Beware of bad advice

People left penniless following the collapses of advisory firms Storm Financial and Westpoint will know that a bit of diligence in picking the right financial planner is crucial.

Whether you’re planning your budget, your next investment, or your life, it’s worth seeking out someone who can give you the best advice based on your situation, rather than trumpet their own agenda.

Recent government reforms to the financial planning industry are intended to weed out the bad guys and make choosing a financial planner easier.

In August last year, the federal government introduced draft laws on its Future of Financial Advice (FoFA) reforms, which aim to stop consumers becoming victims after these and other high-profile cases such as Trio, Opes Prime, Fincorp and Bridgecorp.

In most cases, people failed to check properly what they were investing in after being roped in with promises of hefty investment returns.

About 18,000 financial advisers across Australia, including the big banks, face a stricter regulatory environment. Under the first reforms, financial planners will be banned from accepting commissions for advice.

The reforms, which were first announced in April 2010 and involved a year of industry consultation, will ban trailing commissions (payments that planners receive for years after selling the original product) and commissions on risk insurance within superannuation.

Financial planners won’t be able to add fees to a bill automatically. Instead, a client has to “opt-in” every two years.

Under the changes, the Australian Securities and Investments Commission will also have greater powers to act against unscrupulous operators and refuse or cancel a licence. It can also ban individuals if they are not properly trained.

If the reforms are passed in federal Parliament this year, most will apply from July 1, 2012. However, the ban on upfront and trailing commissions will apply from July 1, 2013.

Financial Planning Association (FPA) chief executive Mark Rantall says “the reforms, on balance, are a positive initiative which aid consumer protection”.

But he wants new laws that require financial planners to sign up to a code of conduct and register with a professional body such as the FPA, or other reputable organisations representing professionals who give financial advice, such as stockbrokers and accountants.

“It’s about enshrining the term ‘financial planner’ in law such that you can’t call yourself a financial planner unless you’re part of an approved professional body,” Rantall says.

“Seeking out a member of the FPA, for example, ensures that the person has sought higher education and a higher code of conduct than the law requires.”

There are also general traits people can look for in a financial planner. Rantall says consumers can spot “the bad guys” by being on the lookout for someone who is trying to sell them something that doesn’t suit their life goals.

“The better financial planners will ask a lot of questions about you, what you’re looking for and what your goals and objectives are,” he says. “Try to be clear about what you’re seeking to achieve and the problems you’re trying to solve. Make sure the advice aligns with what you need.”

However, the president of the Independent Financial Advisers Association of Australia and partner with Brocktons Independent Advisory, Daniel Brammall, says choosing a member of a professional body doesn’t guarantee reliability. In the case of Storm Financial, some of the advisers involved were FPA members who lost their membership after the damage was done.

“The collapse of Storm Financial and Westpoint happened regardless of the advisers involved being members of professional associations and regardless of their experience,” Brammall says. “So for the FPA to say that you have to be a member of a professional body is ignoring history.”

Brammall says the most important check a consumer can make before picking a financial planner is to make sure they don’t have a conflict of interest. He says there are two main ways of determining whether conflicts exist. “First, if they are charging you fees based on percentages [of assets under management], run a mile,” he says. “Second, If they have an association with a product manufacturer, they have a conflict.”

He says wealthy individuals typically require more complicated investment advice, which is more expensive. But he says consumers concerned about being charged high fees can take their case to the financial ombudsman.

The chairwoman of consumer group Choice, Jenni Mack, also warns consumers against agreeing to asset-based fees. She points to Rice Warner research in May 2011 that found consumers pay between two and 17 times more if they pay by asset-based fees rather than hourly rates or lump sums. “We are very concerned that ongoing asset fees are commissions dressed up as fees,” she says. “They result in consumers paying way too much.”

The second part of the changes under the FoFA reforms is a ban on conflicted remuneration structures and soft dollar benefits (not actual cash payments but other kickbacks such as holidays or gifts). It also includes the replacement of the accountants’ exemption. Accountants will now have to partner a licensed financial adviser, obtain their own licence or become an authorised representative of a licensee to continue providing advice on setting up self-managed super funds.

