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How to sniff out a bad financial adviser

Emma Rapaport  |  02 May 2018Text size  Decrease  Increase  |  
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Unfortunately, financial advisers don’t always act in their client’s best interests - something being made painfully clear in the ongoing Royal Commission.

To help you identify professional, trustworthy financial planners, we’ve put together the following guide.

Before you sit down with an adviser

 

Check their licence

First, check if your adviser is properly licensed to provide advice, or is an authorised representative of a financial services licence holder by searching for their name on the financial advisers register.

This register will give you the:

  • status of your adviser (you want to see “current” listed)
  • name and number of the licence holder who employs or authorises them to provide advice.

If you find your adviser is not operating under a licence, look for one that does.

Check for bad behaviour

On the register, you can also check to see if your adviser has done anything wrong. This could include an ASIC banning order disqualifying an adviser from providing advice for a brief period or perhaps for life.

Lodging an inquiry with the Financial Planning Association of Australia or Association of Financial Advisers may show whether the adviser has been in trouble. However, as the royal commission has shown, this step may not reveal all instances of wrong-doing.

Qualifications and training

On the register you can also check the qualifications and training of your financial adviser. It may seem obvious that someone advising you on your life savings should have the relevant bachelor's degree, the industry does not insist on it. To become a financial adviser a person must complete Regulatory Guide 146 - a short open-book course, which has been criticised for being low cost and too basic.

However, stricter education standards are in the pipeline, and by 2024 all existing financial advisers must complete (at a minimum) an approved bachelor's degree and pass a code of ethics course to retain their licence. From next year, entrants must complete an ethics exam, have an approved bachelor's degree, and complete a “professional year” to qualify for a licence.

"We estimate that there are around 8,000 advisers who will leave the industry because they don't want to continue studying," says Adrian Raftery, Deakin Business School associate professor of superannuation, and the course director for financial planning.

"If you find a good adviser that you’re happy with but they only have diploma of financial planning that’s fine for now, but I’d be concerned about whether they’d be around in six years from now. You should be selecting a financial adviser who you trust to manage your money for life."

Raftery says it’s best to ask your financial adviser whether or not they intend to meet the new requirements.

Check ratings online

You wouldn’t book at table at a restaurant before receiving a recommendation or checking out their reviews online. You can now also do that with financial advisers on the site Adviser Ratings. The website has more than 24,500 advisers listed and a rating system for each.

Former financial adviser, fintech investor and entrepreneur Clayton Daniel says checking customer reviews to get a client’s perspective is crucial.

"The website really has one goal: to help people make better decisions about financial advisers,” Daniel says. “I would be more inclined to choose an adviser who is consumer focused, public facing, values full transparency."

Meeting an adviser

 

Ask about conflicts

Whether or not an adviser has conflicts of interest behind the advice they give will have a huge impact on your financial future. As heard during the royal commission, Fair Work commissioner Donna McKenna was advised by celebrity financial adviser Sam Henderson to roll her existing superannuation into an SMSF so she could buy an investment property. Had she taken that advice, she would have lost $500,000 in benefits.

“I thought if I went to an independently owned financial planning firm that I wouldn’t be subjected to the product flogging of the type associated with the big banks, and yet all I’m being flogged is Henderson Maxwell’s own products and services,” McKenna told the commission.

To determine whether your adviser is receiving commissions, Daniel recommends asking your adviser one key question: are you paid in any way beyond the fee I’m paying you to provide me advice?

Daniel adds that you can check if an advice practice is aligned to a particular dealer group or a bank by checking their website. But this does not mean every adviser within that practice is bound to that affiliation.

Ask about fees

Another question to ask in your initial consultation is how your adviser is paid.

Broadly speaking, advisers are paid via four fee structures:

  • Commissions. An upfront commissions paid for placing a client into a product, as well as trail commissions as long as the client remains invested in the fund.
  • Performance fee. Payment based on beating a pre-arranged performance hurdle.
  • Flat fee-for-service. Payment for a set item of work completed. For example, a statement of advice.
  • Percentage of AUM. A charge based on the percentage of assets under management that the adviser is managing for you. The more money you have with an adviser, the higher the fee will be.

Each fee structure has its pros and cons. For example, while you’ll have no out of pocket expenses for the advice in a commission structure, it encourages a sales-driven mentality and will probably cost you more.

In summary, you should check your potential financial adviser is licensed; is subject to any disciplinary action or banning orders; and is suitably qualified.

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Emma Rapaport is a reporter for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a reporter for Morningstar.com.au

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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