There are some great checklists available to help you choose a financial adviser, especially if you have no idea where to start. But, most focus on basic questions such as experience, professional membership and the services they offer.
While these are helpful as a starting point, they don’t get to the heart of what determines the quality of the advice and service your financial adviser provides.
I think there are a few additional questions you can ask to help ensure you get great advice and support.
Q1. How many clients do you manage on an ongoing basis?
So you can check your adviser has time for you.
If you are one of 400 clients, your financial adviser probably has less than half a day a year to allocate to you, once weekends and the need to bring in new clients is taken into account. Before you pay for any ongoing service, make sure you are happy with the amount of time your financial adviser is likely to have for you. Then think about what you’re paying (and what you’re receiving) for the amount of time allocated to you.
Q2. With what other businesses are you, or your company, associated?
Finding out if your financial adviser has a relationship with another financial services business can identify a possible bias towards a recommendation that will pay them additional money, and may not suit your best interests.
Currently, there is a focus on holding direct property within a self-managed superannuation fund. Financial advisers aren’t generally authorised to recommend specific properties, but some may refer you to an associated business in which they have an interest. This business might establish the super fund or identify appropriate properties to buy.
In many cases, this type of referral will be done transparently and there’ll be a compelling benefit to you for dealing with those parties. But it is important for you to understand who will benefit financially from that referral and whose interests are being given priority – you need to be satisfied that any recommendation is in your best interests.
Also see Question 4 below about referral arrangements.
Q3. Who owns the license?
Few financial advisers have their own license and the majority act as representatives of a licensee that provides the support they need and authorises them to provide advice. Many of these licensees are owned by financial product manufacturers, superannuation trustees, banks, insurers and fund managers. The advice provided by their financial advisers tends to be weighted towards the products and services provided by the Licensee or companies in the same group.
So while you may still get good advice, you are far more likely to get advice involving that group’s products. And you are less likely to be told to dispose of their products or be alerted to a better product or strategy offered by a competitor.
For example, the adviser employed by your superannuation fund is unlikely to recommend a fund other than their own. In contrast, a non-aligned financial adviser is less likely to be influenced by association and will often have access to a wider range of options.
Ownership or association with a financial institution doesn’t necessarily mean that your advice will be bad, but you do need to recognise the conflict of interest this relationship creates. That way you can determine whether the relationship is likely to influence the advice you receive.
If you are dealing with a financial adviser from a bank, see the comment about bonuses in Question 5 below.
Q4. What referral arrangements do you have with other professionals and what fees are you paid for referring to these people?
You should check what your adviser is paid if they recommend strategies that involve other services they don’t provide directly. To put it another way, have you been referred to a third party because it’s in your interest or because the adviser will financially benefit from making the referral?
For example, traditional mortgage brokers (who don’t refund trailing commissions) often pay financial advisers who refer clients a percentage of the commission they receive. This provides a compelling reason for the adviser to refer clients to a particular broker.
In particular, be wary if your financial adviser recommends you speak with a specific property developer. Even if you specifically sought a referral to a property adviser, always check what your financial adviser is paid and take that into account when deciding if this is the best possible referral available.
The self-managed super fund and property packages, mentioned in Question 2 above, can pay thousands to a referring financial adviser.
Q5. How are you paid?
If your adviser is paid predominantly from commission, you may get advice that is biased towards products that pay greater commission than others. This bias can sometimes be removed if your adviser caps their commission, or rebates or reduces the commission they may receive on products such as insurance.
If your financial adviser is paid a salary, ask how any bonuses are worked out. Also ask when bonuses are determined so you understand at which stage in the adviser’s bonus cycle you are receiving your advice. You should also check if your adviser’s pay varies depending on which products are recommended.
While many financial advisers won’t be used to being asked these specific questions, make sure you choose someone who appreciates why you’re asking and who takes the time to answer each one.
Professional advisers won’t hesitate to address your questions transparently and ensure the advice they provide to you is plainly in your best interests. If they can’t clearly and easily respond, then that might indicate they are not the best adviser for you.