Do you need financial advice?

Financial advice is a term with a multitude of meanings.

Do you need financial advice?

If you are having problems balancing your household accounts or finding direction, personal finance expert Noel Whittaker tells how to move forward in this extract from his updated book, Making Money Made Simple

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Good advice doesn’t cost — it pays. - Jim Rohn

Financial advice is a term with a multitude of meanings. One sense is general advice, such as recommending you get your debts under control before borrowing any more or making sure you have adequate insurance.

In the investment world we are more likely to talk about specific advice. This could be advice from a financial adviser about planning for the future, advice from an accountant about the appropriate vehicle to use to start a business, or advice from a solicitor about estate planning.

In Australia, it is illegal for anybody who is not appropriately licensed to give specific advice. An accountant or solicitor is the appropriate person in many cases, but they normally work closely with a financial adviser. The financial adviser must be licensed by ASIC, or be an authorised representative of an organisation licensed by ASIC.

If you are having problems balancing your household accounts or finding direction, you do not need a financial adviser, but a financial counsellor — they can be hard to find, but often your credit union or building society may offer these services, and occasionally the local school or college may have courses that can assist you. If you need taxation advice, such as whether to form a company or trust, or in what name to purchase a property, you should consult your accountant. Tax is the specialty of accountants and, although many financial advisers have a strong knowledge of tax, you should always be guided by what your own accountant says as well.

A good financial adviser can make a massive difference to your life. For the material in this chapter I spoke to six of Australia’s leading financial advisers and asked them a series of questions. The next two chapters are based on a composite of their answers to my questions.

Good, specific financial advice can help you identify your goals, develop strategies to achieve your financial goals, choose investments that will work with your goals and your risk profile, decide what insurance you need, and help you plan for retirement. There is no doubt that you will need specific financial advice at some stage in your life, but the big question is: do you need it right now?

Financial advice will cost you money, so you won’t want to be paying for advice until you have some money to worry about. So, the first step is to get your finances under control: make sure you are spending less than you are earning and your free cash is building up.

Then you can examine your options. If you are young, and your goal is to buy a car, or accumulate enough money for a house deposit, all you need to do is set your target and accumulate the funds in a bank account that is paying a reasonable amount of interest. If you are paying off your house, and meeting the mortgage payments on time, simply bank your spare money in an offset account attached to that mortgage. Insurance is important, but unless you have specific needs, you can cover that using the insurance option in the superannuation fund your employer’s contributions go into.

Once your mortgage is under control and you have a good cash surplus, you are stepping into a new world, where financial advice can make a huge difference to your future. There will be decisions such as whether to speed up the mortgage payments, or to start a separate investment program — by regular contributions or by borrowing

In fact, given the wide range of topics that advice can cover, even without a surplus, an event such as a pay rise, relationship separation, impending childbirth or simply a need to provide for retirement or for children’s education may trigger your need for advice. Also, there may well come a time when you are in line for an inheritance, and a financial adviser is the perfect person to advise you how best to invest for both long-term growth and maximum tax effectiveness. Remember, too, that restructuring your affairs could save you a lot of money, so if you have some assets behind you, it may be important to get specific advice focused on your needs, regardless of how much you have free to invest right now. If you are in a job where you may get sued for negligence, a financial adviser can also help you arrange your affairs for maximum asset protection.

An alarming trend is that many people who would benefit from specific financial advice - often those who need it the most - don’t seek it.

If your finances are under control, and you are prepared to seek help in mapping out your future and to meet with your adviser at least once a year to make sure your affairs are on track, you are a perfect candidate for financial advice.

The right adviser
What should you look for in an adviser? First, you need someone who is knowledgeable in the area you need advice in. For complex areas, such as aged care, running a self-managed superannuation fund, or salary packaging you should seek out an adviser who specialises in the field you are after.

Second, make sure the adviser is licensed to provide advice, so take the time to understand their background and education. The financial adviser register on the ASIC MoneySmart website allows you to check if an adviser is licensed, has the appropriate qualifications — and if they have had any disqualifications.

