How to choose an adviser

zoe fielding

It’s hard to know where to start when you’re looking for a provider of financial services. There are so many horror stories of dodgy planners, banks that rip you off with hidden fees and insurance companies that charge a fortune in premiums and won’t pay out when it comes to the crunch.

Good news stories often go unreported. But there are plenty of people who have excellent experiences with their financial service providers. Often, all it takes to make sure you walk away smiling is to ask the right questions at the beginning.

Know your money managers

Financial planners and accountants are very different and many larger practices employ experts in each area. Some accountants are licensed to provide financial advice and some financial planners have accounting qualifications.

Here are a few questions you could ask both your accountant and financial adviser, plus others that relate specifically to one or the other.

1. Qualifications and experience?

The more the better, really. Accountants must have a degree and they also undertake continuing education each year. Check whether they are members of the following professional bodies: CPA Australia, the Institute of Chartered Accountants of Australia or the National Institute of Accountants. Financial planners don’t need to hold a degree, although some do. The minimum education levels for advisers to comply with their licence obligations are quite low. Look for a planner who has an advanced diploma of financial services and, ideally, one who is a certified financial planner.

2. What are your areas of speciality?

Check whether the accountant or adviser has expertise and qualifications in the areas you need help in. Accountants can assist with everything from completing tax returns to setting up a family trust. Advisers might focus on retirement planning, insurance or a range of other areas. You’ll probably get better advice from someone who targets clients like you and spends most of their time advising on the topic that you’re interested in. Specialist qualifications are also helpful.

3. Who’ll provide advice on topics you don’t cover?

If you need advice in an area outside an accountant’s or adviser’s area of knowledge, then any professional should be able to refer you to someone who can assist you. These may be people in their own practice or someone from a separate business. It’ll make your life easier if your accountant, adviser and solicitor can all work together when necessary.

4. How and when do you charge for your services?

Accountants may bill by the hour, or charge on a job cost or retainer basis. Financial planners are moving in this direction too. Under the Financial Planning Association’s guidelines, advisers must adopt a fee-based remuneration structure by 2012. Commissions on many products will be banned.

Whatever the payment model, you should be able to negotiate how, when and how much you pay. Make sure you understand what’s included – will you be charged for phone calls and travel time, for instance?

And ask if commissions can be rebated to you. Expect to pay even if you don’t act on the advice. If you don’t have to pay for the advice, chances are you’re being sold a commission-paying product.

5. Can you provide a reference?

A good way to find an accountant or financial adviser is to ask friends and family for recommendations. If no one you know can offer suggestions, try the professional and industry bodies’ websites. The accountant or adviser should be able to refer you to an existing client for a testimonial – take this with a grain of salt though as they’ll hardly let you call a disgruntled client.

6. Complaints handling processes?

The business should have internal complaints management channels and be a member of an external dispute resolution scheme such as the Financial Ombudsman Service. Members of professional bodies are bound by codes of conduct and disciplinary mechanisms deal with those who break the rules. Check that the accountant or adviser has professional indemnity insurance. If something goes wrong and you are owed compensation, there’s a better chance you’ll get it if the business is insured.

7. Who will be my main point of contact?

Your first meeting with the accountant or adviser will probably be with a senior team member. You don’t want to be palmed off to a junior member of staff as soon as you’ve engaged their services. Juniors can handle administration but for detailed questions make sure you have access to the person you first met.

8. What level of service should I expect?

Avoid frustration by setting expectations in advance. Understand how long the work will take to complete, how quickly your calls will be answered and how often your case will be reviewed. Planners must provide a statement of advice document outlining their recommendations and services. Members of professional accounting bodies must issue a letter outlining the terms of the engagement.

9. Practice size and ownership structure?

Practices vary in size from those with a single professional to huge networks with hundreds of members. Each model has its pros and cons. For financial planning, in particular, it is important to find out who the financial backer or licensee is, as this could influence the range of products the planner recommends.

Extra questions that relate specifically to advisers:

1. What processes would you use to make sure you understand my goals and risk profile?

The top issue that leads to litigation against financial advisers is a mismatch between the client’s risk tolerance and their portfolio. You want tailored advice, not cookie-cutter recommendations.

Peter Bembrick, a financial planner for the Sydney-based financial advisers Centric Wealth, says advisers should be able to explain how they will learn about your goals and risk appetite. This should not be based on gut feeling. They may ask you to complete a basic questionnaire or a sophisticated psychometric test that will help them assess how you would react in different situations.

2. Do you provide advice on your clients’ full financial situation, including existing assets, debts and investments?

You probably want help with your full position but many advisers will limit the assistance they give to new investments or superannuation. In many cases, the best advice may be to pay down your home loan. But there’s no commission in that for an adviser so it might be overlooked. Make sure you know what you’re getting.

