Recent commentary has raised criticism around the performance of a certain number of funds. While the replies to this article have understandably centred around the recent adverse return period markets have experienced, we wish to focus on another. Quite simply, investors must invest into quality managed funds.
Not too many years ago, dealing with money was relatively simple for most of us. We acquired it as best we could, spent most of it on necessities and tried to put some of it away for a rainy day or a special occasion. If we had any left over we stored it in a bank account. But in the past dozen years, financial affairs have become increasingly complex, even for people with only modest means. That’s why your financial adviser could be one of the most important people in your life.
But even if you hire an adviser, your best interests can get lost in the shuffle unless you manage your relationship with your adviser. In this article we’ll give you some tips to help you do that.
Providing financial advice is a full-time, demanding job, trying to keep abreast of a constantly changing marketplace of products and services as well as developments in financial markets around the world. They spend a lot of time talking directly with their clients about their needs and their anxieties. The job takes knowledge, experience and a strategic focus, along with the courage and discipline to stick with a strategy in the face of inevitable market setbacks and the temptations of the thousands of alternatives that are always there.
We can’t tell you exactly how to find the perfect financial adviser. But the following questions can help you find a new adviser or get the most from your present advisor. Even if you think you already know the answers, you’re almost guaranteed to profit from asking again.
1. Do you receive independent investment and economic research?
Although a little tongue in cheek to place this at number one, independent research should be an important facet in the offering of a financial adviser. Did you know that internationally independent research is compulsory? This is not the case in , although many of the top quality advisers do voluntarily receive research.
FundSource Research provides this research, which includes qualitative ratings that provide ratings from 'AAA Preferred' to 'Sell". These recommendations are provided to advisers with the benefit of a level of indepth research that the adviser cannot complete without sacrificing time with the more important person - you! We encourage advisers to share this information with their clients so ask your adviser what the FundSource qualitative rating is on the funds you currently invest in - we wouldn't suggest holding a fund with a 'Sell' rating!
To get further insight into the independent research FundSource provides advisers, have a look at our Specialist Adviser Research.
2. What is your ongoing commitment to me?
Look for an adviser or planner who will leave you alone if you want to be left alone or who will call you if you want to be called. Look for somebody who will be available whenever you have a financial question, even one that seems trivial to you. Also look for somebody who will review your whole situation periodically without necessarily trying to sell you something new.
3. What is your educational background and why are you qualified to be my adviser?
A formal educational background is very helpful. Financial products, services and markets are technical, and anybody managing your money is in effect competing with some of the brightest minds around. Perhaps look for someone who teaches. Many advisors teach classes to the public, often as a way to obtain new business.
Even better, from your point of view, is somebody who teaches other professionals or writes in professional publications. This is the mark of somebody interested in constantly pushing the limits of his or her own knowledge — and who is recognised at the peer level as having something valuable to say.
Another good sign is a business background beyond providing financial advice or money management. If your advisor has started, managed or owned a business, he or she will have experience and perspective that might benefit you.
4. How many clients do you have? How much money do you manage, and how long have you managed it? What level of service will I get?
Just as you don’t want to be a doctor’s first patient, don’t be among an adviser’s first few clients. A large number of clients and a lot of money under management both indicate an advisor who has inspired plenty of confidence.
On the other hand, an advisor with thousands of clients all over the country may be spread too thin to take care of your own needs. If you must have personal or telephone access to the person who makes decisions about how your money is invested, you’ll obviously want to avoid an adviser who can't provide this ongoing service. On the other hand, small firms that always have time to talk to you may not have the resources of a larger group. In the end, your comfort and your needs should prevail. Any adviser worth hiring has made decisions and choices that amount to a style of doing business. You’ll be a happier client if you find out what that style is — and make sure it matches your own style.
5. How would you describe your investment philosophy and style? And what are the limitations of this style?
Look for an answer you can understand well enough so you could explain the essentials of it to someone else. Ideally, you’ll find an approach that fits your own personality and financial needs so well that you could adopt it for a lifetime. In the best case, you’ll find somebody who produces good results and does it in a way that you would recommend him (or her) to a friend or relative.
In addition, an adviser should recognise and freely admit his or her limitations. Essentially what you are doing trying to find an adviser you understand and are comfortable with. A younger bullish investor for example may not be suited to a older bearish adviser.
6. How are you compensated for the work you do for me? Do you receive any compensation or incentives from any product or service you recommend?
In some ways, this is one of the most important question you can ask, because it can expose potential conflicts of interest. Just bringing up the topic puts an adviser on notice that you know the potential for a problem. Whatever type of compensation your advisor receives, make sure you understand it in advance.
An advisor paid on commission can have a direct financial stake in what you buy and (in some cases) a stake in how rapidly your portfolio turns over. There are excellent financial planners either way but it should be important for the investor to understand.
7. Are you currently invested yourself in those investments you are recommending to me?
The 'do as I say not as I do test'. This question is most pertinent when seeing an adviser that shares certain characteristics similar to yourself - such as age, life stage, risk profile, time until retirement, financial position and so on. This question was raised after last weeks article by a prominent South Waikato adviser. He wrote: "…I am quite happy to tell my clients that I have many if not all of the investments they have. Whether it gives them any comfort to know that I am suffering the effects of the market downturn just like them, I'm not sure. But it makes me feel more comfortable that I'm not telling them to do one thing and doing something quite different myself."
If nothing else this question provides insight into the personal confidence an adviser has in those investments they are recommending. It's probably the closet thing you will get to a personal guarantee.
The last point, also raised by the same adviser, if they don't invest personally into their recommended funds, "Why not?"
8. Can you give me references of people you’ve worked with that have circumstances similar to mine?
If your finances are serious business to you, then you should check out references. Clients can tell you about service and satisfaction. Would they hire this adviser again? When they need something, how available, accessible and helpful is this adviser?
Obviously the adviser will need to gain the permission of their clients to provide this information, but this step should create a degree of confidence in the adviser. You do it for pretty much every other purchase you make, why not financial advice?
9. Are you the subject of any complaints or disciplinary action? Have you ever filed for bankruptcy?
A good place to start for your own investigation should also be the FPIA (Financial Planners & Insurance Advisers Association) by phoning 0800 40 44 22 0800 40 44 22 . By itself, one complaint doesn’t mean very much, though you will want to understand it and perhaps get the adviser’s response. But if you find a pattern of complaints, look elsewhere.
A bankruptcy filing should be a huge red flag, though some businesses and individuals are forced into this position for reasons that should not disqualify them from being financial advisors.
A FINAL QUESTION
Now here’s a final question for you if you are your own advisor. If you (as investor) asked yourself (as advisor) these questions, would you be satisfied with the answers? Are you qualified to advise yourself? Can you explain your investment philosophy and style along with its limitations? If the answers you get from yourself would be unsatisfactory coming from a professional, should you consider hiring a professional to at least review what you are doing? It’s worth thinking about.
* * A copy of my Adviser Disclosure is available free of charge upon request. * *
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Having studied law and with a wealth of experience in commerce and finance, I feel well qualified to discuss your plans with you
I am building my client base slowly and through word or mouth. Look at Betty's story
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These shoes are not my style but I am happy to discuss my approach and philosophy to investing
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Fees and remuneration can be fully discussed
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. . . this ewe may follow the herd . . . but you don't have to
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