The long road to restoring trust

Financial planning confidence debacle

Ordinary Australians must hope the planner they visit at their local bank or in a city office block is going to do the right thing.

As the veteran planner and commentator Nick Bruining suggests, people contemplating entrusting their future to another person should not be afraid to ask a lot of questions. He also suggests interviewing three planners before you commit.

Ask the planner about their education and experience, including in the area or the time of life in which you are seeking advice. It is no use someone approaching retirement talking to a planner who knows nothing about how Centrelink works.

Education is important, with many people with very few qualifications having been grandfathered into the industry from life insurance sales.

While the FPA-administered certified financial planner status does not prevent someone from going rogue, holders of this designation do get ongoing training.

And, the FPA boasts, its CFPs are significantly underrepresented in ASIC enforcement actions. This is commendable but it is hardly a reliable sample given ASIC is hardly prolific in moving against rogue planners.

Meanwhile, hardcore shonks and property spruikers will be able to keep on peddling investments by telling the unwary not to trust big banks or financial planners.

As the superannuation lobby group Industry Super Australia argues, confidence in financial advice is important for the wellbeing of many Australians and will become more so as retirement savings balances grow.

Industry Super chair Peter Collins, also a former NSW Liberal leader, said the banks recognised they had gone too far with their campaign against Labor’s investor protection laws.

Mr Collins said he supports all efforts to build competency and professionalism in the financial advice industry but this had to be built on “strong laws that protect consumers”.

And, in this reporter’s opinion, these laws provide false comfort without industry regulators with plenty of resources to carry out enforcement and powers to move quickly against rogues.

It is worth closely examining whether a powerful industry supervisory body could help make ASIC a more effective regulator and give it a nudge when needed.

In its desperation, Mr Brodgen’s masters at FSC might be on the right track with the push for the creation of a standards board with real teeth.

BEFORE THE HANDSHAKE

Endorsements

If you need a painter or a mechanic, there’s a good chance you will ask friends and family for a recommendation. Don’t be shy in asking them whether they have a financial adviser they are happy with. Just make sure the person they recommend has been providing advice for more than a couple of years — you don’t want a fly-by-nighter. Ask your accountant as well.

Similar clients

Make sure a prospective planner has clients similar to you. Planners specialise, so if you are a public servant in your 40s with kids at home and a huge mortgage, don’t sign up with someone who bills themselves as an expert in self-funded retirees or small business people.

Eyes open

Determine who the planner works for. The seemingly independent suburban planning outfit could be a subsidiary of a big bank. There’s nothing wrong with this — there are many planners who have links to the big banks and deliver great service. But be aware there may be a bias to push you into a suite of products which are delivered by the parent company. Again, this is not necessarily a bad thing because these products are often the best on the market. But go in with your eyes open.

Qualifications

Ideally your adviser should have a commerce or business degree in addition to an industry qualification. Full membership of professional associations indicated by letters such as CPA, CFP, ASIA or ICA indicate that in addition to complying with the legal requirements, they are bound by professional rules of conduct with serious penalties for breaches.

Money talks

Trailing fees are fees that a planner receives from the business offering the financial products (such as managed funds or insurance). A planner who only collects commissions may provide biased advice. If you don’t like the trailing fee method, then find a planner happy to charge either a flat fee or by the hour. Be aware that on top of these fees, they may still get the clip from the companies behind the products you are signing up for.

Numbers game

Ask them how many clients they have, do they themselves prepare the plans and will they be your ongoing adviser. Proper financial planning requires continuing reviews. If the adviser has thousands of clients, he or she is unlikely to be able to provide a proper ongoing planning service. Some advisers will contract out planning work to third parties who prepare plans based on the data collection prepared by the adviser.

Pudding test

Ask to see a sample plan prepared by the planner. A comprehensive financial plan will run to many pages and should contain discussion about areas such as your objectives, cash flow, investments, insurances, estate planning and taxation. Rather than simply generic information, it should analyse your specific situation in these areas and, where deficient, provide strategies which set out the pros and cons in an objective way.

Gut feeling

You will always look at the fees a GP charges you but will likely be willing to pay a premium over the bulk-bill rate if you have a connection with the person across the desk. If you feel comfortable with a potential adviser, if they come across as genuine, answer your questions in a straightforward manner and are upfront about how they get paid, then trust your gut.