Nick Bruining: What you need to know about how the financial advice industry works before signing up

Australia’s retirement income system is justifiably ranked as one of the world’s best. But at the same time, it is probably the world’s most complicated.

If it all seems too much, you might decide that it’s time to pay money and seek professional help.

One of the problems with engaging a financial planner is not really knowing what to expect. Your first big question is: Do I even need a financial adviser?

It’s probably fair to say that we can do most things ourselves if we have the time, patience and discipline. You can lodge tax returns with the Australian Taxation Office, represent yourself in court and, indeed, do your own financial plan.

There’s a lot that goes into a full financial plan and knowing the tricks, tips and short cuts can make a big difference. There’s nothing worse than discovering after the event that there was a better, easier and cheaper way to do something.

Knowing things that you’ve never thought of or knew about, then building that into your financial plan is where a good planner can add real value.

But once you’ve signed up — and are perhaps paying thousands of dollars in fees each year — are you actually getting value for money? Really good financial advisers operate “hold-your-hand” services where they’ll deal with organisations like the ATO, My Aged Care and Centrelink on your behalf, right through your retirement.

There’s also plenty of others who charge big fees for doing little more than selling you a financial product or a service like a self-managed super fund. They might meet with you once or twice a year to have you sign forms and tell you what just happened. Actual investment management is done by the fund managers they may have recommended or sold to you.

The overarching regulator of financial advice is the Australian Securities and Investments Commission, which issues Australian Financial Services Licences. To provide financial advice or products, you have to have one. The licence ensures their advisers are properly qualified and receive ongoing training to operate to the required standards.

Most financial advisers pay a percentage of their revenue to the parent AFSL to cover costs and for the AFSL to make a profit. Usually, that’s between 15 and 50 per cent and the more the adviser earns, the smaller the AFSL cut — a direct incentive to lift the fees collected from clients.

About 90 per cent of the financial advisers operating in Australia work for an AFSL that is owned by a financial product manufacturer. That, or they have links to product manufacturers or funds which collect fees from your investments.

The AFSL decides what products and services the adviser can recommend through an Approved Product List. In essence, financial advice firms will only use financial products or services where those fees can be collected. It is unusual to see an APL include an industry super fund, for example.

Some argue that this arrangement is akin to your GP working for a big pharmaceutical company that dictates that the only drugs the doctor can prescribe are those produced by the parent pharmaceutical company.

The alternative is independent financial advisers who cannot work for an AFSL that has any link to a product or service manufacturer. Independents can use any recognised financial product, from any source, without restriction.

Currently, there’s a smidge under 16,000 financial advisers, and of this an estimated 300 people that can be legally defined as “independent advisers”.

Since the royal commission into dodgy financial advice, non-independent advisers must now clearly state that they are “not independent” or “biased”. The Financial Services Guide you must receive from your adviser at your first meeting tells all.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association