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7 steps to finding a good financial advisor

Research by the Financial Services Council suggests that a New Zealand financial advisor is worth the impressive sum of $1.5 million over 25 years to every person they assist. If you haven’t already received the backing of an advisor, what better time than now?

The Financial Markets Authority has developed some initial questions it suggests you ask when selecting a financial advisor. We have added some insider secrets, tips and questions. These include:

1/ Avoid advisors with a limited range of solutions

“If all you have is a hammer, everything looks like a nail” – Abraham Maslow

Insider secret: Many financial advisors have a surprisingly narrow range of solutions available, often tied to their employer.

What you should do about it: Before you even set out, ask yourself the following questions:

  • If you see a stockbroking financial advisor, do you think they’ll suggest you invest in property (real estate), an annuity, a managed fund or something else?
  • If you see a financial advisor employed by a bank, do you think they’ll suggest you use a non-bank solution? The same goes for advisors employed by major and even mid-sized institutions.
  • If the advisor works for a property investment company, do you think you’ll receive any meaningful suggestions to do anything other than invest in more property?

Of course the answer to all the above questions is nearly certainly “no”, which means you should probably avoid these people and seek out those who have a range of solutions.

2/ Do they practise what they preach?

This could be the most important thing on the list.

Insider secret: Many financial advisors don’t practise what they preach. Worse still, some are in an inferior financial state to you!

Example: If you wanted to get fitter and healthier, would you be wise to listen to an overweight or obviously unhealthy personal trainer? Of course not. You wouldn’t have to seek out Usain Bolt or an All Black to train you, although you’d surely want to see someone who is at least on a good pathway of health and wellbeing.

What you should do about it: Ask about the advisor’s personal finances – this tactic is surprisingly under-used. Questions you ask could be about:

  • The advisor’s own investment portfolio(s) and performance, personal financial statement or summary, and KiwiSaver provider.
  • If they have any, their personal insurance policies. What types and who is the provider?
  • What financial mistakes have they made and what did they learn? If they say none, run a mile – no one is perfect.

In the modern age of online fraud and cybercrime, the advisor shouldn’t be emailing you such info or providing account statements and so on but at a minimum they should be willing to show you proof online and/or talk through their own approach. Such a talk might include any differences between what they may recommend you do and what they do in their own financial life. For example, a 40-year-old advisor would surely be unwise suggesting the same financial approach as the advisor would take to a 70-year-old couple.

3/ Does the advisor make sense?

“If you can’t explain it to a six-year-old, you don’t understand it yourself” – Albert Einstein

Insider secret: It’s no secret that the financial world is like law or medicine – there’s a lot of jargon. In any of these fields, some experts might be too inattentive to explain things you might not first understand. You might be speaking with a genius but if they can’t explain things in a way you understand, what use is anything they’ve got to say to you?

What you should do about it: Make sure you understand things in simple terms. Ensure that any advice you receive is clear and concise. Any advisor giving it should check to make sure you’re comfortable with it before proceeding, and be willing to modify the approach if needed.

4/ Is the company trustworthy?

Insider secret: Some financial services companies aren’t what they seem. Many are owned by product providers, for example:

  • New Zealand’s biggest single financial advisory firm has more than an 80 percent shareholding from one of the country’s largest financial institutions.
  • One of New Zealand’s biggest mortgage brokers is owned by a bank.

What you should do about it: Do your homework on the company the advisor works for. Ask the tough questions, and ensure you clearly understand any conflicts of interest.

5/ Is the advisor for you?

Insider secret: Let’s split this into two parts. The first is more of a tip than a secret – many people look for a financial advisor who’s just like them. In some cases this works well and helps build rapport and understanding, but it can backfire too. Let’s say you’re a 63-year-old couple looking for both an investment-focused financial advisor and separately for a lawyer. What happens if you choose professionals roughly your age? Thinking ahead, within a few years it’s reasonable to expect both will be retired, which is probably the last thing you want.

Secondly, many self-employed advisors work alone or might run a little office with one or two administrative staff. This can be a problem for clients when the advisor encounters health trouble, goes on a lengthy holiday or has an unexpected life event. They might even get divorced and need to sell some or all of the business, which might mean “selling” your custom as a client to someone else.

What you should do about it: In this example, give some serious thought to finding an advisor and lawyer younger than you are who should be working as long as you might need them, in this case at least the next couple of decades. That way you won’t be forced to change to a younger pro as your mature one leaves the game.

Without writing off all self-employed advisors, you’ll want to be comfortable with the systems and processes the advisor has in place to deal with some of the situations above.

6/ Will they listen?

Insider secret: Some advisors might not listen to you and are just trying to sell you something. More still might avoid tough conversations, perhaps because they don’t want to upset you, or are too focused on selling you something.

What you should do about it: Ensure you’re being heard. If a tough conversation topic comes up, be open-minded and thankful the topic was raised. Or make it clear from the start that you’re only interested in a limited scope of advisory services.

7/ Check their remuneration

Insider secret: Most advisors receive some sort of commission, volume quotas and bonus, or might even have some of their pay “at risk” – that is, they lose pay if they don’t hit certain financial targets.

What you should do about it: Clearly understand how your advisor is paid. They should be willing to openly discuss this, not just leave the answers to your questions buried in a lot of disclosure information.

The bottom line

Keep these tips and questions in mind when you select a financial advisor and you might end up with an even better result than the Financial Services Council research shows.

About Milestone Direct Ltd

Milestone Direct Ltd
Milestone Direct Ltd is a full-service financial advice firm with a focus on retirement planning, wealth management, and ensuring your funds don't run out before you do. Milestone Direct is unique, with; no product provider ownership, no quotas, and all financial advisers are paid a salary instead of commission. Milestone Direct Ltd are already trusted as the official financial advice provider to organisations such as the NZ Defence Force, so you can trust them too. Call now for a free and no obligation initial consultation, toll-free 0508 645 378 or learn more at: www.milestonedirect.co.nz.

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