Investment Research Group
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“There has been a lot of talk in the past few months in respect of regulation of the Financial services industry. One of the issues that has been concerning me over the years has been the practice of financial advisors calling their customers clients.
“The client is the person who pays you for advice. For example if I take legal advice then I am the client of the lawyer and I pay him. In financial services, I am the client of the company whom I place my business with, for example a share unit trust. I am not the client of the so called advisor. His client is the unit trust who pays him for passing my money to them. I am his customer.”
“I have heard that sometimes people will pay a small fee to the ‘advisor’, and then the ‘advisor’ take a commission for the institution invested in. This is a clear conflict of interest and would not be tolerated in any other profession.”
The writer touches on a big problem in our industry: The advisor who attempts to serve two parties, the person investing the money, and the company receiving the money. This is clearly a conflict of interest and it gets worse where the company receiving the money is owned wholly or partly by the so-called advisor.
The fact is there are many independent advisors who receive only the fee of the client and treat all investments on their own merits. These advisors will often advertise this fact.
There are five questions to ask an advisor:
How long has he/she been giving advice, and at what level?
On average a bear market follows a bull market at intervals of between five and seven years. The point is that young investment advisors often have experienced nothing but bull markets. Not only are they often unable to identify bear market signals, but when the market is ready to slide, they are out of their depth in finding defensive strategies.
Does he/she get paid a commission by the companies they invest client money in? This is a real no-no. Because New Zealanders have traditionally been reluctant to pay for investment advice, a big part of the fees for advisors has become hidden.
The advice is then neither free nor independent. An advisor who earns the major part of his income from investment firms whose products he recommends, is a salesman.
Does he/she have a strategy they can explain, which has delivered returns they can prove?
The advisor should be able to explain clearly what his strategy is, how it relates to your particular risk profile and financial goals.
Does he/she take responsibility for returns?
The portfolio should be benchmarked against the returns for assets of a similar risk profile. If returns fall short of the benchmark the advisor must explain why.
What are the fees?
You need to know all the costs in managing your money, not just the upfront fee earned by the advisor. Are fees paid downstream to others in the process, and if so how much?
Costs, extensive research has shown, are a big drag on long term returns.
