Good versus bad financial advice

Good financial advisers take their time to ensure you understand concepts and strategies.
Financial advisers should not pressure you to sign documents before you understand them.
You should not proceed with a recommendation that makes you feel uneasy.

It's important to find a financial adviser you feel comfortable with. However, it's also important to look past a financial adviser's personality and ensure you focus on the advice they are providing, if it is appropriate and in your best interests.

Identifying your needs and objectives

One of the most important aspects of a financial adviser's job is to identify your personal and financial goals and objectives. A good financial adviser will try to collect as much information about you as possible in order to identify what matters to you.

They should also work with you to identify and clearly explain suitable strategies that can help you achieve your financial goals, including the costs involved. However, it is important that you understand the strategies before you commit to any recommendations.

The buck stop with you

Your financial adviser's job is to work with you to prepare a financial plan and make recommendations to you about where to place your money. But they are just an adviser. You are the one making the final decisions. If anything goes wrong, your financial adviser's lawyers will remind you that any investment decisions were yours.

Establishing your risk profile

A good financial adviser will always speak to you about your risk tolerance and base their recommendations on these findings. However, it is important to remember that your risk profile changes over time with different life stages.

Example

If you are approaching retirement where it usually becomes more important to protect your money, your financial adviser should be considering increasing your exposure to lower-risk investments, such as cash and fixed income, and reducing your exposure to high-risk investments, such as shares and borrowing to invest.

If you have an ongoing relationship with a good financial adviser, they will continually monitor your risk profile and ensure your investments are still suitable.

For a detailed discussion on risk, see the Understanding risk section of this guide.

Alarm bells should sound if an adviser is pressuring you to invest in something outside your risk profile, which you are not comfortable with and do not fully understand. A good financial adviser will not pressure you to invest in a product or take on more risk than you are willing to.

Traits of good and bad financial advisers

A good financial adviser	A bad financial adviser
Asks questions about your personal and financial situation and helps you identify your goals and objectives.	Shows little or no interest in trying to understand what you need, have to say, or what you want to achieve from financial advice.
Clearly explains and ensures you understand strategies, the advice they are providing, and the costs involved.	Suggests strategies that do not allow for your circumstances, appear to be a one-size-fits-all solution or not very well thought out.
Makes sure that you clearly understand all concepts, jargon and recommendations before you commit.	Fails to clearly explain concepts or jargon, and pressures you to commit before understanding their recommendations.
Gives you time to read documents before you sign them. They should encourage you to take home large documents to review, such as the statement of advice (SOA).	Asks you to sign documents before you have time to read and understand them.
Ensures your investments are suited to your risk profile and that you understand what you are investing in.	Recommends complex or high-risk investments that you are not comfortable with, do not understand and are a poor fit with your risk profile. Fails to explain the reasons behind their recommendations and the commercial associations they have with any of the products they are advising you to invest in.

Finfluencers: Exercise caution

Social media provides an accessible and easy way for people to voice their opinions and attract followers. One group with a strong virtual presence is 'finfluencers' or social media influencers who discuss and promote financial products and services online.

There are clear reasons why finfluencers are popular. The administrative burden of increased regulatory hurdles and consumer-protection obligations have seen financial adviser numbers decrease, thus reducing access to and increasing the cost of financial advice in Australia. Further, people tend to be more interested in finances and investing an earlier age than previous generations.

A key consideration is whether finfluencers are actually providing financial product advice and need to be licensed as per the Corporations Act 2001. This is not always clear cut.

According to ASIC, financial product advice is about the intention to influence a person's decision regarding financial products.

Example: Opinion or recommendation

Get in quickly to buy shares in Company A, as they will increase strongly in value over the next six months.

Further, ASIC stipulates that it's possible to provide factual information describing a product's features or terms and conditions without crossing over into the financial product advice space.

Example: Factual information

Company A pays a fully franked divided upon its shares which means it has already paid tax on its earnings.

Finfluencers can perform a positive role as a source of information, possible advice and encouraging people to take an active interest in their finances. However, they may be motivated by good intentions but unwittingly fall foul of the law, for instance, making 'innocent' positive statements about their experiences using a particular product, which may not be suitable for others.

While finfluencers may have prominent public profile, they enjoy a certain degree of anonymity and distanced accountability compared with seeing a financial adviser in-person.

Following is a checklist to help determine if a finfluencer and the and vice offered in a social media post is legitimate.

Assessing finfluencer credentials

Do they use a made-up name making it tricky to verify their identity?
Is their content Australian and does it take into account local laws and regulations?
What are their experience and qualifications?
Are they licensed and, if so, are their credentials (AFS licence number and name of authorising licensee) displayed online?
Are they upfront about the limitations and scope of their content?
Do they receive any payments or benefits for their comments and recommendations?
Do their claims sound realistic, stand up to scrutiny or could they be seen as misleading and deceptive?