Third, look for a personality fit. There is no point having an adviser with a string of qualifications if you don’t work well together. You are looking for someone with whom you can have a productive and interactive relationship for many years. While you want someone with some experience, consider your own age, and avoid picking an adviser who is about to retire.

Also, I think it’s a good idea to ask them where they invest their own money.

Some advisers offer a free initial consultation to see if their services and personality are compatible with the potential client. Usually, this would be a 15-minute chat to determine what the client is seeking to achieve, whether the adviser can be part of that, and whether there is a good fit between the people.

However, if you are looking for a detailed proposal, it may involve several hours of research for the adviser and they may well charge a fee. Often, the fee will be refunded if the client goes ahead with the adviser’s recommendations.

I’ve always preferred a quick chat to start the process — it can save a lot of time on both sides if it becomes obvious quickly that what you are looking for is not the province of this particular adviser.

Paying for financial advice
Costs of financial advice vary. In response to recent rule changes, most advisers now work on a fee-for-service basis, like an accountant or solicitor. Previously, many advisers worked on a commission basis, so no upfront payment was necessary. However, it is still common for the fee to be deducted from the investments, which saves the client the necessity of having to find the money upfront.

The over-regulation of the financial advice sector means that every interview requires a mass of research and paperwork, which currently costs the client at least $3000. Because of this initial cost, some advisers said a potential client needs at least $200,000 to invest before seeking specific financial advice, but there is no hard and fast rule.

In an ongoing relationship, it is common to pay a flat annual fee, based on regular reviews of your situation.

I am regularly asked what is a reasonable fee, but there is no standard answer as it depends on the amount of work involved, the complexities of the investments and the client’s structure. Obviously, the more complex your situation the more fees you can expect to pay. Advisers are required to show all fees in detail: the main thing is to understand these clearly from the outset, then to make sure you are getting value for the fees. If at any stage you think the fees are excessive, or are not giving the value you hoped for, talk to your adviser.

Money clips

  • Try to decide at the outset just what you want the financial adviser to do. If you are uncertain, it’s fine to seek direction at the start.

  • If possible, start with a short meeting at no cost to decide if there is a possibility of a future good long-term relationship.
  • Make sure you are clear about what fees will be charged at the start, and what ongoing fees there will be.

  • Look for a good personality fit, and good reputation in the industry.

 

Making Money Made Simple – the ultimate guide to finance and investment in the 21st century, by Noel Whittaker, is available from all good bookshops.

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    COMMENTS

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    Ted
    22nd Jan 2020
    10:15am
    Reads like financial advisers can give you the world, my experience is the opposite, charge the earth and provide no real value. Over the years I have paid thousands and got nothing in value. Now I go without, trying to recoup my losses. The Royal Commission exposed the industry for what it is, some good ones but a lot of charlatans. Trying to extract $3000 for an initial meeting is outrageous, Give up the fancy offices and Christmas parties etc and charge less!

    Never could understand how advisers could charge on the basis of funds under management, not one could explain to me what additional benefit I got from them when were paid extra for the fund making a little more, simply holding their hand out, clipping the ticket on the way through.
    54-11
    22nd Jan 2020
    10:42am
    I agree, Ted. Once upon a time, I trusted one of these mongrels. He churned us through different products, taking a nice little (undisclosed) commission each time, recommended products that went belly up in the GFC, and in the end he made a lovely earning and we were worse off than if we had just made our own decisions.

    There is only one person who has our best interests at heart, and now I trust my own judgment, not one of these scammers.
    Greg
    22nd Jan 2020
    10:46am
    I think there are people out there who have no idea about money, even if you try to explain to them in very simplistic terms their eyes glace over and you know they don't understand. These people, unfortunately for them, need the help and they have to pay to get that help.

