The convergence of Mathias Cormann’s changes to the Future of Financial Advice regulations the previous government put in place, and the scandal at the Commonwealth Bank’s financial planning arm, have shone a light on an industry that is both one of Australia’s most important, and one of its most conflicted.
Important because with a superannuation pool of around $1.5 trillion – yes, trillion with a T – in assets under management, Australian savers and employees have a pool of investments equal to more than 100% of Australia’s GDP.
Crucially, this means most Australians at some time in their life are going to need advice on not only their superannuation, but insurances, taxation, home ownership, investments and so on.
So choosing a planner – who is likely to be a trusted adviser for many years – is crucial to the financial health of Australians, and Australia.
The problem with the system as it now stands, and which the Commonwealth Bank issues highlight, is that “advisers” have a potential conflict between their interests, the client’s interests and in many cases the product provider’s interests, i.e. that of their employer, or of the provider of the platform (the computer interface between the planner and the products he places client’s funds into) through which the planner invests funds.
It is these potential conflicts that are causing all the debate at the moment and making it difficult for Australians to know how they can choose a financial planner, and who they should choose.
So how do you know what to look for?
Qualifications are a good start.
Like the accounting, legal and medical professions – those which give advice of a similar import to financial planners – best practice would first require a degree qualification.
But the financial planning industry is in transition and only a small number of planners are degree-qualified at present, according to Mark Rantall, CEO of the Financial Planning Association (FPA), who told Business Insider degree-qualified planners only make up around 80% of those who hold its highest qualification – that of Certified Financial Planner (CFP).
That’s 4,400 of the 5,500 holders of the FPA’s CFP designation*.
Rantall said that the other holders of the CFP designation had received it as a result of industry experience, but at the time the designation was granted, these recipients had been trained to the highest global standards for planners.
But even 4,400 in a total industry still makes it potentially difficult for most Australians right now to find a planner with the same level of qualification as their doctor, lawyer or accountant.
But at tax time, you don’t need a degree-qualified accountant to lodge your tax if it’s uncomplicated. Arguably, it’s the same with financial planners.
Degree-qualified is aspirational given the import of what exactly it is you are planning. But both Rantall and Deborah Kent, director of the alternative industry body – the Association of Financial Advisers – say it is the membership of an industry body which has requirements such as acting in a client’s best interests, continuing education and professional development for advisers, fee transparency, association membership and adherence to a code of ethics.
Rantall, however, reiterated that degree qualifications are the new gold standards and the FPA believes the CFP designation, with its higher educational and training requirements, is where the whole industry needs to get to in time.
So where does that leave us – you – in trying to find a planner?
Ask about their qualifications, their experience, and how long have they been planning. What types of clients do they have? Can you get references? Are they members of the FPA or the AFA?
Can they talk about the code of ethics and their views around it?
You are interviewing them – not the other way around.
Equally a key conversation to have with a prospective planner is the one around fees. What are you going to charge me? Are you going to earn commissions? And what service and advice will I get from you?
But leaving all of the above to the side gets us back to one key point that our own experience and that of friends, relatives, colleagues, and contacts have continuously mentioned over the years as the key to a successful relationship between you and the financial planner.
You and your planner need to be on the same page.
This means an open and honest relationship. You have to explain what you want out of life and they need not only to understand that but work with you on a plan that is structured in such a manner as to help you achieve those goals.
It’s as simple, or as difficult, as that.
* This is an edited version of the article first published 07/07/2014 which corrects an error made my myself in transcribing my discussions with FPA CEO Mark Rantall.
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