Financial advice: buyer beware

Diana Clement ~ NZ Herald

Not everyone can be a financial expert. And in the same way you might go to a doctor for medical advice or a careers coach for guidance on how to climb the corporate ladder, many people choose to get professional financial advice from someone qualified and experienced.

A number of professions offer advice and some overlap. These include accountants, lawyers, financial advisers (also called financial planners), insurance advisers, stockbrokers, and mortgage brokers.

investment strategyYou can also get free advice from budget advisers associated with the Federation of Family Budgeting Services. If you’re in debt, this can be a very good place to start because it costs nothing.

Or, if you need a kick up the pants as well as advice, you might consider employing a financial coach or mentor. Their role is to keep you on the straight and narrow and focused on achieving your financial goals.

Seeing your coach is like getting a weekly or monthly financial reality check. Have you done what you said you would do? Are you fooling yourself with myths and excuses?

Banks and life insurance companies also employ people who can give you “advice”. But only about the products that their particular company sells, which may not be best suited to your circumstances. Before you choose an adviser it’s important to understand the way your adviser gets paid.

In the case of accountants and lawyers it’s usually on a per-hour basis, which should, unless you’re really unlucky, mean that you’ll get advice best suited to your needs. A small number of financial planners charge by the hour and either don’t take commissions, or reinvest them for you.

Many Kiwis aren’t prepared to pay up front for financial advice. If you do, however it will save you wondering if you’re getting the best advice.

Typically, financial advisers get a commission or cut from products you invest in and sometimes charge an ongoing annual management fee. In some cases this has led financial planners to recommend inappropriate products to clients. However, most are professional in their dealings with clients and offer best practice advice.

Most advisers use what is known as modern portfolio theory, which uses diversification to optimise the return from investors’ portfolios. Usually investors will be given a portfolio containing a mixture of cash, shares, bonds and property, weighted according to their risk and return.

Because of the way most advisers are paid, they tend only to recommend those investments that pay commission and residential property investment is often left out of the mix. They will, however, include commercial property syndicates, which do give investors exposure to property.

In New Zealand, many financial advisers use what are known as “Wrap Platforms” or “Master Trusts”, which are effectively one big investment umbrella sheltering lots of smaller investments. Wraps and master trusts enable advisers to chop and change investments under the umbrella with ease when the economic or investing climate changes or the individual’s investment needs change.

Mortgage brokers are paid a commission by lenders. Many will have a panel of lenders they use, giving home buyers and investors a better range of choice than they would get going to the local bank. They won’t, however, recommend lenders who don’t pay commission such as the BNZ or Kiwibank.