Getting professional financial planning advice
If you're thinking about going to a professional financial planner, it pays to be prepared. Three key questions will help you work out which advisor or planner will be best for you.
- Are they licensed?
- How do they charge?
- Who do they work for?
Are they licensed?
In the world of financial advice, you're playing with fire if you're dealing with someone who isn't licensed by the Australian Securities and Investment Commission. To check whether the person or business you're dealing with has an Australian Financial Services licence, see More information. No license? Walk away.
By law, licensed advisers are required to:
- Take account of your goals, needs and circumstances when they make their recommendations;
- Tell you as clearly and accurately as possible about how much the advice and the investment will cost you; and
- Tell you if they have any vested interests that may be in conflict with your interests.
How do they charge?
Advisers have different ways of getting paid by their clients. The three basic ways are to:
- Charge a fee that covers their hourly rate that's usually paid upfront;
- Charge a commission when they 'close the deal' that's a percentage of the capital you invest; or
- Charge a trailing commission that's a percentage of your investment returns for as long as you hold on to the investment.
In reality, an adviser will have a fee structure that's based on a unique combination of these. This gives people more options about how and when they pay for advice. It can make it trickier to compare the costs of different advisers. Don't let that stop you shopping around until you find the service that meets your needs for the right price.
Like anyone in the paid workforce, the way a person gets paid usually has a direct impact on where they'll focus their effort. Incentives can impact on the advice you receive. Keep this in mind when you're choosing an adviser or considering their advice. In the worst case scenario, a recommendation that's in their best interests may not be in yours.
The good news is that licensed financial advisers are required to put their cards on the table and tell clients about their fee structures. Be sure to ask key questions like:
- How do you charge?
- Do you receive commissions? Are they upfront or trailing commissions?
- Which companies do you deal with? Do they offer you any incentives to recommend or sell their products?
- Do you provide any ongoing service? What does it cost?
A licensed adviser has to give you information about their fees and charges in a document called the Financial Services Guide. This is a must read for anyone using a financial adviser. It always pays to understand the fine print!
Who do they work for?
If you plant an apple tree, it's reasonable to expect apples. Similarly, if a financial adviser works for a certain financial services business, it's reasonable to expect that they will recommend investing in products of that business. Who the adviser works for can certainly have an impact on the sort of advice you receive. Financial advice can be offered by businesses such as:
- Financial planning businesses;
- Banks;
- General insurance companies;
- Fund managers;
- Stockbrokers; or
- Accounting firms.
There's nothing wrong with apples, but if you want an orange, you need to find a different tree!
Also ask about their business connections. It's not always obvious from the name of the business that an adviser may have connections with other businesses or products. These connections can actually limit an adviser's ability to recommend a wider range of investment options. Again, the law offers some protection because licensed advisers are required to disclose their relationships. They must also tell you if they have any other interests that may be in conflict with yours.
Next steps
If you've got plans to see a professional adviser, it pays to be prepared. Advisers charge for advice so the more prepared you are, the more valuable your time with them will be. It pays to do a Budget and be able to talk about your finances - where you are now and where you'd like to be in the future. For more tips, including what to do if you have a problem with an adviser, see Getting information and advice.