Ever thought about getting a professional to help you with your financial planning? Maybe you’re hoping to get the most out of your assets, or looking to put together a foolproof long-term plan. Regardless of your motivation, it’s important to find a financial planner who will put your needs first and give you good-faith, genuine advice.
When choosing who to work with, it’s imperative to consider whose interest your adviser works for, how they’re paid, and whether or not they receive commissions for the advice they give.
Don’t get us wrong — every financial adviser is legally bound to act in the best interest of their clients, as legislated in the Financial Planners and Advisers Code of Ethics and Corporations Act. These ethical standards require financial professionals to avoid conflicts of interest and keep clients’ needs at the forefront. However, advisory firms with an ‘aligned business model,’ that is, those who work for a specific product provider, company or bank, may have incentives or a bias (conscious or subconscious) to steer you towards certain products or services regardless of your actual financial needs.
So, while such a professional might have your financial success in mind, there still remains a potential for conflicts of interest to arise. In this blog, we’ve compiled a list of questions you should ask your adviser to unearth such conflicts and ensure they work for you and not an institution.
3 questions that will confirm if there’s a conflict of interest
Conflicts of interest in financial planning are generally not ideal. We’ve got that down. Now here comes the difficult part; how do you quickly identify these potential biases?
MoneySmart’s guide to choosing a financial adviser outlines the key to making an informed decision: asking as many questions as possible.
It’s smart to get a handle on your potential adviser’s fees and payment structures, including whether or not they will receive incentives for the products they recommend. Other useful questions relate to their areas of speciality and practicalities such as how often you’ll meet, how they plan to manage your money and how they’ll keep you updated and in the loop.
You can also find the answers to these questions in the advisory firm’s Financial Services Guide (FSG), which should be accessible on their website, or as a PDF document you can request from them. Having access to this document will allow you to conduct an in-depth review of the firm’s background.
So, here are the questions you should be asking if you want to figure out what may influence the advice you get from a financial professional.
1. Who owns the financial advisory firm?
First and foremost, it’s key to find out who owns the financial advisory firm, and whether or not they have full control over their license.
Traditionally, the financial advisory industry developed along product distribution lines; because of this, most advisers worked with banks and dealer groups. Banks saw financial advisers as a means to recommend their products to more people, and many advisers’ Australian Financial Services (AFS) licenses were tied to the company or product they worked for.
Today, there are many more non-aligned financial advisers than before. However, they still remain a minority; most advisers still have their AFS license owned by insurance companies, superannuation funds, banks and investment product providers.
If an adviser’s firm is working in an aligned business model with another institution, their advice may be skewed to favour specific products and services. In contrast, a non-aligned firm that owns its own license won’t have these same pressures and incentives and thus is free to advise clients in a way that is purely in their best interest.
2. Is the financial advisory firm connected to a product provider or distributor?
The next thing to investigate is whether your financial advisory firm is connected to a product provider or distributor. This information should also be available in their FSG, which you should be able to access through their website or upon request.
If the firm is aligned with another business, it will typically have a proven product list for what advisers can recommend to their clients. Depending on the products they offer, and their compatibility with your financial goals, this can either help or hinder you in achieving your objectives.
Ideally, you want an adviser who will give you advice based on your needs and goals, not on the products they offer.
3. How are financial advisers remunerated?
Lastly, it’s important to look into how your financial adviser is typically remunerated — will you cover all of the service fees, or will some of them be subsidised by another institution?
There are a few common user-pays compensation models for financial advisers in Australia. The first is an annual fee, which may be a fixed fee, a fee based on your asset levels, or a combination of the two. The second type is a percentage of Funds Under Management (FUM); that is, a percentage of the funds that your adviser is managing, which may include certain investments or assets. It’s important to clearly define what is included in this FUM. Lastly, some advisers charge an hourly rate.
However, to avoid biased recommendations, we recommend that you find a financial adviser who uses a fee-for-service or user-pays model, meaning that they only receive compensation from you for the services they offer to you. In other words, they don’t receive compensation or commissions from other institutions for recommending certain products.
Another type of remuneration that avoids biased recommendations is performance fees, which Cooee Wealth Partners applies for investment advice. This is a type of compensation that wealth managers and financial advisers receive based on the returns they generate for their clients. It is typically calculated as a percentage of the profits earned on a client’s investment portfolio, ensuring that there is a better alignment between the client’s and the adviser’s interests.
2 qualities you should look for in a financial adviser
Now that you know what red flags to look out for, let’s talk about qualities that your financial adviser should have to ensure that they are completely committed to working with and for you.
1. Your financial adviser should be dedicated to your success
First and foremost, it’s crucial to ensure your financial adviser offers objective and tailored advice. This means they should be focused on understanding your unique financial situation, goals, and risk tolerance, rather than adopting a one-size-fits-all approach. An adviser who prioritizes personalization in their strategy ensures that the advice you receive is aligned with your specific needs and future aspirations. Moreover, it’s essential that this advice remains unbiased. For example, at Cooee Wealth Partners, our Wealth Partners are committed to providing genuine and unbiased advice that they would be happy to follow in their own financial lives. The fact that we don’t receive commissions means that we work for clients, not sell to them. Overall, while due diligence is essential with any financial adviser you consider, choosing a professional committed to prioritizing your financial well-being is a key factor in your selection process.
2. Your financial adviser utilises a user-pays model
It’s important to make sure your financial adviser uses a user-pays or ‘fee-for-service’ model. Essentially, this means you pay for the services yourself, rather than being cross-subsidised by a product provider or separate institution. While this may lead to higher service fees, it ensures that your financial adviser is only beholden to you and your interests regarding your financial matters. In other words, their advice is not influenced by commissions, subsidies or other financial incentives. What’s more, advisers who earn their income entirely through commissions are not required to make a ‘best interest’ recommendation, only ‘suitable’ ones.
When your financial adviser utilises a user-pays model, you can be more confident that they are placing your interests at the forefront. As such, they have incentives to ensure you’re satisfied with the services you receive and to only recommend products or services that they genuinely think will fit into your financial strategy.
Picking a financial adviser to work with is a tricky task, with a lot of research and due diligence involved. While all financial planners are legally required to give good-faith advice to their clients, conflicts of interest still may arise when advisers are tied to specific institutions, products or services. If you’re ready to get advice from a Wealth Partner that works for you (and only you),book a meeting and let’s discuss your goals.