Three things to look for in your financial advisor

Investing
June 6, 2018

If you want to get advice on making an investment, but you've never dealt with a financial advisor before, it can be difficult to know what to look for. There is currently legislation designed promote best practices and fair dealing to protect you, as the investor. So when looking for an adviser, there are three key things you should consider:

  1. what sort of qualifications they've got
  2. how they should engage with you, and
  3. what you should expect from your on-going relationship with them.

This article identifies the different types of financial advisors, then focuses on how to get personalised financial advice and a recommendation that suits your financial needs.

What sort of financial qualifications have they got?

At the time of writing, there are currently three types of financial advisors. Each type of advisor has different qualifications, which will determine how personalised your service is, and what recommendations they can make. The types of advisors are:

  1. an Authorised Financial Advisor
  2. a Registered Financial Advisor, and
  3. a Qualified Financial Entity.

Authorised financial advisors

An Authorised Financial Advisor (also known as an AFA or a full service advisor) is required to complete training to a high level and must maintain a certain number of hours of training each year, in order to maintain their AFA status. With a qualification, they can then register with the governing financial body of that country (which should be the same country that you're a Resident, or Citizen of). In New Zealand, this is known as the Financial Markets Authority (more commonly known as the 'FMA') and in Australia, it's the Australian Securities and Investments Commission (more commonly known as 'ASIC'). Lists of current Authorised Financial Advisors in New Zealand and Financial Advisors in Australia can be found on these respective websites.

Only an AFA can discuss your needs and provide a personalised financial advice on what investment products you should invest in. So your conversation with them might sound like: "From your financial history and because you said you wanted X, I recommend you invest in X... because...".

AFAs can recommend any range of regulated investment products, from securities and managed funds to portfolio investment entities, land investments and insurance contracts. They can also recommend ways to manage your tax, mortgage and insurances to ensure the best outcome for you.

Registered financial advisors

A Registered Financial Advisor (also known as an RFA) is also required to complete training to a high level and must also maintain a certain number of hours of training each year, in order to maintain their qualification. 

However, RFAs can only provide class advice. So your conversation with them might sound like: "65 percent of people like you [ie women, aged between 25 and 35 years of age and living in Wellington] are invested in this. Based on this, you may also want to consider investing in this."

In addition, RFAs can't recommend the same extensive range of products that an AFA can. RFAs can recommend investments like term deposits, debt securities such as bonds and insurance contracts.

Qualified financial entities

An advisor of a Qualified Financial Entity (or QFE) is an employee or a nominated representative of a qualifying financial entity. In this instance it is generally the company that is registered, not the individual.

This means people within this company can only talk to you about the products or services that their company issues, or promotes. An example of when you're more likely to talk to a QFE is when you're wanting to buy insurance. You'll know they're registered as a QFE because when you're on the phone, on hold, you're likely to get a message advising you of their status, and outlining what they can, and can't talk to you about. If you don't get put on hold, then the first person you talk to, will likely tell you this. Often, it's a short script that's not longer than a minute or so.

Coming soon

In New Zealand in December 2017, the Ministry of Business, Innovation and Employment (MBIE) have proposed some changes in order to cover five broad objectives:

  1. we can access the financial advice we need
  2. the advice we get makes us better off
  3. if we need to, we have effective access to redress
  4. misuse of the Financial Service Providers Register (FSPR) is addressed, and
  5. regulation is enabling with no undue compliance costs, complexity or barriers to innovation.

This will also establish a level playing field of regulation for all who provide financial advice. 

Initially, this means the three types of advisers above will not exist and moving forward three new types of adviser should be introduced:

  1. financial advisors
  2. financial advice company, and
  3. agents (being the person giving you advice on behalf of financial advice company).

Both financial advisers and agents will be able to provide the same financial advice. But in the case of agents there will be an additional requirement that the financial advice firm the agent works for is permitted to give the advice. Financial advisers would be responsible for their own compliance with these changes, but financial advice companies would be accountable for their agents’ compliance. In addition, all financial advisers will be able to give advice on any regulated financial product.

These changes are anticipated to take effect over the next 18 months.

How should they engage with you?

Before an advisor can provide advice about financial products or services, they are required to disclose information about their qualifications to you. With an AFA, or RFA, this might be a piece of paper which provides their full name, the company they work for, what type of advisor they are, what sort of advice they can give you and what financial products they can discuss with you. This disclosure may also include additional information about their training and skills. It should also clearly outline details of their fee structure, who pays this and any conflicts of interest. 

Your financial advisor should not hesitate to provide a clear explanation of how they are compensated. Generally the more assets you have, the lower their fee. However this can be off-set by the value of your assets. So don't be afraid to ask what their fee means in dollar terms ie if the value of your portfolio is ie $10,000 vs. $500,000 so you can be completely comfortable with what you should expect to pay them, in both the short and long term. Their fees may come in the form of:

  • an hourly rate
  • a flat fee to complete a specified project
  • a quarterly or annual retainer fee
  • a fee charged as a percentage of assets that they manage on your behalf (typically anywhere from 2.00 percent per year to 0.50 percent per year)
  • commissions paid to them from financial or insurance products you buy through them, or
  • a combination of fees and commissions.

