Canny view: There is no such thing as free advice

Free service is a myth - it simply doesn't exist. Photo / Supplied

Free service is a myth — it simply doesn't exist.

If you are wrestling with a prickly investment question or simply hoping to seek some financial advice, engaging a financial adviser might sound appealing. But searching for one who would put your interest above all can quickly get confusing.

You want a financial adviser you can trust and who is able to help with your specific situation – but also someone whose payment structure is easy to understand.

The draw toward the fee-only advice world has grown in recent years, with the number of advisers going fee-only steadily on the rise.

Factors such as tougher regulation, greater flexibility in serving clients, increased acquisition opportunities are motivating more advisers to drop their commission models and embrace the 100 per cent fee-only advice model.

How do you know if it's fee-only advice? A simple rule of thumb is: In the fee-only advice model, the only person paying the adviser is you.

In other words, the adviser gets paid solely by clients instead of receiving commissions or other payments from an employer or product providers. That can help ensure you're not dealing with a salesperson masquerading as an adviser.

But how can you know if enagaging a fee-only adviser is right for you?

Fewer conflicts of interest: A fee-only adviser "won't have an incentive to pitch certain products, because they're working off of a fee versus getting a commission for promoting this fund or that annuity product", says Charles Rotblut, vice president of the American Association of Individual Investors, a nonprofit group that aims to educate investors.

While some fee-based advisers might provide "perfectly good service to their customers", Rotblut says, "The business model is not designed to support that. They have to work against the grain of the incentives."

That said, it's impossible to entirely eradicate conflicts. But the conflict can be clearly disclosed and easily understood.

In fact, the Ministry of Business, Innovation and Employment (MBIE) has set new disclosure requirements to ensure that people seeking financial advice can make more informed decisions. The new financial advice regime will come into force on Monday, March 15.

The new disclosure rules will require businesses and individuals who give financial advice to disclose important information to their clients.

According to Sharon Corbett, manager financial markets at MBIE, the information those giving financial advice will need to disclose includes details about fees, the range of products they advise on, whether they have any conflicts of interest or earn commissions, and how to access dispute resolution services.

This information needs to be provided at different stages of the advice process, including on the company's website, when an adviser meets with a client, and during any complaints process. This will ensure that consumers receive only the information they need, when they need it.

Advice is the focus: When advisers are paid for advice, rather than selling financial products, they may be willing to spend more time offering the advice.

Personally, I think financial advice is diagnostic and 80 per cent of the time we spend with clients is discussions about making good financial choices in life, there is no need to discuss a product or solution in those initial discovery meetings.

The Fiduciary Standard: Financial advisers fall into two buckets, fiduciaries and non-fiduciaries. When a financial adviser has a fiduciary duty, which is the highest standard of client care, it means that they must always act in the client's best interest, even when it's in opposition to theirs.

Nick Stewart

Contrary to popular belief, not all financial advisers have a requirement to put the client's interests first, and it can be difficult when the adviser works for a company that provides investment products and incentivises the adviser, through commissions, to sell them to clients.

To exercise fiduciary duty means that the adviser must recommend the best product options to clients, even if those products result in reduced or zero compensation for the adviser.

Financial professionals who aren't fiduciaries are held to a set of standards known as the "suitability standard".

Think of it this way, you wouldn't expect to go to a Toyota dealership and the salesman to say, 'Now that I've gotten to know you, I think a Hyundai might be a better fit for you.'

A fiduciary would be required to tell you about the Hyundai. A non-fiduciary? Not so much.

That said, non-fiduciary advisers are not necessarily looking to take advantage of their clients, and if you have an adviser you like and trust, have an open discussion of fees and commissions with them, and how much those costs are impacting the earnings on your portfolio each year. The real questions are:

· Does an adviser have a documented process which adheres to the industry's best practices?

·Are the recommendations in writing, setting out what the adviser is recommending and why?

· How are the fees charged? Is there an annual fee or monitoring fee? Does the adviser charge a percentage of the money invested?

· Is my adviser being the best professional? Who is verifying it?

Mary Holm, New Zealand's leading personal finance journalist, says before selecting an adviser get together a list of questions you want to ask and email a list to them.

Ultimately, like most other aspects of personal financial planning, the right answers are going to be specific to your situation: your finances, your family, your individuality and your goals.

· Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz