Watch out for financial planning fees
A truly independent adviser will have your interests at heart
A friend recently looked at her disabled brother's managed funds statement for his $500,000 portfolio and found he was paying an advisory fee of $3100 a month to a bank-related financial adviser.
She hit the roof and contacted the bank on her brother's behalf. That wasn't easy as she wasn't the client and she got a lecture about client confidentiality and so forth.
But she persevered and the bank acknowledged it had made a mistake. The charge should have been annual, not monthly. She wrote to the bank's chief executive and asked for a refund and got it.
This example shows the need to scrutinise the fees charged on your investments. Whether a mistake or a scam, my friend's problem is not an isolated case.
A lot of good financial advisers are vying to manage savings and retirement nest eggs.
There also appears to be a lot of dubious practices in the financial services sector, as shown by recent action taken by the corporate regulator, ASIC: it required CBA Financial Planning and Macquarie Wealth to review more than 500,000 client files between them to determine if those clients were unhappy with the quality of advice, the products they had been sold and their risk levels.
About 80% of financial advisers are linked to or owned by the big four banks or large financial institutions.
You might think from their trading names that they are independent and are not under pressure to sell a particular product range manufactured by a large institution. But a large proportion are product pushers, often with sales targets to meet.
So you might walk through the door of XYZ Wealth Managers and be unaware that they are, in fact, owned by a bank and are about to flog you only their owner's products. It's a lucrative business for the banks.
Recently the CBA announced that its cash return from its wealth management division grew 17% in 2013-14. The head of that division earned a monumental $3 million for that year, including a $900,000 pay rise. These pay levels are funded by advisers' clients.
A Roy Morgan Research report on financial planner independence found widespread confusion among clients.
"The main area of confusion occurs when the planner is branded differently to the major fund manager that owns the planning group," the report says.
"For example, 55% of clients using Financial Wisdom (owned by Commonwealth Bank) consider it to be independent, which is well ahead of the 14% who consider Commonwealth Bank-branded planners to be independent."
Fifty per cent of respondents thought Godfrey Pembroke was independent when in fact it is owned by the NAB group and 34% thought MLC, also owned by NAB, was independent. And 44% thought Hillross was independent of the AMP group.
The trouble with these aligned financial advisers is that they are likely to be under the pump to sell products that may not be in your best interests.
A classic example is being advised to borrow against your house in retirement to boost your share portfolio or buy an investment property.
In retirement, without a separate income, it is risky, if not downright dangerous, to put your home on the line when a share portfolio can plunge, as it did in 2008. As a result of this strategy thousands of people lost formerly mortgage-free homes.
Some financial advisers charge a management fee on an asset base that includes your home (which they don't manage) and loans, which are a liability and not an asset.
If that sort of fee is charged, ask on what basis.
Only by paying close attention to the statement of fees can you be sure you are not paying for the management of assets that should not be included.
So how do you know if your adviser is aligned to a bank? There is no requirement for them to tell you but one of the first questions you should ask is: "Are you independent or do you have a commercial link with a group?"
Alignment information must be included in the financial services guide, which might run to dozens of pages, so you might have to dig for it.
It should be under "associations or relationships". It's easier, though, to ask upfront.
Other questions worth asking include how long they have been an adviser, whether they are a member of the Financial Planning Association, how they charge and what they can offer advice on. Also ask about their training and experience.
Do and don't
DON'T: Believe it when you are told that the advice you are receiving costs you nothing because there is no upfront fee. You can rest assured that multiple fees and commissions are being paid indirectly by you, which reduce your returns.
DON'T: Be pushed into taking on debt or mortgaging your house to "boost" your share portfolio. You need to understand the risk this entails and have sufficient income or desire for tax deductions before signing up for loans.
DON'T: Risk losing your home as part of any financial plan.
DO: Ask how fees are charged and, if an asset fee is charged, find out what is included in "assets" and whether this includes your home or loans.
DO: Ensure that if you want independent advice you don't go to a product flogger for a large institution.