The purpose of this disclosure is to provide you essential information about what they can and can't discuss, so you can make an informed decision about the recommendation you're about to receive.

In New Zealand, under MBIE's proposed changes, disclosure requirements for all types of financial advice will be shortened and simplified. Disclosure will focus on the scope of the service, the remuneration and competence of the provider and be available in more user friendly formats. Agents will also have to disclose that they are only agents of their financial advice company and that their company, not them, are accountable for advice given.

When first engaging with them, they should meet with you two or three times to:

  1. get to know you
  2. provide a recommendation, discuss this thoroughly with you and respond to your queries, and
  3. do the necessary work to implement your plan, manage it and update you regularly on how it's performing.

Getting to know you

AFAs must use "reasonable diligence" when opening and maintaining your account. ​Before a financial adviser can recommend a plan or financial product to you, they must take into account you age, other investments you might have, your current financial situation and needs, tax status, investment objectives, experience and time horizon, liquidity needs, risk tolerance and any other information you may disclose, in connection with such recommendation.

Providing a recommendation

A good AFA will not make recommendations until they understand your goals and have run a long term financial plan for you. If you meet with someone who starts talking about a financial product right away they are more likely a financial sales person. A good AFA will want to gather account statements and data on all aspects of your financial life.

Getting recommendations is writing is always a good idea, as it leaves no question as to what course of action was recommended. 

Their recommendation should also include a Product Disclosure Statement for each financial product they recommend you to invest in. Generally, each Product Disclosure Statement will be a relatively short document (three or four pages) telling you about its investment strategy, a summary about the investment product, it's historical rate of return (generally up to five years), fees and who manages it. If it's a managed fund, then it should also outline the top ten companies or funds that the fund is invested in.

Irrespective, financial advisors are legally held accountable for any strategy that they may recommend to you based on your circumstances.

It's in your best interests to discuss their recommendation with them. They shouldn't be surprised if you ask for a few days to consider their recommendation, and should be open to phone calls or another meeting to discuss any queries with them.

Once you've received their recommendation, think about whether:

  • the fees they're receiving, or any conflict of interest outlined in their disclosure document, impacts their recommendation to you, or that they've considered:
  • any preferences for investment options you might have discussed with them (such as aligning your investments with industries you're interested in, or simply ensuring that you're not investing in companies that manufacture weapons, fossil fuels or tobacco)
  • what rate of return you will need to earn to achieve your goals over the time frame you both discussed, and does this take into account their fees
  • anything you need to do differently to reach your financial goals
  • what level of investment risk is appropriate for the different types of accounts you have
  • how much you need to save or keep in your emergency fund
  • what changes might improve your tax situation
  • if you have a mortgage, what type of mortgage you should have, and whether you should focus on paying it off, or refinancing
  • what type and how much insurance you need (this would include life insurance, long term care insurance, disability, and some planners also give advice on property and casualty and health insurance), and last but not least
  • based on your discussion around retirement (do you want to downsize? live off investment income?) what your approach to retirement should be and what types of retirement accounts to use.

If they haven't included this information, or you don't believe your financial advisor is acting in your best interests, you should get a second opinion. By no means should you feel that you should proceed. Any good AFA would want to know what you didn't like about their recommendation, and should work with you to resolve your concerns. If they feel like you don't see that value of their advice, and call you a 'bad client' you should walk away immediately, because they don't have your best interests at heart.

Implementing your plan

If you feel your advisor is acting in your best interests, then you'll no doubt be comfortable proceeding with their recommendation. They may ask you to sign your recommendation in acknowledgement of this. If you haven't dealt with them before, they'll ask you for your identification in order to open an account for you. Opening your account generally shouldn't take longer than five business days. Depending on your discussions around anything you need to do differently, requirements to change the structure of your current investments and complexity of their recommendation, implementing your new financial plan shouldn't take more than a month to implement.

What should you expect from your ongoing relationship with them?

You should always feel comfortable contacting your advisor, even if it's not in a formal meeting. Whether over the phone or in a face-to-face meeting, your advisor's role is to place your interests first and offer you advice when you require it. So you shouldn't be afraid to contact them whenever you have a question or concern. 

Meeting them

Generally investors only meet with their advisor once per year. This gives both parties the opportunity to discuss any recent lifestyle changes you've implemented, and whether your investment(s) should reflect these changes.

However, it's recommended that see your financial advisor if you do have a major change in your lifestyle, such as:

  • got married
  • have had kids
  • changed jobs (so your income and employment benefits have changed)
  • got divorced, or
  • are seriously ill.

Your advisor will be able to consider these changes and tweak your investment structure, and possibly even their recommendations, to meet your new requirements.

Reporting

Your advisor also needs to provide you with regular updates as to how your investment(s) is performing. These updates should include opening and closing balances, details of any transactions made within the month and any significant changes they may have made to any of their financial products that you're invested in.

At the very minimum you should receive an account statement every month. Generally many also provide you with an online or mobile dashboard to monitor your investments' performance yourself. You'll also be able to monitor your investments with finappster.

You may also receive regular updates from them about what's happening in the market, in relation to your investment(s).

Ultimately the better the relationship you have with your finanical advisor, and the longer they have to get to know you, the better the outcome for you. So making sure you're 100 percent comfortable with your advisor is more likely to contribute to prosperous future for you.

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