Why would I Choose YOU?
CHOOSING a financial planner is just like choosing any other professional service.
The buyer of the service wants to know, first of all, that the provider is competent, but also that there is a personal suitability.
The competence has to come first, says Richard Klipin, chief executive at the Association of Financial Advisers.
“You’ve got to ensure that you’ve chosen someone who has the right skills, qualifications and competencies to deal with whatever your issues are,” he says.
“If you’re running a self-managed super fund, for example, you need to make sure that your adviser is a specialist in SMSFs, or at least is competent in such funds’ issues and needs.
“By the same token, if you’re a pensioner you want to find someone who is used to dealing with pensioner clients.”
If you are sure that the adviser’s expertise suits your particular needs, Klipin says you should ensure that the adviser is part of a reputable organisation, whether it has its own licence or is licensed through one of the big organisations.
“It’s also important to ensure that the recommended list [of investment products] the adviser has is wide enough, broad enough and deep enough in terms of your particular requirements,” he says.
Mark Rantall, chief executive of the Financial Planning Association of Australia, says the individual’s needs are the most important driver in the choice of adviser. “We’ve produced a guide to choosing a planner that encourages clients to ask a series of questions,” he says.
“For example: Would you tell me something about your own background and how long you have been a financial planner? What are your areas of specialisation and what kinds of clients do you mostly see? Who is the ultimate owner of your business? May I have a copy of your financial services guide? How do you charge for your services? How will I know exactly what services you will provide?
“We’ve designed the questions [in such a way] that the individual should be able to establish what they need to know in terms of the technical competence and professional affiliation of the adviser, but also that the adviser is listening to them and asking the right questions about their goals and objectives, because at the end of the day the individual has to be able to make some sort of emotional connection to the adviser.
“This is absolutely critical, and the client has to understand that it needs to be a two-way street,” Rantall says.
This search for rapport — a subjective thing — is essential because a financial advisory relationship is potentially long-lasting. And if you’re exposing your financial circumstances, hopes and dreams to someone, you want to relate well to that person.
“We’ve all had that experience of needing a service and finding someone — an architect, a doctor, a dentist — that we connect well with,” Klipin says.
“Equally we’ve all had to deal with people where maybe the age is different, maybe the values are different, maybe the personal chemistry is not quite there.
“The most productive relationships happen when the competency is there and the personal connection is there as well; from that we get the feeling that the relationship is going to be very productive and fruitful.
“Given that you’re potentially going to be working with this person for 10 [to] 20-odd years, there must be a good personal connection, and the feeling that the adviser’s [values] are aligned to yours.
“We strongly advise clients to speak to several advisers and not to feel that they should sign up with the first one that they speak to.”
Andrew Inwood, managing director of marketing research firm Brand Management, says the clients should understand that the adviser must work to show the client that they deserve to be taken on as adviser, not the other way around. “The role of the planner has changed from someone who’s just offering people access to the market to someone who’s got to show that they can actually help people to make good decisions,” Inwood says.
“For the past seven or eight years it was simply enough to turn up at a meeting, the planner would put money in the market and it would be OK. That concept has absolutely gone.
“The planner now needs to be able to act much more tactically and be more active . . . to actually drive satisfaction among consumers.
“One of the things we’ve learned from the [global financial crisis is] that advisers who had relied on simply selling people things — who were just ticket-clippers, collecting commission — and who weren’t able to communicate effectively with people about what was going on and what was happening, just offered no value to their clients.
“It’s really important to understand is that the better your planner is, and the more involved you are, the better off you’re going to be,” Inwood says.
Daniel Brammall, vice-president of the Independent Financial Advisers Association of Australia, stresses to potential clients that they should be looking for impartiality. “First and foremost, if you’re looking for advice — not information — you should be looking for impartiality,” he says. “You can’t get advice that’s not impartial; that’s called a sales pitch.”
Brammall says the IFAAA has a gold standard for independence for its members. “We see three conflicts that are getting in the way of impartiality. The first is ownership links with a product manufacturer: there must be no links whatsoever between the product manufacturer and a financial adviser.
