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Financial Planners

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With the Banking Royal Commission in full swing, there’s been a renewed focus on the separation of advice from businesses that manufacture financial products.

People are rightly concerned at the seemingly never-ending cases of poor advice given by banks who recommend the products they make and call it “financial advice”.

Former ACCC chairman Allan Fels weighted into the debate recently. “There’s just a deep conflict of interest between creating financial products and then giving independent, or so-called independent, impartial advice,” he said.

But, does removing vertical integration lead to independent advice?

Not by itself.

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Many financial advice firms promote the benefit of offering a one-stop shop, where you can get all your financial advice in one place.

These firms tout the convenience of only having to deal with one firm and they claim you will get a better overall service if your accountant, estate planner and financial adviser all work for the same company.

While there may be some benefits to this model, I think there are elements of a one-stop service that can conflict with your best interests. I think potential conflicts need to be examined and considered whenever you receive advice from a bunch of specialists all working for the same company.

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Who's Really Paying Your Financial Adviser

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Despite a series of financial planning scandals over the last few years, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has shocked the country as it uncovers extraordinary levels of dishonesty and unethical conduct.

Many people are probably wondering if they should trust anyone in the financial services industry ever again.

If you’re one of those people, I understand how you feel.

To help you make sense of what’s been uncovered, over coming weeks, I’d like to break down some of the individual stories to help you understand what happened and how you might avoid similar problems.

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If you read newspapers, you’re aware that the financial advice industry struggles to manage conflicts caused by ownership, targets and remuneration. Accountants, as a profession, have generally managed to avoid these conflicts by not providing financial advice to their clients. Instead, accountants refer clients to specialist advisers and mortgage brokers.

It seems like a good strategy. Is it really?

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The Importance of an Investment Philosophy

An advisor without an investment philosophy is like a boat without a rudder.

If your advisor doesn’t have a convincing, evidence-based set of beliefs about the markets and how to invest in them, then you risk drifting from one idea to another.

An inconsistent investment approach is a common cause of capital loss.

An investment philosophy should inform an advisor’s decisions about your portfolio, so it’s important you not only understand and agree with their values and ideals, but that you can see evidence of a logical basis for making decisions about your wealth.

If your advisor recommends an investment strategy that doesn’t fit your values or view of the world – and that bothers you – then it’s not the right strategy for you.

My investment philosophy follows:

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Photo Credit: caseygoodness

There are biases that affect the quality of advice we get every day of our lives. And not just financial advice.

When a real estate agent shows you houses for sale, they are working for the seller, not you. This affects which properties you are shown and your ability to negotiate the best price.

(This is why buyer’s advocates have become popular. As you are paying them to find your ideal property, your advocate’s interests are aligned with yours.)

In assessing the quality of any advice, it’s worth considering which party the seller is working for: you or the owner of the product.

There are other more subtle influences on the advice we get. While the medical profession manages potential conflicts by operating under a professional code of conduct, your GP may be influenced to prescribe some brands over others, due to a relationship with the pharmaceutical company (this could be done unconsciously…see below).

 

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Photo Credit: social.englishme

Photo Credit: social.englishme

 

This morning I read an interesting article “7 Ways to Pick a Better Adviser”.

Knowing how to work out a good from bad advisor seems to be the biggest challenge people face in getting financial advice. That’s certainly what most people tell me.

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Photo Credit: Itani stock photos

Photo Credit: Itani stock photos

“He was actually a little uncomfortable and embarrassed”.

Last week I was contacted by Ross, a lawyer in Melbourne, who was concerned he was being charged unfairly for financial advice. He told me that his planner seemed “uncomfortable and embarrassed” about the fees he was obliged to charge.

Ross used the words “fee grab” to describe his current financial planning company’s new policy to charge an asset based fee (brokerage) for switching managed funds.

Financial planners need to charge for their advice and service. But in Ross’s eyes, this fee seemed to be excessive and incidental to the service.  

But this fee is not what gets me worked up. 

Ross‘s financial planner seemed to think this fee was disproportional to the value his company was providing for this transaction.

It’s hard not to conclude that this financial planner is putting the interests of his employer, and in turn his own interests, before his client’s.

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Photo Credit: Eric Flexyourhead

Update (March 2018):

Over 20,000 people have read this article, after searching for information on financial advice fees. If you’re like them, and concerned you’re not getting value for your financial advice, call me on 1300 369 045 or email contact@justinbrand.com.au – and get a second opinion. 

At some point over the next year, you may receive a Fee Disclosure Statement from your financial planner.  If you know what to look for, this statement will help you work out if your financial adviser is worth their money.

As a part of Future of Financial Advice (FOFA) reforms, all financial planners who charge an ongoing fee for their service must give their clients a Fee Disclosure Statement (let’s call it an FDS).  That’s for any advice fee your planner charges you on an ongoing basis, beyond 12 months.

This law is supposed to ensure you are told what you’ve paid for ongoing services and list what services you actually received. This should help you decide if you’re getting value.

But, the Fee Disclosure Statement is very basic.  You need to ask additional questions to ensure you are not wasting your hard earned money on support that doesn’t benefit you, doesn’t suit your needs or is simply overpriced.

The FDS will give you key information for the preceding 12 months:

  •    Fees you have paid for ongoing service
  •    Ongoing service you should have received
  •    Ongoing service you did receive

So lets look at each section.

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