Smart Financial Decisions

Three rules to live by.

Did you know that 80% of financial advisers are aligned to an insurance company like AMP or one of the big banks?

In the last decade, the big banks have been collecting fund managers and financial planning groups. For example the Commonwealth Bank owns Colonial First State, ANZ and ING are in bed together, so are Westpac and BT whilst NAB has it’s fingers in a number of pies including MLC, Godfrey Pembroke, Apogee, Garvan and as of last week, JBWere.

If you walk into a Holden dealership, what are the chances that they’re going to try to sell you a Holden?  You’d expect 100%.  In fact you’d probably be speechless if they assessed your needs and concluded “you need a Subaru, and lucky for you, they’re right next door!”

So what are the chances of a financial adviser doing the same?  According to a report in the Sydney Morning Herald last week, planners from the big groups have been allocating over 70 per cent of their sales to their own products.

Some people say they can’t afford to pay for advice, but in the wake of advice given by financial planners involved with Storm Financial, Westpoint, Opus Prime and Basis Yield, you simply can’t afford not to.
 
We provide independent financial advice, so we have a conflict of interest in saying that you should demand nothing less than conflict free advice; but for goodness sake, please make sure you are aware of these three important rules when seeking any financial advice:

Rule # 1 - No ownership links with any product manufacturer

If advice is being delivered by someone who is employed by a product manufacturer (or is related to them in any way) then their advice can be conflicted.  Many firms refer to themselves as “independently-owned”, but can’t call themselves independent because they break one of the other rules below.

Rule # 2 – No payments to the adviser from any third parties (no commissions)

Are there any payments being made to the planner by a product manufacturer? In fact, more broadly, does the planner receive any payment that doesn’t come direct from his client, including referral income? If so, then the advice can be conflicted.  The more you invest, the more commission.  The more you insure yourself for, the more commission.  

Rule # 3 – No skimming the cream off your cake (no asset based fees)

Most financial planners charge asset based fees of 1%.  Where on earth did this arbitrary 1% come from?  If you give a planner $200,000 to invest, they’re earning twice the fee than if you were to give them just $100,000. But are you receiving twice the value for their services? Are they doing twice the work? Or have they simply found a cheeky way to double their fee?

What if the best advice for you is to actually pay off your mortgage with that $200,000 or invest it in direct property? The only conflict-free way for a financial adviser to charge for their services, is an agreed fixed dollar fee based on the complexity of the work involved. 

Simply commissions by another name, this asset based fee method was an innovation that went something like this:

“We have to drop commissions because they’re a dirty word now. Okay, let’s ‘waive’ the commission and invent a new fee which is calculated precisely the same way.”

Only when the interests of your adviser are 100% aligned with yours are you going to be getting the best result and eliminating the risk of being a victim of bad advice. If your adviser’s interests are at all in conflict with yours then you’re getting a product pitch masquerading as advice.

There are over 18,000 financial advisers in Australia and less than 20 are on record as satisfying ASIC's definition of 'independence'. They can be found at www.independent-advice.com.au