I know. You have probably seen lots of news about the Royal Commission and the financial advice horror stories. I don’t plan to rehash anything that’s already been said.
The only thing I will say is that the publication of these horror stories is a very positive thing. At a minimum, it encourages people to educate themselves about their advice options and maintain a healthy level of scepticism (not blindly trust). At best it will force the industry to change.
The point of this blog is to help you understand who you need to seek advice from, when and what fee (remuneration) arrangements are acceptable. In short, to give you the lay of the land. This will help you navigate the financial industry and put the Royal Commission commentary into context.
Important: There are two types of financial or investment advice
- Strategic financial advice will tell you what and how much you need to invest in to achieve your financial and lifestyle goals.
- Asset-class investment advice will tell you how to invest in a certain asset class.
It is very important to understand what type of advice you are looking for. The mistake that many people make (which gets them into trouble) is that they seek strategic advice from someone that is only able to provide asset class advice.
For example, you don’t ask the salesman at a Ford dealership if you should buy a Ford or Holden. Instead, you need to go to an independent car dealership that sells both Ford’s and Holden’s and seek their advice.
There will be times in life when you need strategic advice and other times when asset-class advice is sufficient.
(A) Strategic financial advice
If you need strategic financial advice you absolutely must go to an independent financial advisor. This blog sets out 5 tests that an advisor must pass to be considered independent.
Someone needs strategic financial advice if, amongst other things, they have goals that they want to achieve but don’t know what to invest in, when and how much in order to achieve these goals. To receive honest advice, the advisor must not have a vested interest in recommending any particular course of action or investment.
These blogs on the value of advice and cost of advice might also be of interest.
(B) Asset-class advice
Not everyone needs independent advice. If you have already worked out what asset-class you would like to invest in then you don’t necessarily need independent financial advice.
1. Superannuation and managed fund advice
If you would like some advice on where to invest your super (i.e. which fund) or if you should like to invest in managed funds then you must seek advice from an independent financial planner.
The industry funds have their own financial planners. Industry funds are certainly better than retail funds but they do have their weaknesses including (1) many of them exclusively use active management which is proven to produce lower returns, (2) they don’t adequately benchmark their returns and (3) whilst they are not-for-profit they are also not-for-productivity in my opinion (which results in higher costs for members). Even the Productivity Commission has previously commented that they should be more cost effective given their size. However, given they are heavily influenced by the unions, there is pressure on them to continuously employee more and more people. If you do want to seek super advice from an industry fund, then I’d recommend Hostplus.
It would be remiss of me to not mention that we (as an independent advisor) offer a super review service.
2. Stock brokers
There is overwhelming evidence that demonstrates that ‘stock picking’ is a losers game. Therefore, if you are considering acquiring a portfolio of direct shares, think again. My advice is to invest in low-cost index funds (particularly ETFs) instead (see point # 1 above).
However, if you are hell-bent on investing in direct shares then get some advice – don’t try and do it all yourself. Either use a stock picking newsletter or use a broker that charges a retainer fee (so that they are not incentivised for you to buy and sell stock regularly).
3. Residential property advisors (buyers’ agents)
If you want to invest in property, then you must realise that more than 80% of the financial results you enjoy (or suffer) will be determined by the actual property you select. If you invest in the wrong property, your investment will fail. Therefore, it stands to reason that you must get expert advice – or a second opinion at the very least. When selecting an investment property advisor, I believe there are a few things you need to look for:
- Must be able to clearly articulate the factors that make a property investment-grade.
- Do not listen to you i.e. that will not compromise on the quality of an investment just to appease your tastes or dislikes. They are 100% focused on buying the right property or nothing at all.
- Can show you examples of properties they have bought for clients more than 10 years ago and demonstrate their strong performance.
- Specialise in one geographical location. It is impossible to be an expert in a whole city or many cities. You want a local area expert. That’s what you are paying for i.e. intimate knowledge acquired over many years.
- The longer they have been in business, the better. Someone that has been in business for 20+ years would have seen many cycles and changes.
- The only financial benefits they receive should be the fees that you pay them (no commissions or kickbacks from other agents or property developers).
Over the past 15+ years we have established relationships with a network of property advisors that we trust.
4. Mortgage brokers
Most mortgage brokers are commission-based i.e. they receive a commission instead of charging you a fee. This might seem risky – because you definitely should avoid commission-based financial planners – but brokers are different for three reasons:
- Most brokers offer whole-of-market advice. Whilst most brokers don’t have relationships with every single mortgage lender in Australia (that would be impossible), they typically have a panel of 30+ lenders. These 30+ lenders represent approximately 98% of the mortgage market in terms of volume. Therefore, its unlikely that you will miss out on any major opportunities by using a broker;
- The price you pay (fees and rates) are the same compared to you going to the lender directly. In fact, a good broker will shop your loan around and often get you a better deal. A banker at CBA isn’t going to tell you that Suncorp is offering a lower fixed rate for example; and
- The commissions paid by all lenders do not vary by a material amount – they are virtually uniform. Therefore, there is no incentive to recommend any lender over another.
I would caution anyone from taking investment (property or share) advice from a mortgage broker unless they are licensed to give financial advice (hold an Australian Financial Services License).
5. Bankers
Do not take loan structure or investment advice from a banker (i.e. an employee of a bank). I have seen some people get into real trouble in this regard. Most bankers do not have the tax or investment knowledge to be able to provide this advice. Only seek product specific advice from your bank.
6. Accountants
Most accountants are only able to provide you with tax advice. That is, they are not able to provide financial advice unless they have an Australian Financial Services License.
Accountants should always maintain their independence and should not accept referral fees, commissions or kick-backs from any product or investment provider.
It is very advantageous if you can work with an accountant that is able to provide both tax and financial advice because whilst minimising tax is advantageous, ultimately you want to ensure it results in wealth accumulation. In this regard a holistic approach works best i.e. not becoming too tax centric.
7. Insurance advisors
You definitely should get advice when arranging income protection, life and TPD insurance because the ‘quality’ and structure of cover is just as important to consider as the ‘cost’. Often, you can optimise both i.e. you don’t necessarily have to pay more to get a higher quality product. Too many people put their families at risk by trying to do it themselves. They think they are adequately covered but in actuality they are wasting money on poor quality cover.
Many insurance advisors receive a commission, and this does create a conflict of interest because the more cover they recommend, the higher the commission they receive. However, a fee-for-service insurance arrangement has its limitations too.
My advice is if you have modest insurance needs, a commission-based insurance advisor is the best solution (so long as they consider or compare obtaining Life and TPD insurance via an industry super fund, if applicable).
However, if you have substantial insurance needs e.g. you need several millions in cover, then maybe a fee-for-service solution will be more economical.
What you need and who to see
Hopefully this blog gives you a better understanding of what advisor to use and when to use them. It is very important to recognise the difference between strategic and asset class advice. As discussed above, if you need strategic financial advice then you must use a commission-free, fee-only independent advisor. However, if you only need mortgage (credit) advice for example then commissions are fine.
