Take a little advice - if you can find it

By PHILIP MacALISTER*

These days more and more people are asking how to find a good investment adviser or financial planner.

The question comes up regularly as people realise they need help managing their money, and advice on how to reach financial goals - including how to make sure they have enough money to live on in retirement.

This "flight to advice" is also being driven by a number of more immediate factors.

The most obvious is that markets have plunged in the past 18 months and returns are looking particularly ugly.

Also, the advent of online share trading and the growing ease of buying investments mean that many people have ended up with portfolios that are pretty muddled up.

Things like the tech boom - where investors bought shares on the promise of great returns - helped fuel this development.

It is in these uncertain times that the value of good advice really pays off.

Using a professional to help is sensible and is no different to using the services of a doctor, lawyer or accountant.

We use these professionals to look after our health, legal affairs and books, so it makes sense to have a professional look after our financial wellbeing.

There is no one simple way to find an adviser. Then again, nor is there a straightforward way of evaluating other professionals you use, such as doctors and lawyers.

The following is a guide to why you should use a professional financial adviser, what you can expect to get, and questions you should ask.

First, find a financial planner

Finding a planner doesn't sound hard, but when you consider that the association representing planners has a membership of 1200 nationwide, it's clear there aren't a lot of these people about. There is also a wide range in quality.

The internet is a good place to start your search.

The Financial Planners and Insurance Advisers Association (www.fpia.org.nz) has a list of all its members, while the Good Returns (www.goodreturns.co.nz) "Find A Planner" page has many FPIA members plus all the members of the other major advisory group, the Society of Independent Financial Advisers.

If you want to deal with one of the bigger organisations such as AMP or the banks it's helpful to visit their sites.

What you can you expect once you've found your planner or adviser

Financial planning is a process. A good adviser should take you through that process and come up with a plan, rather than just be trying to sell you a product.

One of the key features of a professional adviser is that they will work through a series of steps that addresses the key aspects of your financial life.

Someone who is not as professional may have just one investment on their books and try to sell that alone.

The planner should offer you an initial consultation (usually free) where he or she explains their service, what they can and can't sell, and what they can do for you.

One good tip is to shop around. Talk to a number of planners and compare those from the big organisations, such as banks, with the smaller independent operators.

You will find that the range of funds used varies. For instance, the big guys generally only sell their funds, while smaller firms, or one-man bands, use a variety of funds.

Another thing you'll find is that some use solely managed funds, while others use direct investments such as shares and listed UK investment trusts.

There are no hard and fast rules about which types of investments are the best to use.

With the latter approach the adviser is essentially building you your own fund, as opposed to taking an "off-the-shelf" fund from a manager.

This can have pros and cons. For instance, with direct investments you face higher transaction costs, plus you have to work out the most appropriate time to buy and sell. With a manager you devolve all the responsibility to them and pay for the service.

Referrals are a great way of helping choose an adviser. If you know someone who is happy with their planner make an appointment to see him or her.

It also pays to know a little bit about what's on offer in the investment world, so you can feel comfortable with what the adviser is suggesting.

One of the more common complaints is that investors have been sold the wrong type of investment.

The other day I came across a woman who wanted a good place to park a reasonable sum of money while she looked for a house to buy.

She went to a large Auckland financial planning firm and was sold a contributory mortgage.

However, the company's contributory mortgage business got into trouble and she stood to lose some of her funds.

On analysis an inappropriate option was taken and the woman should have known the risk she was taking. Equally, the adviser had a duty to correctly explain the investments risks to her, and make sure she understood them.

Watch out for fingers in the pie

Anyone can hang up a sign and call themselves an adviser in New Zealand, and there is next to no regulation.

In this country the only controls are based on disclosure.

One of the most important things is to ask your potential adviser for their disclosure statement, as this will tell you important information about their qualifications and fees, and whether they have any interest in the investments they are selling.

The system is a two-tiered one, with some information an adviser must, by law, give you up front. The bulk of this is basic stuff that doesn't tell you much about them, or how they operate their business.

However, there is a second set of information they are obliged to give you, but only if you ask for it.

This is the more meaningful material, such as qualifications, experience, their relationship with fund managers and product suppliers, and whether the way they are paid may influence their recommendations.

It is generally acknowledged that this disclosure process is deficient, as not many potential clients know about it, and are informed enough to ask for this second set of material.

The good news is that the Securities Commission has acknowledged this problem and is looking at making changes which would strengthen the investor's position.

Fees are one of the big areas you need to consider, along with the sort of relationship your adviser has with fund managers.

Advisers have a wide variety of fee structures (and sizes).

These range from straight commission-based selling, where an adviser takes a commission on the amount invested, through to charging on an hourly basis as other professions do.

A key point to remember is that the level of ongoing fees will have a direct impact on your portfolio's return.

Over the past decade, where double-digit returns have been the norm rather than the exception, investors may not have focused too sharply on fees.

Now that returns are falling, and in many cases have been negative, fees have been thrown into sharp relief as their impact on net returns is far greater.

It is important you know all the fees being charged, (ask) and feel you are getting value for money.

When talking to your adviser watch for danger signs such as inflated promises and returns that sound just too good to be true.

Don't put all your eggs in one basket and make sure that all the investments offered have investment statements and prospectuses.

At the end of the day the big questions are similar to those you would ask about a doctor or any other professional: do you trust this person, do you get on well together, and what are his or her qualifications?

Financial planning is increasingly becoming a relationship business. What's happening is that the technical process of selecting investments and fund managers and writing the actual plan is being done behind the scenes by technocrats.

The adviser is the person out the front talking to you, answering questions and managing the relationship.

It's important to know that all the technical skills are incorporated into the process, but don't forget about the personal side.

After all, your financial planner is someone with whom you will have a long term relationship. He or she is your personal financial coach.

* Philip Macalister is the editor of online money management magazine Good Returns (www.goodreturns.co.nz). Good Returns provides readers with news, data and information on managed funds, superannuation, mortgages, financial planning and insurance. His email address is philip@goodreturns.co.nz