Financial advisers’ actions can make or break you financially. Good advice can set you up for a comfortable life and retirement. Bad advice can lead to financial ruin. But without waiting for the consequences, how do you know if the advice you have received falls into the “good” category?
Recently there has been increased media attention about this subject, with accusations that the Wild West is alive and well in the financial services world. There is growing concern that the advice consumers are receiving is not in their best interests, nor may it be personalised.
“Best interests” is an important term as it is a key defining feature between the different types of Financial Advisers. Thought they were all the same? Think again.
Authorised, Registered & QFE Financial Advisers
Changes to financial adviser legislation in 2008 introduced three types of financial advisers:
Authorised Financial Advisers (AFA’s)
An Authorised Financial Advisor has been through a rigorous examination process to ensure they meet minimum standards for competence, knowledge and skills, client care, and ethical behaviour. Most will have in fact exceeded this standard and hold recognised university qualifications. There is also a requirement for police checks on all AFAs.
An AFA can give advice on more complex financial products and services; such as Kiwisaver, investment, financial planning services, retirement planning services, and wealth management.
AFA’s follow a Code of Conduct and are monitored by the Financial Markets Authority. Importantly for consumers, an AFA is required to put your best interest’s first.
Registered Financial Advisers (RFA’s)
A Registered Financial Adviser currently does not have to meet any minimum qualifications. Consequently an RFA is restricted to giving advice on simpler products such as mortgages, life insurance, risk insurance, bank term deposits, consumer credit contracts, and many different insurance products.
An RFA may be registered but they have a lower level of disclosure, financial supervision and monitoring by the Financial Markets Authority (FMA). There is no requirement for police checks, no code of conduct, nor is a RFA required to put your best interests first!
Advisers working for Qualifying Financial Entities (QFE’s)
Financial advisers employed by companies that have been granted status as a Qualifying Financial Entity (QFE) by the Securities Commission do not need to be individually registered or authorised if they only provide advice on their company’s own products. The QFE must ensure that its employees and nominated representatives have the competence necessary to exercise reasonable care, diligence and skill in advising clients. A typical QFE would be a bank or insurance company.
Is Your Financial Advisor Working for Your Best Interests?
A review of the current system has found that the terminology is confusing and it is hard for people to know where to seek advice.
The key to knowing if you have a good adviser is in the questions they ask about your personal situation. They can’t possibly give you the personalised advice which is best for you if they don’t have a thorough understanding of your situation and future goals. If they spend their entire time ‘selling’ you the benefits of one particular offering, policy or insurance company over another then maybe they’re not the one for you.
You need to ask questions too. Ask:
• “Are you aligned with a particular company or do you have requirements to sell a particular provider’s products?” A Financial Adviser may not be “independent” and their answer should at least tell you if your adviser will shop around for you or if you need to do it yourself.
• “Can you name the other policies or investments you have compared this recommendation against?” (Have they really thought about what is best for you?)
• “What incentives are you going to have the opportunity to get if this sale goes through?”
• “How do you get paid?”
• “Are you getting paid more to supply one product rather than another?”
While advisers have to be paid like anyone else who works, if they squirm at a question or don’t have an easy answer then it’s probably best to walk away.
Ultimately, it’s essential to ask for references. Are there people in your community or network who the adviser can point you to for a testimonial? A good financial adviser should be someone you are prepared to go back to every 12 months or whenever your circumstances change to help keep you on track with your financial goals.