25 questions to ask your financial adviser

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Today, one the most respected of all the professions are the medics. Yet it wasn’t always thus. Contrary to popular belief, ‘Primum, non nocere’ – ‘first, do no harm’ does not appear in the Hippocratic Oath – it is, in fact, attributed to Thomas Inman, as recently as 1860. That same year a doctor by the name of Oliver Wendell Holmes famously remarked that “If the whole material medica, as now used, could be sunk to the bottom of the sea, it would be all the better for mankind—and all the worse for the fishes.”

In 1987, when Stanford Brown was founded, few would have mourned if the entire financial planning profession were sunk to the bottom of the ocean, as a visit to your friendly neighbourhood planner could be seriously harmful to your financial health. You were likely to emerge as the proud owner of an egregiously expensive insurance policy or a fancy investment scheme such as a macadamia nut plantation, with fees and commissions layered more intricately than an onion.

However, that was then. And the times are a changing. Financial advice as a profession is finally coming of age. But where to start? There are more than 20,000 licensed financial advisers in Australia. How does one sort the wheat from the chaff; the Bernie Madoffs from the Warren Buffets? We would recommend commencing your search with this helpful pamphlet, entitled ‘Questions To Ask Your Financial Adviser’ compiled by our industry regulator, ASIC.

A more critical (and controversial) article was recently penned by Jason Zweig, a financial columnist for the Wall Street Journal, entitled ‘The 19 Questions To Ask Your Financial Adviser’. Here we look at each of his questions and adapt for the Australian market. It won’t guarantee you a good adviser, but it will reduce the odds of a dud.

1. Are you always a fiduciary, and will you state that in writing?

Not a problem for Australia’s financial planners as we are required, by law, to act in the best interests of our clients.

2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?

Since 2013 it has been illegal to receive payment from the managers of funds recommended by a financial adviser. However, the vast majority of advisers receive payments from the insurance products they recommend. A conflict of interest, for sure, but mitigated by the fact that from January 2018, advisers will receive the same commissions from insurers, and volume bonuses for channelling business to one particular insurer have been outlawed.

3. Do you participate in any sales contests or award programs creating incentives to favour particular vendors?

Should be a no. Red flag if otherwise.

4. Will you itemise all your fees and expenses in writing?

Absolutely. Insist on this. It’s also the law.

5. Are your fees negotiable?

We believe (quite strongly) that fees should not be negotiable. Clients should be charged by the same methodology. Existing clients should not subsidise new clients (unlike certain cable TV providers we could mention), nor should those with superior negotiating skills receive favourable terms.

6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets?

Depends on the job you want done. Yes, for specific project work; but not for ongoing advice. Hourly charging encourages inefficiency. Nearly all advisers will increase their fees in line with the assets to manage. But the relationship should not be linear – managing $2m is not twice as involved or complex as managing $1 million.

7. Can you tell me about your conflicts of interest, orally and in writing?

Of course. These must be disclosed orally and in writing.

8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients?

Some advisers are developing their own in-house sector funds. For example, the Acme Financial Adviser Australian Share Fund. This creates a conflict of interest. Focus on those who have a broad Approved Product List (APL) to recommend only the best-in-breed and most fee-competitive funds.

9. Do you pay referral fees to generate new clients?

Many advisers pay referral fees to lawyers and accountants to refer new clients. Provided this is fully disclosed, there is no conflict. It’s more an issue for the referrer than the adviser.

10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance?

Some advice firms offer all these functions in-house, but the vast majority work with other professionals (such as estate planning lawyers and accountants). No issue, again provided all relationships are disclosed.

11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents?

A repeat of Q9.

12. What is your investment philosophy?

A five-word question but a lengthy answer. Not all are the same. This is one of the most important questions you need to ask if the principal job you are looking for is money management.

13. Do you believe in technical analysis or market timing?

Those advisers that repeat the mantra ‘it’s all about time in the market’ are not really providing investment advice. Try telling a Japanese equity investor from the late 1980s that it’s all about ‘time in the market’. Since the 1987 crash, US equities have returned a whopping 11% per annum whilst Japanese equities have returned a derisory 0.5%. Advice firms should have long-term views (the short term is almost impossible to predict) on asset classes. Otherwise, what are you paying for?

14. Do you believe you can beat the market?

See above. It’s all about the long term. As Mark Twain might have said ‘markets don’t repeat but they do rhyme.’

