I started my career in a financial advice firm. This allowed me to form a decent understanding of the advice process, the business models of financial advice firms in Australia and the regulations that govern them.

One of my close friends recently asked me for recommendations for a financial adviser. There are qualifying questions that you start with – what their qualifications are, what types of clients they advise. This is an important question as some advisers only take on clients with a minimum base of assets.

Outside of this qualifying criteria, it is like recommending a doctor – there is a level of trust that you have to build as ultimately, your (financial) wellbeing is in their hands. They intimately know your circumstances, the health of your relationships including marriage and children. It’s hard to recommend somebody as each person will prefer something different in their adviser.

However, there are a few factors you should look for outside of bedside manner (or a financial adviser’s equivalent) and soft skills.

Here are a few tips for choosing a financial adviser.

What are you looking for?

You need to narrow down what you’re actually looking for. Financial advice firms can be holistic – everything from investments, to tax, to estate planning. There are also specialist advisers that focus in on one area – such as investment consultants. They will advise on investment strategy and structuring.

It is difficult for financial advisers to specialise across all of these areas. Understand what they offer, and whether they outsource certain parts of advice to other professionals. This is not necessarily a bad thing, but understanding specifics around what you are looking for and trying to achieve will mean that you’re better able to assess whether a financial adviser is the right fit for you.

One area where financial advisers add value is when they can optimise your whole financial situation. No part of your financial life operates in a silo – it is all connected. Your tax is connected to your investments, your investments are connected to your estate planning, your estate planning is connected to structuring (e.g. trusts). Having an overseer of your whole situation is valuable.

See a few financial advisers before deciding

Most financial advisers will offer a free, initial consultation. You’re able to discuss your financial position and your goals, and in turn, ask them about their approach to financial advice. Doing a few of these meetings means that you’re able to better understand what may be a right fit for you.

These meetings are a good opportunity to hear about the fees. After the Royal Commission into Banking and Financial Services, fees have become a lot simpler and transparent. It is hard to know how much value an adviser can provide to you and whether the fee is worth it.

These are a few questions that you can ask:

  • Have you helped clients that are in a similar situation to me, and could you give me an example of the value you have provided?
  • How does your fee schedule work? What would I receive for any upfront costs, and what are the services included in any ongoing costs?
  • Could you walk me through the process of how you generate a financial plan for your clients? How many people are involved in the process?
  • Do you have any partnerships or are you aligned with any financial services companies? Do you operate independently?
  • How often do you review a client’s portfolio?

You’re also able to search for financial advisers through a government register. This will show their qualifications, the areas in which they can give advice, any reported misconduct or complaints that they’ve had in the past.

Mark LaMonica, CFA, has conducted a webinar on unlocking the value of financial advice. You can watch it below.


Understand their focus

Advisers should not be focused on products. If certain products come up in the initial meeting, this may be a red flag.

You are looking for an adviser because you want professional advice and assistance to achieve financial goals, rather than an immediate focus on maximising wealth in your portfolio. Although this ultimately might be part of the outcomes you seek, each individual is different which means the pathway to achieving particular goals is unique.

You may be in a position where your goal is to reduce the volatility in your portfolio as you get older. You may be looking to structure your assets in a way that you preserve capital so you can leave an inheritance. You may want to support elderly parents, or help out with grandchildren’s’ educations.

Each of our goals are different. Putting your money in the next hot stock without any consideration of your circumstances or goals is rarely the answer.

This focus on goals should be the tone of your first meeting. The discussion should be about you, your family, and your goals. They should focus on what you are trying to achieve and whether they are able to help you get there. Be wary of advisers teasing you with investment ideas.

Are they focusing on risk capacity or risk tolerance?

I’ve written on risk capacity and risk tolerance before. Risk tolerance is a concept that is widely used in financial advice in Australia, by way of a tool called a Risk Tolerance Questionnaire (RTQ). The origins of this tool are in regulatory requirements for an adviser to understand their client and their perception of financial risk.

The way that your adviser defines risk is crucial to the way that they will approach your financial goals and deliver financial advice.

At Morningstar, we believe that RTQs are not an adequate way of assessing how much risk a client should take. Advisers should do more than simply ask how you feel about taking risk in certain hypothetical scenarios.

Conversations with a potential adviser should focus around risk capacity – how much risk that you need to take to achieve your financial goals.

This is another place where financial advisers add value. The reason that you invest in the first place is to meet financial goals. The act of investing is a trade-off between risk and return. Taking on less risk with your investments may increase your risk of not reaching your goal. You may feel uncomfortable with taking on risk, but is it more uncomfortable than not achieving your financial goals?

Financial advisers can act as behavioural coaches to explain what is happening in markets, why your investments are behaving in a certain way, and act as a barrier to stop you from making rash decisions with your investments when markets are volatile.

We discuss a few more tips on what to look for (and what not to look for) in a financial adviser in this episode of Investing Compass.