Although the chances are that your adviser is a good one, Kiwis need to ask questions when signing up for any financial advice or products. Lots of questions.
The first question to ask, says David Boyle, general manage of investor education at the Commission for Financial Capability, is: "Are you aligned with a particular company or do you have requirements to sell a particular provider's products?"
That's because the words "financial adviser" don't automatically equate to "independent". As Boyle points out, you wouldn't expect an ANZ adviser to sell a Westpac product. The question will at least tell you if your adviser will shop around for you or if you need to do it yourself.
Or they may be required to sell a certain amount of business to qualify for perks. "Many (advisers) have an agreement with a provider that requires a certain amount of product to be sold," says Boyle.
If the adviser does say they're independent, it's important to know that this doesn't necessarily mean they're comparing all the products on the market. Often it's just a handful, and sometimes it's only the ones that pay the best commission. Ask "please name the other policies or investments you have compared this recommendation against".
"What incentives are you going to have the opportunity to get if this sale goes through?" is a question recommended by Robert Oddy, chair of the Society of Independent Financial Advisers.
Perks such as free computer systems, marketing materials and those overseas trips (called conferences but largely a jolly) are all part of the remuneration for some financial advisers.
"The people who have the most trips are the people who switch their business regularly between one provider and another," said one commentator who didn't want to be named. AFAs are required to tell you about the perks they get for selling business, although it can be buried in a disclosure document. But insurance and other advisers or salespeople aren't.
The ones who fancy free exotic holidays or a higher commission rate ... may "churn" their clients.
If an adviser squirms at a question or doesn't have an easy answer then it's probably best to walk. Some advisers will have answers off pat for the difficult question. Even so, if nothing else, by asking questions you can start to put the heat on the commission system that adds to the costs of the insurance policies you buy, says Otago University professor of finance Timothy Crack.
Another reason to ask questions is to ensure that your financial adviser is in fact someone who has qualifications and experience. RFAs have no educational requirements and in some cases are just salespeople with fancy titles.
What's more, says financial services management consultant Russell Hutchinson, of Chatswood Consulting, it's important to ask your adviser how much business he or she does.
Sometimes, says Hutchinson, accountants or solicitors offer to sell investments or insurance. But he wouldn't get his accounts done by someone who did financial advice most of the time and the occasional set of accounts.
The Financial Advisers Act, which most advisers work under, is being reviewed and there are many opinions on what should change. I'd love to see the removal of the words "financial adviser". These words give the public misplaced confidence that the person in question is automatically a professional.
Most RFAs sell insurance or mortgages, not investments. Even so, those that sell insurance have the power to cause their clients an awful lot of financial pain.
The ones who fancy free exotic holidays or a higher commission rate for meeting a certain threshold of business may "churn" their clients. Every few years they move all of their customers to another insurer to double dip on the fat up-front commissions paid by insurance companies for "new" business. Counter this by asking "how long have you been selling products from this business?"
The worst offenders, I'm told by an insider, will move their entire client base from one insurer to the next every three years or so in order to generate more commissions. The move is usually sold to the customers as a better or cheaper policy being available, but can be disastrous for clients with life, or health-related cover such as income protection. If their health has changed since the original policy was taken out they may not be covered by the new policy for an illness the old policy did cover. Or there may be a stand-down period for the new policy during which the client isn't covered.
"How do you get paid?" is another question from Boyle, and "Are you getting paid more to supply one product rather than another?"
It's not just people selling insurance who get commissions. There is a whole range of other salespeople who can call themselves RFAs. One such class of salesperson is the RFA who sells real estate as an investment to "create wealth". Typically they will advertise a free service offering to source investment property. These investments can be very risky as they often involve loss-making property that requires "investors" to top up the mortgage each week. Should the owner or owners lose their jobs, they could well lose the property.
These companies are typically paid commission by developers to flick on properties and Oddy says there is an incentive to manipulate figures. Questions to ask property-flogging "financial advisers", says Oddy, include "what are the downside risks of investing in property, what are the risks of borrowing money at the current low interest rates and what will happen when interest rates rise?"
Hutchinson adds that potential clients should ask "if this is an investment property, what other investments do you sell?"
With the Blue Chip debacle in mind, and the occasional collapse of other investment providers and insurers, it's a good idea to ask "What is the credit-worthiness of the provider?" And while you're at it, "What is the claim record of this company?"
As a way of identifying bad eggs, ask advisers and investment companies if they have any complaints against them or have been investigated in the past. Find out, as well, which complaints resolution service the adviser belongs to and search for any relevant entries on that service's website.
It's also a good idea, with insurance, to ask advisers what they do in the event of a claim - are they focused on you or just sales?
Ultimately it's essential to ask for references. Are there people in your community or network who the adviser can point you to for a testimonial? More than one is good.
