How to choose a financial advisor

I get asked this a lot. How do you choose an advisor and why would you go with one over another? In this post I’ll break down the process of vetting advisors, assuming you’ve already determined that you need one. (For the difference between AFA and RFA, and when to use which, refer here.)

First note that there is no such thing as the “best” advisor. You’re unlikely to get substantially different advice on the same problem from two different competent advisors, although they might differ in some details; if the advice is in fact substantially different, which doesn’t happen too often, the most likely reason is that either route will get you to your destination just fine. Basically, for the most part, if they’re good enough they’re good enough, and either they’re authorised to give the kind of advice you need or they aren’t. That said, there are some licensing things happening (regulatory regime change, etc) so stay tuned on that authorisation thing.

For the rest of this I’ll write as though you wish to find an AFA for financial and investment planning, including insurance. There are many regulations surrounding AFAs, and you should definitely only go with someone who complies to the letter and spirit. If they can’t keep on top of the details for their own business, they won’t do it for yours. You might not want to read all the regulations, and that’s okay, that’s why I’m writing this for you. Feel free to generalise to whatever your own need is.

Start by asking for and reading the disclosure statements of advisors you’re considering. You’re looking for an AFA who ticked the fees-only box for investments, and fees+other if you’re also planning to get insurance through them. Look for an advisor who’s able to provide products from a wide range of organisations (there’s a checkbox and you should try to find one that says 5+). And then look them up on the FSPR to make sure they are who they say they are. The FSPR is also a good place to start looking for advisors local to you, if you’re so inclined.

The initial get-to-know-you meeting is always free. It is OK to meet with several advisors to find a good fit. Comes time to have that meeting, you should ask about the following, in addition to figuring out whether their competencies and your needs align. Take notes.

  • They are required to tell you the specific fees, commissions, extra payments, and other benefits that they have received or will, or may, receive in relation to the services that they provide to you. Direct quote. (I have in front of me a document listing them as follows: entry fees, statement preparation fees, yearly fees, hourly rate, other please specify, including non-monetary “perks” even down to the occasional free stationery from suppliers.) This includes telling you that some or all of the investment products they may recommend will pay them commission. Ask them about their fee structure and how they get paid, but it’s OK if you can’t get exact numbers now because that does depend on the final report. Ask about the timing and method of payment too. Pass over anyone who tries to weasel. Especially pass over anyone who tries to justify receiving commissions on anything that isn’t commission-only, which for the most part is just insurance and mortgages.
    • If what you’re after includes insurance, I strongly recommend using a fees-only advisor for financial and investment planning. Get from them the correct amounts and types of insurance to buy (this falls under financial planning), and take that to an insurance broker to do the actual buying. That way you know you have the right types and amounts of insurance, since the fees-only advisor isn’t paid on commission like the insurance broker is. And insurance brokers are a lot better than DIYing insurance. Besides, you’ll get access to a lot more good AFAs this way who don’t broker insurance.
  • They should be able to tell you which providers they have relationships with, in the case of insurance and other commission-only products.
  • They should also be able to tell you what their internal complaints procedure is. If you’re unsatisfied with an outcome from there you can take it to dispute resolution, which they should also be able to tell you who they use. But it’s easier all around if you don’t have to pull them up on it with a third party, and anyway someone with a sane internal complaints procedure is more likely to be sane with your money.
  • Ask about their data security and how they comply with the Privacy Act. Your call on whether that’s good enough. Avoid anyone who doesn’t know the answer to this. They should have a document or webpage somewhere that talks about it anyway, that’s a legal requirement now.
  • Ask about their AML due diligence process. I don’t know anyone who particularly enjoys carrying out AML requirements, but you should avoid anyone who blatantly disregards it and doesn’t do due diligence.

Once you and they have determined that you have the competencies to meet your needs, they are required to provide a secondary disclosure statement. Make sure this lines up with your notes on the first two points above. You don’t want an AFA who either isn’t prepared for the meeting with information they should have at their fingertips all the time anyway, or is lying to you and hoping you don’t read the documentation. If you’re happy with this secondary disclosure, then you can go with the advisor.

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