The point is; the fee received by the planner should not be linked to the advice outcome in any way.
   In addition, is a percentage fee really a good measure of value added by a planner? For example, if you have $1 million of assets invested, you will pay the planner $10,000 per year. If you have $500,000 invested the fee would be $5,000 per annum. Is there really twice as much work involved with managing a $500k portfolio versus a $1 million portfolio? Unlikely!
3. Many financial planning firms (particularly the large ones) are owned by the big banks, insurance companies or fund managers. This can create a conflict of interest as the planner might be obliged or incentivised to sell the owner's (bank's) products. In addition, all financial planners work off an approved product list which is a list of products they are allowed to sell. Often the product list is dominated by the owner's products. An independently owned financial planner has more flexibility to choose which products and fund managers it wishes to deal with – without any pressure or influence.
4. Most financial planners are prohibited (by their dealer group) from giving advice about investing in direct residential property. Therefore, if you have approached a financial planner for advice on which asset classes to invest in (i.e. property, shares, fixed interest, etc.); most are not able to provide a balanced assessment of all asset classes. It's a bit like a doctor who can only prescribe one type of medication. Let's remember that direct property is the biggest asset class you can invest in. The value of the world's property exceeds the value of world's stock markets. Closer to home, 9 out of the top 20 richest people in Australia have built their wealth using property (BRW Rich 200 - May 2008) and it's the single biggest industry amongst the BRW Rich 200. How can you call yourself a financial planner if you are not allowed to even consider one of the largest asset classes?
5. Financial planners do not receive any training about investing in direct property. The Diploma of Financial Planning, which is the required minimum training for all financial planners, covers topics such as derivatives, securities, managed investments, superannuation, life insurance and foreign exchange. The notable exception is direct property. Even the advanced financial planning course (CFP) doesn't assess direct property.

My last two points are about direct property. I am not suggesting for a second that everyone should have direct property investments. Of course, I realise property doesn't suit everyone. However, if you are seeking investment advice, it is important that the person providing the advice can, if they see fit, consider and recommend all asset classes. If you are restricted from giving advice about property or don't have a good knowledge about property investment, how can you recommend one asset class over another? To draw an analogy, I can't conclude that a Ford car (as opposed to a Holden) is the best car for you unless I have equal knowledge of the strengths and weaknesses of both Ford and Holden cars. If I don't know anything about Holden cars, how can I say with any integrity that a Ford is better for you?

If you are going to see a financial planner, you must ask these 4 critical questions:

1. Do they accept any commissions?
2. If they charge a fee, ask how the planner's fee is calculated? Is it linked to the outcome of advice in any way? Watch out for a percentage of funds invested.
3. Who owns the financial planning practice and the dealer group? Watch out if it's owned by a company that also sells its own investment products.
4. Can they offer advice on direct residential property if required? How much do they know about investing in residential property? Even if it's not appropriate for you now, it might be sometime in the future so the planner should be able to offer you to this.

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