The world of financial advice in Australia is changing for the better, a process that has been sped up significantly by the Hayne Royal Commission. If you’re wondering what that is you should probably stop reading now, it has received a huge amount of interest, and not only in Australia, and has sparked a reaction that would best be described as outrage.
Australians have always struggled with how to identify whether their financial adviser is ‘good’ or not, and in turn, whether the financial advice they are receiving is in fact of high quality. ASIC’s Report 562, released in January of this year, revealed that 150 of 200 files reviewed by the regulator failed to comply with the best interest duty (that’s 75%!). Of particular concern for ASIC was the unnecessary replacement of a financial product. Of these 150 files they had significant concerns that 19 would require client compensation (that’s 10%!) due to leaving the client in a “significantly worse financial position”. The conclusion that could be reached from this report is that of all the client files reviewed by ASIC, as little as 25% of the advice received by Australians actually put them in a better financial position, oops!
So, how do you avoid ending up in the same position as this 75% of clients, and how do you find a good financial adviser?
- Vertical integration – The Royal Commission has highlighted the issue of vertical integration, i.e. where a company makes money from:
- Distribution – This is the Financial advisers themselves;
- Platforms – Commonly used to invest both superannuation and investment monies;
- Managed Funds – The companies products run by their fund managers, that sit on the platforms.
It looks a bit like this:
So basically, avoid financial advisers that run a model of vertical integration.
- Meaningful conversations – Great financial advisers know that great financial advice needs to be valuable to you. This means having a meaningful discussion, at least every year, about the outcomes and aspirations that are important to you. This is the entire context for the relationship and the advice, which cannot be based on outdated assumptions.
- Are they just selling you products? – Sure, products are important, but great financial advice goes beyond just product. It needs to uncover and solve the deeper complexities that may be stopping you from achieving the financial future you dream of. It’s about smart financial decisions.
- Do you pay the fees? – or does someone else pay the fees? If you want an adviser to work for you, then you should be paying the fees, and no one else. If the adviser receives income from any other source, this introduces a conflict as they are no longer working solely for you. The result? The advice can no longer be relied upon, making the exercise of obtaining advice a waste of your time and money.