What makes a good advice firm?

What makes a good advice firm?

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An Adviser’s perspective – Glenn Weston, AFA 18 February 2020

Tap-dancers need not apply…they may look and sound the part but seldom contribute to the bottom line!

When meeting new clients for the first time, I ask: “Is this a new experience for you?” because it often is. If the answer is “yes”, I then ask “So how do you know we’re the right people to work with?”

This question frequently catches new clients ‘off-guard’ because they expect me to be selling them something and, after all, I’m also wanting them to sign up as new clients. But I want clients to know from the outset they have choices, including who gives them advice.  As a client of mine once said: “It shows fairness, which engenders trust in return and gives us more confidence – not less.”

An adviser may look and sound the part, but how do you know they’re not a ‘tap-dancer’? And what about the business they represent?

Obtaining good advice is money well spent, but how do you know which advice firm is right for you?

The short answer is you don’t, well not until you’ve completed some form of due diligence. There are a range of business models offering financial advice in New Zealand ranging from one-person owner/operator businesses to multi-national businesses. Some only offer their own in-house investment solutions while others are independent of the solutions they recommend.

In my view, you should consider the following checklist as part of your due diligence when choosing a financial advice firm to work with.

 

 

  1. Do they offer impartial advice? This is probably the most important consideration because, if not impartial, how can you be sure they will act in your best interests and provide the best advice for you? Click here to read more on impartial advice and why you should care.
  2. Are you being kept in the dark? Ask yourself, how transparent is the firm in describing their business, the services they provide, the people in the firm and how they get paid, their fee structures and how they manage any conflicts of interest? And, how often will they be communicating with you? Click here to read more about our thoughts on transparency.
  3. How well is their advice tailored to your personal situation and needs and explained in simple terms so it’s easy for you to understand? Or are they simply trying to flog products and use words you don’t understand?
  4. Are client references or proof of client satisfaction (e.g. from surveys) or client testimonials available? There’s nothing better than to see evidence of what the experience of others has been before you.
  5. How will the firm manage your money? You’ll want to understand how they construct portfolios. Do they have their own in-house skill and expertise to do so or do they outsource this critical factor to reputable 3rd parties, or a combination of both. You’re looking for:
  • A well-diversified portfolio across asset classes, industries and geographical regions to reduce risk
  • A risk/return equation that’s right for you. You’ll need to be able to handle the market ups and downs, not just the ups
  • A good track record for the firm’s investment strategies over time with explanation of the returns for each strategy. Note past returns are no guarantee for how your investments will perform in future.
  • A flexible approach to investment management to ensure timely changes can be made to your investment strategy as and when your personal situation or the investment outlook change
  • An ability to liquidate your investments in normal market conditions. You’ll want ready access to your money as and when you need it.
  1. What arrangements does the firm have for handling money and client assets? For security of your capital, best practice is to use a 3rd party custodial service to hold and administer investments on your behalf.
  2. How much does the firm charge for its services? Are the fees reasonable and what services are included for the fees charged? Don’t be afraid to dig deeper by asking how the firm and its advisers get paid. Is their only source of revenue from fees paid by clients or are they also receiving commissions from product providers? And if so, can you satisfy yourself their recommendations aren’t influenced by these commissions? And what about brokerage for buying and selling investments? These costs can be significant but hidden and are real none the less.
  3. Is the firm legitimate? A quick search on the NZ Companies Office is a good start but also fact check through other sources such as the Register of Financial Services Providers.
  4. How is the firm governed across the business? Who are the directors and how do they ensure the business is meeting its obligations to clients?
  5. Importantly, is the firm’s business model susceptible to conflicts of interest? For instance, is the firm more focused on sales than advice? Hallmarks of such conflicts are when advisers are incentivised by commissions or their remuneration is significantly influenced by the amount of business they write or how often they buy and sell investments within your portfolio. Another example is selling ‘in-house’ products and investment opportunities that look too good to be true, as they often are.

Finding the advice firm that’s right for you may not be as easy as you’d hope, so feel free to get in touch with us if you’d like to know more or would like some help.

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate personalised financial advice from a qualified Authorised Financial Adviser to suit your individual circumstances.



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