3. How do you research the products you recommend?

The investments are what will make or lose you money so the research behind recommendations is important. Bembrick says best practice would be to have in-house investment specialists analyse both primary research and information bought from external sources.

When you first meet a potential adviser, you’ll need notes on your financial goals and what you want from the adviser, and some brief information about your financial and personal situation. This will help the adviser explain what they can do for you. You won’t need all your paperwork now because this meeting is intended for you to get to know more about the adviser, not for the adviser to find out all about you. Take some notepaper and write down the answers.

A good first meeting will involve each of you sharing the conversation. Begin by saying you are looking for an adviser and you feel they may be able to help you, but you won’t be making up your mind till you’ve seen two or three more.

Say you may take some notes to help you remember things. Invite the adviser to give you anything in writing that will help answer your questions.

You should get the opportunity to hear about the adviser’s experience, the kind of people they advise, the kind of financial products they advise on, and their qualifications.

Extra questions for accountants

1. Can you offer tax advice and complete my tax return?

Only registered tax agents can provide tax advice and prepare and lodge your tax return. Financial planners can give limited guidance on tax issues that relate directly to superannuation and the investments they are advising you on. But for specific tax advice, they’ll have to refer you to a qualified tax agent.

2. What access will I be given to the data you hold about me?

CPA Australia suggests using your accountant to keep track of your financial records. The accountant should be able to provide you with the information they hold in your file within a reasonable time frame if you request it.

Extra questions for insurance providers

1. Who backs you and what is your financial strength?

It’s not always obvious who is behind an insurance policy. Gerard Kerr, the head of product and marketing for life insurance for the financial services provider ING Australia, says some companies “white label” other companies’ insurance products. That is, they sell them under their own brand, so it’s unclear who is taking on the risk.

The bottom line issue is this: will the company insuring you still be around if you need to make a claim 20 years from now?

2. How volatile are your premium rates?

Expect premiums to rise over the policy’s term due to factors such as inflation. But if there are wild swings in the cost, that could indicate a problem with the sustainability of the company’s practices.

Sean McCormick, general manager of advice product for MLC Insurance, says: “They might introduce a liberal benefit that wins them market share but then

they might find that when people claim they have to put up the premiums.”

3. How often do you upgrade or close off your policies?

Life insurance products are being improved all the time but some companies only extend upgrades to new customers.

Insurers may close off policy series rather than raise premiums for products that are giving them grief when more people are claiming than they expected. Raising premiums would encourage customers to start cancelling policies. Enhancements won’t be passed onto old products. So you could be stuck in an out-of-date policy that doesn’t cover you as well as other products might.

4. Do your products contain a claims reduction clause?

These are well-known in the life insurance industry but you certainly don’t want one in your policy. Claims reduction clauses are usually tucked away in the fine print. They introduce a grey area into the insurance contract. That may allow an insurer to avoid paying your claim or reduce your benefit if they believe you can do – or earn – more than you say you can.

5. How often and how much does the company pay in claims?

While all insurers will try to dazzle you with their statistics if you ask them this question, big numbers can give you an idea of the scale of the company you’re dealing with. Measures like the proportion of claims paid compared with those made give clues about how likely you are to be paid if you need to make a claim. Don’t expect 100 per cent payout rates.

6. What kind of clients do you target?

It will be comforting to know the company has paid claims made by policy holders who are broadly similar to you in age, health and profession. Some insurers specialise in covering people who work in particular industries and hazardous roles, such as miners, police officers and security guards, who might otherwise find it difficult or expensive to get insurance.

7. Are there packaging opportunities?

You may get a discount for taking out two or more policies. This could apply to an individual taking out several kinds of cover with the same insurer or to family members or business partners with related policies.

8. What additional services are available with the life insurance policies?

Simply put: what can I get without first having to die or get sick? Aside from the basic policy terms and conditions, life insurers are starting to offer services designed to keep you fit and healthy (to reduce the risk you’ll make a claim). These sweeteners should not be the main reason for picking a policy. But if it’s a close race between two providers, they might just tip you one way or the other.

9. How flexible are your products?

So that you don’t have to start all over again at some time in the future, find out whether your policy will let you increase your cover later on if you take out a mortgage or get married and have children. Also check if there are alternatives to letting the policy lapse if you find yourself struggling to pay premiums. You might be able to extend the waiting period on an income protection policy, for example. It’s also useful to have a choice of stepped premiums (which rise as you get older) or level premiums (that are not linked to your age). A level premium on a long-term policy like income protection insurance can save you tens of thousands of dollars. Stepped premiums may be cheaper for shorter-term policies.

The Australian Financial Review