15. How often do you trade?

We all know the stockbroking model is largely discredited. Large turnover means large trading fees and taxes. At SB, we adopt Warren Buffet’s maxim that the cornerstone of our investment strategy is lethargy, bordering on sloth.”

16. How do you report investment performance?

This can be a major differentiator between advice firms. All investment returns (after fees) should be available at any time over any period. And they should also be benchmarked. Worry if you are told that ‘we don’t benchmark.’ To paraphrase Trotsky, you may not be interested in benchmarking, but benchmarking is very much interested in you.”

17. Which professional credentials do you have, and what are their requirements?

The CFP is the gold standard in the US and here in Australia. It doesn’t guarantee great advice, but it reduces the odds of engaging a dud. Make sure to ask for the qualifications of the Investment Committee too. The Chartered Financial Analyst (CFA) is the undisputed certificate of excellence for portfolio analysis.

18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term?

Your financial adviser should be able to provide you with past returns (for a given level of risk) and conservative estimates of future returns. Returns will likely vary from inflation plus 3-6%, depending on the level of risk in the portfolio. Anyone promising you double-digit returns is either a fool or a crook.

19. Who manages your money?

See also Q17. Financial advisers are not money managers. They are not trained to do this. Look for a professional Investment Committee run by an experienced CFA.

We would also add five of our own to Mr. Zweig’s comprehensive list.

20. How do I exit this relationship if I don’t like it?

There should be no lock-ins. Financial advice firms are not mobile phone companies. Account portability is essential.

21. Who owns your business?

Most advice firms are owned by a handful of individuals. Be wary of those with institutional ownership, especially when those institutions also manufacture financial products. Massive conflicts of interest.

22. Who provides your licence (AFSL) to operate?

You might prefer those firms who have their own licence. But there are plenty of shoddy independent operators, and there are plenty of excellent advice firms who are licensed by a major financial institution. Not all that helpful. The one key advantage of being self-licensed is that these firms are free to recommend a broader universe of funds and insurance products. If you are meeting with a firm licensed by a bank, ask them what percentage of their clients’ funds or insurance contracts are placed with related entities. This should tell you all you need to know.

23. Who is your ideal client?

If the response sounds like ‘anyone with a pulse’, it might be best to move on. Advisers are increasingly specialising. This is a good thing!

24. Can you provide me with testimonials of clients in a similar situation?

Always ask for this. We would recommend checking out a website called Adviser Ratings. It contains testimonials from the adviser’s clients and a rating. It’s a bit like Trip Adviser. Also ask for ASIC’s Adviser Register. This will tell you if your new adviser has been up to any skulduggery in the past.

25. What do you read or watch to keep up-to-date?

Markets constantly evolve and advisers should read serious financial journalism written by experts, not only popular press and media. Of course, Cuffelinks should be on the list.

Choosing your financial adviser is a significant decision. We suggest asking people in your life whose financial opinions you respect. These might be your accountant or an educated friend. And meet plenty of advisers during your due diligence. A good adviser adds value. They really do. We hope this list will help you in your search. Good luck!

 

Jonathan Hoyle is Chief Executive Officer at Stanford Brown. This article is general information and does not address the circumstances of any individual.

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7 Responses to 25 questions to ask your financial adviser

  1. carikku November 9, 2017 at 1:21 PM #

    I am disappointed there is no mention of the importance of independence in financial advice. Advisers who are members of the Independent Financial Advisers Association of Australia (IFAAA) have pledged;
    No ownership links or affiliations with product manufacturers
    No commissions or incentive payments from product manufacturers
    No asset-based fees
    Taken from their website http://www.ifaaa.com.au
    Independent advisers can give unbiased, objective advice and aren’t limited by a restrictive “Approved Products List”.
    Also, I disagree that the CFP is the “Gold Standard”. You should find an adviser with a Bachelor or Master’s degree so that you are getting someone with a good education. Interesting that if you have a Masters in Financial Planning, then that’s almost all of the requirements for the FPA to give you their CFP accreditation but having a CFP does not mean you are most of the way to getting a Masters! Universities value quality education, although I believe there can be some credit for years of professional experience.

    Otherwise I thought the article had some good points.

  2. Jonathan Hoyle November 9, 2017 at 3:38 PM #

    carikku – plenty on independence – see points (2) and (22). Those member firms of the IFAAA are entitled to their views and their ways of charging. It’s a free market.

    I made the point (22) that just because an advice firm has its own licence (like SB) doesn’t necessarily make it a superior one to a firm that is licensed by a financial institution.