“The second of those hurdles is: no commissions. Commissions are the province of a sales representative. Advisers receiving commissions are not giving impartial advice; they’re not placing their clients’ interest ahead of their own.
“The third thing that gets in the way of impartiality is fees based on a percentage of assets under advice: we think these are just a commission by another name.”
Brammall says asset-based fees were born when commissions “began to get on the nose” a decade ago.
“Smart advisers thought, ‘I know what I’ll do, I’ll calculate a fee that is taken out of the client’s account, but let’s do it in the same way that commissions are calculated.’ If it looks like a duck, walks like a duck, quacks like a duck, it’s a duck.”
Financial services industry consultant Tom Collins agrees that the financial advisory industry still has to shake off its relationship with the product manufacturers to develop into a “true profession” but says, at a client level, independence may not be the highest priority.
“I think we have to accept that some people will only feel safe if they go and talk to a bank or an AMP or an AXA planner,” he says.
“I don’t have a problem with that: if that’s what makes them feel comfortable, that’s OK. Independence might not be what somebody’s looking for; it’s a brandname that they trust.”
Collins says a big-brand adviser will not offer the most high-level, sophisticated advice, but some people aren’t looking for that in the first place: they are looking for conservative advice that won’t get them into any trouble.
“If you look at where all of the recent disasters have occurred, you rarely find that the bank planners have been involved: those lesser-quality, fringe products have been sorted out at the approved product list level because the banks are conservative with what they do; if something is a bit risky, they won’t put it on their list.
“And if anything goes wrong, the banks and the big insurers normally write out a cheque [to the client] anyway,” he points out.
“You know you’re not getting independence, but you’re getting comfort, and that’s going to be more important to a lot of people.”
Collins sees the advisory industry polarising into specialist arms.
“With the way it’s developing, I think we’ll see the mums and dads increasingly getting their advice through the banks and the AMPs, and the high-net-worth customers going to independent advisers. That polarisation is happening at the moment.”
Peter Johnston, executive director of the Association of Independently Owned Financial Planners, says not enough investors “fully understand the conflicts” that exist in the industry.
“Like everybody else, we would say that the client should look to the adviser’s level of education: at the minimum, they should have a diploma of financial services,” he says.
“But we would rank that at about No 5 on the list of things a client should ensure are in place; the other four relate to getting through the conflicts that work against the standard of advice.”
The first of these criteria, he says, is the adviser’s source of research.
“The AIOFP thinks that research is the No 1 criterion because regardless of how well-qualified the adviser is or whether they have the best staff, if they’re making selections for clients from an [approved product list that] is conflicted and has got problems, then the relationship is an accident waiting to happen.”
Johnston says 80 per cent of Australia’s investment research marketplace is conflicted because the fund managers, the product providers, pay the research houses to get rated.
“As soon as anything goes wrong, the research houses hide behind disclaimers,” Johnston says.
“In the past five years, there has been about $3 billion gone south in product failures and we think the biggest problem is that the research houses did not do enough due diligence to make sure that the products were stress-tested or, in some cases, where the money was actually invested.
“We don’t believe they can do this because they get paid by the product manufacturers to rate the products.”
Although “nothing is guaranteed in life”, Johnston says best practice is to use research from firms that do not accept payment from the manufacturers of the products they rate. He nominates Mercer, Russell and McGregor Asset Consulting in this light.
The AIOFP’s second criterion is independence. “If you go to a bank-owned adviser, expect to be sold a bank product,” he says.
The third is fee for service: “Don’t pay commissions because they can and do influence advice,” he says.
The fourth criterion is that the adviser understands “listed” (that is, on the Australian Securities Exchange).
“We think this is very important because one of the biggest conflicts is that the financial planning industry in Australia evolved as a distribution mechanism for managed funds. A lot of advisers still just sell managed funds, but 80 per cent of managed funds don’t add value.”
Johnston says direct shares and other ASX-listed investments are “very real alternatives” for investors these days, as are industry super funds.
“We think the adviser that you see should at least know about the attributes of direct shares and industry funds.
“If you’re paying your adviser a fee to get advice and they have a broad knowledge of the market, and they don’t have any product preference, they will be able to make the decision that, for example, direct shares might be better for you than managed funds.”
