THE harrowing tales of gross financial misconduct emanating from the Royal Commission into the Banking, Superannuation and Financial Services Industry have once again raised huge concerns about Australia's financial advice industry.
They've included sensational revelations of big banks and financial institutions such as AMP providing questionable if not fraudulent advice, charging for advice not given, and even charging fees to the accounts of deceased customers.
Then there's the case of a high-profile financial planning firm that provided misleading advice to a member of the Fair Work Commission (after impersonating her to gain personal details from her superannuation fund) that, if acted upon, would have resulted in a $500,000 loss. The motive was pure and simple - the ability to earn large fees and commissions.
Don't be unduly surprised. It's clear that the efforts aimed at cleaning up the advice industry, including the government ban on product commissions and volume-based payments introduced in 2015, have only scraped off the tip of the iceberg. There are still major flaws in the advice system, especially in the quality of advice being delivered.
But, let's face it. It would be wrong to tar all financial advisers with the same brush. There are many very good advisers out there, that do act responsibly and in the best interests of their clients.
What can you do?
If you use the services of a financial adviser, or are planning to, the cornerstones of your relationship should always be based around transparency and trust.
Transparency is all about the adviser explaining how they operate, and exactly why they are recommending a specific investment strategy or financial products. There has to be very clear reasons, and there should never be unanswered questions around fees and commissions.
- If your adviser will not charge a flat fee for their service, walk away. And don't be afraid to ask them about their own financial plan, including the level and types of insurance held.
- A good strategy should be very detailed and take all your financial goals and needs into account.
- If the adviser is recommending you buy direct shares, you need to be sure you are comfortable with the degree of risk involved, and how this might impact you over the long term. If they are recommending a more passive investing approach through exchange-traded funds, ask for an explanation of the risks and benefits over the medium to long term.
- Don't establish a self-managed super fund just because your adviser recommends you do. The fact is that not everyone needs their own fund, and most people can get the investment control they need without having one.
Financial adviser Theo Marinis says one strategy is to appoint an adviser who is around five years younger than you, which makes sense if you are close to retirement.
"Remember, super is tax-free from 60; so if your potential adviser is aged 59, they may harbour a plan to retire very soon," Marinis says. "You may wish to know who will be left behind to help you if you intend to stay on until age 67. Are there competent younger people working with your adviser?"
Your first step should be to call and book an initial appointment, and tell the financial adviser you have prepared a list of questions you would like to send them, via email. Do this at least a couple of weeks before your meeting.
You should be able to get a sense of how appropriate your potential, or existing, adviser is for you, based on their response. If they don't respond at all, that's obviously a bad sign.
If they don't answer all your questions, ask for more clarification. And if you're still not satisfied, it's probably time to seek another adviser.
Tony Kaye is the Editor of InvestSMART. www.investsmart.com.au