By reputation alone, it is understandable why many Australians are reluctant to engage with a financial planner or wealth manager. Independent financial advice has been hard to find.
The situation is not surprising. Until recently, laws in Australia allowed for a one-week financial planning course being enough to enable you to become a licensed financial adviser. Yet it takes many years of study and personal experience to become an effective adviser in almost any field. Little wonder consumers are and will continue, for some time, to be wary.
At the core of the problem is the structure of the industry itself. Traditionally, the financial services industry has been sales-centric rather than advice-centric and the difference between these two models will determine the experience you have with your adviser.
The traditional or sales-centric model of financial services begins with a profit motive and the need for product sales. In this model, institutions produce their products with the best possible profit margins and then look to ways to distribute and sell their product to as many customers as possible.
In the 1960s and 1970s, when our financial needs were less complex, this model worked well for most consumers who purchased insurance policies and investments from company salesmen and bought and sold shares with stockbrokers.
Just as complexity has increased, so have consumer expectations as they have become more reliant on real financial advice. There is greater awareness of the need for tax planning, proper diversification and long-term planning. In the sales-centric model, there is a clear conflict between what the consumer needs – advice, and what the salesperson wants which is a product sale.
This results in a transaction that has just enough advice included to meet the minimum compliance requirements to get the product sale. There is little motivation for the adviser to provide advice in a truly comprehensive way because the time spent helping you would prevent them from moving onto the next customer and the next sale.
Then once the sale is complete, there is little commitment to ongoing service because it takes time and does not always result in further sales. The traditional model tends to be seen in the larger banks, stockbroking firms and other financial institutions where the adviser’s interests are clearly aligned with their employer’s, rather than their clients’.
Ultimately, this structure forces the good advisers to leave because they feel conflicted and they are unable to provide the advice they know they should be providing. It also tends to leave the slick salespeople working successfully in these institutions with bigger targets to sell more product.
For some institutions in Australia, there is a clear incentive for their advisers to sell in-house products over other potentially cheaper or better products, as the institution’s vertically integrated model rewards those who maximise the organisation’s profits.
The client-centric approach turns the traditional model upside down as it begins with the client’s best interests as the first consideration. Bottom line, it begins with you. Your needs, your goals and priorities, your concerns. This approach places an emphasis on understanding all of your information in the right context before you start making financial decisions. For example, you may wish to invest sustainably, with a socially responsible investment portfolio. A client-centric adviser will listen and ensure your values are met.
A client-centric adviser won’t rush you to make a decision and will patiently listen and gather information so they know what’s important to you before they start providing advice. Just the use of the word client instead of customer suggests a different, more caring approach.
Rather than a focus on getting sales, they will be focused on helping you achieve your goals. There will likely be an expectation of a long term relationship where your progress is reviewed, discipline is maintained and where changes to your strategy are made when necessary.
Great financial advisers are like an orchestra conductor. They surround themselves with a network of other professionals who work together to identify and resolve issues as they arise. Rather than it being the adviser’s first priority, selection of the financial products you need will be the last step in the client-centric advice process.
Capital Partners is a good example of this confusing situation. As investment advisers, we are certified fiduciaries and we are audited each year to ensure we meet the fiduciary standards. We are the only CEFEX certified firm in Perth. We don’t receive any investment commissions so the only way we are paid for our financial planning and investment services is through agreed fee arrangements with clients.