How to avoid the bad advice trap
An article by ASIC Chairman Jeffrey Lucy, published in The Daily Telegraph in March 2006
Note: Some links and resources in this article are out-of-date. For more recent information about financial advice, see Moneysmart's resources on choosing a financial adviser, and on problems with a financial adviser.
Financial advisers have attracted a great deal of attention recently with the demise of the Westpoint property investment group.
These days, Australians are increasingly depending on financial advice to make decisions about their investments, retirement planning and family budgets.
The first step to obtaining good financial advice is choosing a financial adviser you can trust.
For a start, you should make sure the financial adviser you choose is licensed. That means he or she is required to meet a set of minimum legal standards about things like qualifications and compliance arrangements.
It also means that you have more protection if anything goes wrong because you can lodge complaints with licensed planners and, if that doesn't help, go to the Financial Industry Complaints Service (FICS) which sorts out disputes between member planners (which licensed planners must be) and clients, that can't be resolved. FICS can also facilitate compensation of up to $100,000 if bad advice results in losses.
You should also take time to find an adviser that suits your circumstances, who will listen to what you want to achieve and how you feel about risk and also explain terms that are unfamiliar or confusing. Find out who owns the business, the services offered and whether the adviser charges a fee or earns commissions from product providers.
Make sure that the advice offers value for money and fits with your objectives. It should be written in a clear and concise way so that you understand it, setting out the fees or commissions earned by the adviser and any conflicts of interest and risks attached to the investments.
Before making an appointment to see your adviser, gather your personal information - assets, earnings, expenditures, etc. Work out what your goals are and what you want your adviser to do for you. At this point, decide whether you want to pay for the advice upfront on a fee for service basis, or whether you are happy with the adviser not charging you directly but receiving a commission from the products that form part of your portfolio. You should know those fees and commissions before finalising your investment decision and it is the adviser's responsibility to reveal them to you.
If the commission paid on a particular product is significantly higher than a commission of approximately 1 to 2 per cent, then you should ask yourself (and your adviser) why it is so high and whether there is a higher risk with the product that requires such a high sales incentive.
This is the first in a regular column that I hope will make financial decision-making seem less daunting, helping people make more confident and informed financial decisions, while clearing up some myths.