    Most people though with a little bit of smarts can read, analyse and make a decision that's good for them - not good for some adviser.
    Greg
    22nd Jan 2020
    10:51am
    54-11 - Remember they aren't some kind of magician that have a crystal ball and know for certain that a particular market will do well, if they were they wouldn't bother with helping others for the money, they'd be at home making millions themselves.

    All they really can do is advise what's the best way to structure your investments so you get maximum return, income/pension and pay the least tax - something most can do by reading, learning and making their own decisions.
    Mariner
    22nd Jan 2020
    11:06am
    Was happy with the financial advisors C/Link provided, attended a few seminars before pension age. Had a one to one session with a financial bloke in the neighborhood. Quite happy although the GFC got me as well, no-one could see that one coming.
    Anonymous
    22nd Jan 2020
    11:15am
    People tell me regularly about financial advise they have received and how good it is etc. Many times I have to bite my tongue so hard so I don't ;augh as the advisor is the one making most of the money not the investor.

    I recently heard about super funds crowing about 18% last year but I am left wondering how they only made 18% when the sharemaket accumulation index was up over 26%.

    With less than 5% of financial advisors being independent then what hope has one got of getting independent advice?
    Anonymous
    22nd Jan 2020
    4:58pm
    I agree, Ted, this article is ridiculous, as well as self-serving. Suggesting $3,000 is normal for a single interview (with paperwork) is not only ridiculous, but also is a price-fixing action by this so-called expert trying to brainwash people into accepting high fees. People with simple assets can easily get advice for far less - just check with your Industry Super fund, or find someone else if you can.

    The article also doesn't mention the main issue - where can you find a decent Fin Adviser?
    The main issue with finding someone who works for you is as BB has noted - hardly any of them are independent.
    Mez
    24th Jan 2020
    11:49am
    Nah!
    Just don't trust them!
    Last time I saw one was a Vietnamese EX tramway employee who was retired and gave an hour long free financial advice with the ed Westpac bank after which he asked me to sign a blank form which of COURSE I did NOT!
    Horace Cope
    22nd Jan 2020
    12:02pm
    The article makes a lot of sense and we are in the group that used a financial adviser who put us on the right path to saving more funds in super to enable us to have a little bit more in our retirement. He was an employee of an industry fund which we have stayed with and which averages out a rate higher than the compulsory drawdown. Could we do better? Maybe. We are content with our lot and are happy to continue with the status quo.

    I recall a mate who owned an investment property and was not willing to pay the estate agent 7% to collect the rent, choosing to do that himself. He had a tenant walk out owing a couple of weeks rent without notice and it took my mate 4 weeks to get another tenant. His overall loss was much higher than the 7% he was trying to save. By the same token, if one wants to chase the best performer and keep moving funds, the overall result could well be a loss. As regards an SMSF, we have no training in that area nor do we wish to go down that path. We don't want our retirement cluttered up with worries about our choice of investments and the associated paperwork but good luck to those who do.
    Anonymous
    22nd Jan 2020
    1:23pm
    Bad tenant insurance is only a fraction of real estate agents fees. Even with real estate agents it was me who had to take the tenant to the tribunal as the agent just wanted to cave in and let the tenant off scott free. Yes tribunal ruled in my favour.

    If you mange your own money it is not any harder to manage a SMSF.
    ex PS
    27th Feb 2020
    10:20am
    H.C, totally agree, we have had much the same ecperia.nce with our Industry Fund.
    We know people in the same fund who have lost money, basically because they were always swapping and changing investment options looking for higher than reasonable profits. Those who stuck to low/medium risk investment strategies did well overall.
    old frt
    22nd Jan 2020
    6:00pm
    I ask one question . If the investment is so good why are they still working ,why aren't they in debt to the eyeballs and living of the huge difference between loan cost and the great returns they are promoting . As always , little fish are sweetest .
    Chris B T
    23rd Jan 2020
    9:50am
    Most of the Time is about Selling One's Book.
    They become Rich without giving you Personal Advice but Generalised Advice.
    No Responsibility Taken, as past performance is not a indication for future performance.
    {-(!)


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