Financial advisers have had a bad run in recent years. But writing off all financial advice because of a few bad ones is like swearing off dating just because you watched The Bachelor choose Alex over Nikki (I know right!). Certainly there are stupid, incompetent or greedy advisers out there. But there are stupid, incompetent and greedy people everywhere, and to be honest, I would say quite a few of them make it onto reality shows.
So would I recommend using an adviser? Yes and no.
As I said in another post, I generally support outsourcing to experts. I certainly don’t let any of my finance clients write media releases, and they don’t let me manage millions of dollars of other people’s money. It works out pretty well.
So here are some reasons you would consider working with a financial planner:
- You have a pretty big goal to reach, such as starting a business or buying a house.
- You’re undergoing a change such as marriage, divorce or having a baby.
- You want to make sure you are on the right track with planning for your retirement.
- You want a roadmap that keeps you focused on a goal, with a tangible plan to get there.
Advisers actually do quite a lot more than just tell you where to invest your money. They can look your life insurance (read more about that here), how to manage your tax affairs or help with ‘estate planning’ (i.e. they make you get a will).
HOWEVER. There are a few things you should know about the way the industry works, so you go in with your BS detector ready.
Not all advisers are created equal
Remember in Clueless, when Cher explains her virginity? “You see how picky I am about my shoes, and they only go on my feet!”
So ladies, be like Cher. Be highly selective when choosing an adviser, because there is a wide spectrum. Some advisers only have a diploma, while others have a degree (although this is set to change in the next couple of years, under new government rules).
A degree is not, in itself, a guarantee of knowledge or integrity. And similarly, plenty of good advisers have gained lots of experience on the job, regardless of having done a uni course.
However, it does pay to look at their credentials. Ask about their qualifications and experiences. Ask for testimonials. Ask your friends and family. It’s your money, and you want to be like Cher with it.
Know enough to call BS on their advice
I got a big financial plan done many years ago, and part of the recommendation was to get a margin loan to buy shares (more about them here). It was late 2007 and the markets were great. In fact the whole economoy was great, and Australia was ballin’ like Beyonce in a pool of dollar bills.
Anyway, by the time I got around to implementing the advice, I knew enough to be worried. The sub-prime loan thing was happening in the US (a precursor to the GFC). It looked like the boom could be over soon, after a period of ridiculous high growth. And anyone with a passing knowledge of economics knows EVERY boom has to have a bust. The trick is working out when.
So I sat out the storm. We kept our money in the bank, and soon enough, the sharemarkets dropped by more than 30% – which would have meant my margin loan got called in, and I’d have lost money or had to spend more.
This isn’t to say the advice was bad. But it came at the top of the markets, and I wasn’t comfortable with the assumptions underlying it.
The lesson here is, do enough reading and learning on your own, so that if something doesn’t sound right – for you – then you can say no. Or ask more questions. Or marry someone for 72 days.
The people who lost their homes in financial advice scandals such as Storm Financial were told that despite a really low income (sometimes just a pension), they could make hundreds of thousands of dollars. If they had had enough basic financial literacy, they would have known it was total BS. (If it sounds too good to be true…)
It’s like when you are in a shoe store and they only have size 38, but you are a size 39. That sales girl will tell you they are leather, they will stretch, yada yada yada. But you know in your heart those things will give you nothing but grief, blisters and pinched toes. So, you need to take advice (from anyone, including me) with a grain of salt, and listen to your own gut feel.
Someone, somewhere, wants to make money off you
You know when you go to the beautician for a facial, and you’re paying your 80 bucks for the service. But then she tells you your skincare regime sucks, and tries to offload 200 bucks worth of overpriced Dermalogica on you. And somehow, in the moment, a $60 moisturiser seems like a really good idea. (Newsflash: it’s not, and it never will be).
Well, the same thing happens in finance. If you go to a financial adviser at a bank, for example, they are bound by rules to recommend the best financial products for you. But it just so happens that the bank has a whole suite of financial products to offer too. “Look, here’s a managed fund I prepared earlier!”.
And just like the beautician is going to offer you the product that makes her money (I know, she swears by it, she really does) – the adviser is also possibly going to sell you a product that makes money for his or her venerable employer: the bank.
It’s called ‘vertical integration’, and while the finance industry didn’t invent it, they have built a huge business out of it.
Not every adviser is part of this vertically integrated structure. Many independent advisers are deadset against it, in fact. And I am not here to say who’s right or wrong. There are fantastic advisers – both independent and aligned – selling a wide range of products in a highly ethical way. It’s just good to be aware who is making money, and where, and how.
Know what you’re buying, ask questions, and consider whether you couldn’t get a really bloody good moisturiser at Priceline for $12. (I have, and look at my youthful skin!).
So how do I get started?
Asking friends and family for recommendations is a good start. Check out the Financial Planning Association website. Follow some advisers on LinkedIn and see if you like what they say. I wish you well, and hope you never again buy a pair of shoes half a size too small.
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Photo credit: https://www.flickr.com/photos/dskley/