    A Masters Degree in Financial Planning is certainly a good degree, but so is an Economics degree from a good University.

    The CFP is comprehensive, hard to pass and undoubtedly reduces the odds that your adviser is an idiot.

  3. Eric November 9, 2017 at 4:33 PM #

    A good list of issues to cover for anyone who really needs financial advice. Perhaps a set of criteria to determine if a financial advisor could add value should come first (step 1), given the need for them to pass on high infrastructure costs?

    Then could step 2 be more efficient?
    I was told that over 90% of planners use the AFSLs of the big banks or AMP. If this is the case, you (& IFAAA) appear to have narrowed the field dramatically… particularly when combined with your statement that “there are plenty of shoddy independent operators”.

    For bank licenced AFSLs “ask them what percentage of their clients’ funds or insurance contracts are placed with related entities?” Could you find grouped data to determine if any of the banks are close to your standard?

  4. Pamela Murray-Jones November 11, 2017 at 5:57 AM #

    An interesting list.

    However, having been stung twice by financial planners who I now realise knew less about financial markets and investment strategies than I do now, I would suggest a re-ordering of the questions with qualifications up-front plus a further question on their business experience and background. For me a red flag is anyone who came from a sales background (despite their B.Ec and Diploma of Financial Planning) or from an insurance company. And I’d suggest a B.Ec is not in itself a satisfactory qualification for a financial planner being far too narrow in approach. A good advisor also needs a great understanding of strategy and people.

    So a further three questions I would ask are:
    1. What is their understanding of investment strategies and what do they take into account when designing a strategy. If they simply mouth the common rules they operate under (age, financial circumstances, objectives and risk profile), this is not good enough. They should also be able to articulate some understanding of the political and economic environment; market conditions etc and how they build this is in.
    2. What professional associations they belong to. This provides some insight into their interest in keeping abreast of what is happening out there.
    3. What do they value most in their client relationships.

    The final questions is a crunch-time question which should provide tell-tale signs of whether you are dealing with a professional who is truly interested in their client’s welfare. Make sure they are looking you in the eye when they answer!

  5. Jason McFadden November 13, 2017 at 10:14 PM #

    A far better question would be to ask the adviser, how they go about understanding my most deeply held values, understand my purposes and my reasons behind my financial goals. Then after uncovering these purposes, and having a deep understanding of what is truly important to me, align a strategy with my purposes to inspire me to implement and keep me on track. Measurement of a good relationship should be based on achieving real life financial outcomes as opposed to an investment return.

    I would not be using Adviser Ratings as it is a paid subscription service. Remember Storm Financial advisers were rated very highly also. I would also ask about the number of clients they work with. Many of the questions you ask can be replaced by a simple question of asking if the adviser is licensed, as it’s a legal requirement to disclose many of the repeated questions you ask.

  6. AlanB November 14, 2017 at 4:47 PM #

    Here are the essential questions to ask a financial planner. Let’s face it, some have been caught defrauding their clients.

    1. What makes you a better manager of my retirement money than me?
    2. How do I know you won’t misuse the funds I entrust you with?
    3. What guarantees do you offer?
    4. If through your actions you lose my life savings what recourse do I have?

  7. Brent November 16, 2017 at 9:31 AM #

    2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?

    In theory no, product sale inducing payments and arrangements are indeed banned. But, this doesn’t cover other implicit benefits like selling your own product (a conflict? sure, but one could just disclose it as per point 7, press hard 3 copies and move on). Also worth nothing that for point 22. the same thing applies not just to AFSLs operated by product manufacturers, as per point 8, non aligned AFSLs may have the same or even stronger related party product conflicts.

    But the issues with this question are even deeper than that. Simply by virtue of recommending a new product, from any provider, an adviser may well earn more in advice fees than they otherwise would without that product advice (aka super rollovers) or perhaps the incentive is to engage in more complex product advice (eg SMSFs). Therefore “do you earn more to recommend certain products or services?” the answer to that question may well be yes, regardless of commission bans and far more often that we as an industry wish to admit.

    Which brings me to a point mentioned the last time one of these articles was published here:

    Want to increase the accuracy of your quality advice compass? Add another point to the list.

    #26 Is your adviser willing/capable of providing advice that is just that, “advice”. Professional counsel that doesn’t involve the purchase of or transfer to a new product?

    Clients can learn a great deal about the style advice they are about to/have received if they ask what the advice & service would be (and how much it would cost) excluding product recommendations.

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