Weekend Money: Sniff out the right advice

How do you track down a good investment adviser? A recent study of the advice business provides a few clues. Personal finance editor Mark Fryer reports.

Need guidance on managing your money? Before you start shopping around for an investment adviser, it would pay to arm yourself with Consumer magazine's March issue.

The magazine reports on a recent survey of investment advisers, and the findings are less than comforting.

Many of the 14 advisers surveyed failed to meet their legal obligations, suggested inappropriate investments, ignored some basic issues and charged fees which could only be described as generous in the extreme.

While it would be easy to see the report as good reason for avoiding investment advisers altogether, would-be investors can also use it to learn some valuable lessons.

Lesson number one is to treat titles like "investment adviser" or "financial planner" with a healthy cynicism. Anyone can use them - from the highly qualified to the merely hungry - and it is up to the customer to be sure they are getting quality service.

Lesson two: many so-called advisers could more accurately be described as salespeople, and what they sell depends on who employs them.

For example, four advisers in the Consumer survey worked for banks. In every case, all the specific investments they recommended were ones provided by the bank in question.

That's not to say advisers employed by big institutions can't provide useful advice, as some of those in Consumer's study did. However, an unbiased approach to choosing investments is not among their strong points.

Lesson three: it pays to be wary of the way many advisory firms are paid.

While some charge either an hourly rate or a set fee, most receive a commission when they put your money into certain investments.

So when you follow an adviser's suggestion and put your money into a unit trust, for example, you'll typically pay an entry fee of as much as 5 per cent of the amount invested. The fund manager will then show its appreciation by giving most of that fee to the advisory firm which directed the investment its way. Fund managers also pay regular "trail commissions" - payments the advisory firm will receive for as long as you keep the money invested.

Commissions can be costly if you are investing a lot of money. One firm in Consumer's study charged $3750 to invest $85,000.

If you do use a firm that charges commissions, ask whether they will reduce those fees, as many will.

However, commissions raise a much more fundamental question: is an adviser recommending investments because they're right for you, or because they pay the best commissions?

This might explain why several of the advisers in the study failed to suggest that Consumer's researcher consider repaying her mortgage before investing - a sensible option, but there's no percentage in it for the adviser.

There are no easy answers to these problems, but a little knowledge and a lot of questions can go a long way.

First, says David Russell, chief executive of the Consumers Institute, "you've got to consider whether you need a financial adviser. If you've only got a relatively small sum of money, do you need advice?"

"Many people, with just a little bit of reading on their own, can make quite rational decisions."

To find an adviser, he says, ask people you know for recommendations. And when you find a likely candidate, "run through a list of questions and make sure they are completely answered. Be right up-front and tell them you are aware of the disclosure regulations."

And be sure your would-be adviser belongs to a professional organisation.

In the past, many advisers have belonged to the Association of Investment Advisers and Financial Planners (IAFP) or the Insurance and Investment Advisers Association, whose functions will soon be taken over by the new Financial Planners and Insurance Advisers Association.

Denys Wright, co-president of the new organisation, says benefits include the fact that members are subject to a disciplinary process and must have adequate professional indemnity insurance.

Retirement Commissioner Colin Blair, who has the job of encouraging us to save for retirement, says there are some good advisers out there, and finding them is largely a matter of knowing what questions to ask - starting with yourself.

"People should initially go through the sort of process that's in our action planner booklet because that forces them to ask themselves some questions about what they are doing, their risk tolerance and so on.

"Then after that I think they do have to bite the bullet and approach people who know about funds and different products.

"It's like going to a lawyer or an accountant or a dentist - you want to be comfortable with the individual. If the chemistry's not right I'd say try someone else."

Les Ferguson, national manager of financial planning with accountants PricewaterhouseCoopers, says that at minimum your adviser should be a Certified Financial Planner - a qualification administered by the IAFP.
Look also for people who have been in business for a long time.

The level of advice is better than it was a few years ago, says Mr Ferguson, but it's still a young business and there aren't a lot of good advisers around.

* New Zealand investors aren't alone. Britain's Consumers Association did a similar survey recently and came to much the same conclusions. Top prize - if only for sheer gall - went to an adviser who spent just two minutes with the association's researcher before recommending an investment that would have paid him a commission of œ1560 ($4780) - nice work if you can get it.