The Institute of Public Accountants recently joined with AXA and MLC to ensure its 22,000 members aren’t left behind. Chief executive Andrew Conway says 6500 members have already got involved and are licensed to give clients financial advice.

“We believe that the FoFA reforms will lead to a weeding out of cowboys in the financial service industry,” he says.

“One of the things that’s critical for the client is to ensure that the trusted adviser they engage has the skills to provide that advice. The partnership is our response to the continued blurring of the line of traditional financial planner and traditional accountant. We see blurring as a good thing because clients benefit from broader services.”

Conway says the client needs to feel confident that the person giving advice is qualified and trustworthy. “The client should be looking at a few things when picking an adviser,” he says. “First, are they a member of one of the professional bodies? Second, do they have professional indemnity insurance? And third, what’s their fee model?”

Big accounting firms are also moving into the financial advisory space as people with self-managed superannuation funds are increasingly looking for advice.

Deloitte’s superannuation lead partner, Russell Mason, advises large superannuation funds about what services to offer members, such as advice on salary sacrifice, contribution levels and investment options.

He says that just like finding a good doctor or lawyer, a person seeking financial advice needs to shop around. “Compare what they’re going to charge and the services they’re going to provide,” he says. “How accessible is the planner? Do you have someone who has the capacity to serve you on a six to 12 month basis to review your financial planning?”

Matt Hern, who runs his own financial planning business in Perth, Matt Hern Financial Planning, says that while the reforms will help get rid of fraudsters, picking a good financial planner requires more thorough investigation.

He says ensuring financial planners are properly licensed is “the lowest common dominator”. “In the PR release it sounds grandiose,” he says. “But for the consumer it’s not. Sure, the standards aren’t as low as they were before. But that’s worlds apart from finding a true expert.”

Hern says many professions, ranging from banks and real estate agents to accountants and stockbrokers, claim to also be financial planners because they provide one-off financial advice. But he says a financial planner and a financial adviser are different.

“A first-time customer who goes to their bank for financial advice may end up with a product tactical adviser,” he says. “But first-timers need to see the big-picture person who thinks about their life goals. Someone who’s the family chief financial officer ... and can help manage and co-ordinate the right financial decisions to achieve your goals.”

Hern says that as well as picking a true financial planner, consumers need to be prepared to invest in good advice. “The biggest mistake that people make is being tight-arses,” he says. “The average price people want to pay is $300. Yet, a plumber will charge you $100 just as a call-out fee.

“If people are mentally anchored to a low fee, they end up compromising on the advice they get. In the post-commission world, a good financial planner will charge a first-timer about $4000 to $5000. That’s for an initial plan set-up and implementation. And just like any great plan, they need to have milestone check-ins; with lower fees at the end of year one, two and three.”

But Mack says you don’t have to pay high fees, or be tied to seeing a financial planner on a continuing basis, to get good advice. As well as looking for advisers who charge hourly or lump-sum rates, Mack has two other tips: “Think very carefully about whether you need an ongoing relationship with an adviser whereby fees are automatically deducted from your account,” she says.

“And finally, be cautious about what products you’re being recommended: is the adviser going to recommend products that they manage, or is it an adviser who will look around the market and give you general advice?”

In December, ASIC released guidelines for financial advisers in relation to FoFA reforms that aim to clear up issues surrounding conflicted remuneration and “scaled advice” (one-off limited advice rather than ongoing advice). The guidelines make it clear that financial advice cannot take a one-size-fits-all approach.

Mack says that while FoFA “is a very significant package of reforms”, it only applies to new clients. A recent ASIC review of the industry found the top 20 licensees combined had a total of 4.6 million clients, of which almost 1.5 million were identified by licensees as active. The estimated average size of a client’s assets was about $131,000.

“This means 3.5 million clients are disengaged – exactly the ones who need the benefits of FoFA but under the grandfathering provisions, they will not get them,” she says. “We think opt-in should apply to these clients. The best thing these clients can do is change firms so they will get the benefit of FoFA.”

BRW

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