Working with a financial adviser

It's your financial plan

Your relationship with a financial adviser may be a one-off encounter, or it may be ongoing. Whichever you choose, it's important to stay actively engaged with the financial advice, after all, it's your financial plan.

Your first meeting with a financial adviser

It's important to give your adviser accurate information at the first meeting. If you're not honest with them, or if you leave something out, you could get advice that's wrong for your situation. Tell the adviser if you can only give limited or incomplete information.

Be clear about the scope of the advice. Are you expecting the adviser to prepare a broad financial plan or do you want advice on a particular area of your finances?

Be prepared

So your adviser can get a clear picture of your financial situation, they'll want to know about your:

  • financial goals - what you want to achieve (e.g. pay off your mortgage or save for retirement)
  • assets - what you own, including your home, savings, super, car, shares and other investments
  • liabilities - what you owe, including mortgages, loans and outstanding credit card balances
  • income - from all sources
  • regular expenses - the budget planner can help summarise these
  • insurances - what assets you currently have insured and for how much
  • estate plan - whether you have an up-to-date will and/or power of attorney.

Discuss risk

Part of developing an investing plan is considering how much risk you're prepared to accept to reach your goals. Any investment your adviser recommends should suit your investment timeframe and involve a level of risk you're comfortable with.

Your attitude to risk can change with time and circumstances. If you've agreed to receive ongoing advice, tell your adviser if your ability or willingness to take on investment risk changes.

For more information see risk and return.

Judging your financial adviser

It's easy to be swayed by an adviser's confidence, approachability and friendliness. Don't let this affect how you judge the first meeting. Here are some things to consider before you go any further with the relationship.

Signs the meeting has gone well

The first meeting with a financial adviser has generally gone well if the adviser:

  • asks you about your circumstances and helps you identify your goals
  • explains the scope of the advice they can provide and what it will cost
  • is happy to explain complicated financial concepts until you understand them
  • appears to understand your situation, needs and goals.

Signs you should consider a different adviser

You should reconsider your choice of adviser if they:

  • pressure you to sign documents that you haven't read or don't understand
  • don't ask about or listen to what you want
  • seem to be pushing one solution (such as a specific product or self-managed super fund), regardless of your needs
  • cannot adequately explain why a particular strategy is appropriate for you.

Assessing a Statement of Advice (SOA)

Your adviser will consider your situation and put together some recommendations in a written document called a Statement of Advice (SOA). They will discuss their recommendations, often at a face-to-face meeting, and explain why they have chosen one path or product over another.

You should also receive a product disclosure statement (PDS) for each recommended product. Don't sign or agree to anything until you have read and understand these documents.

Go through the advice carefully, starting with the overall strategy and then moving on to the detail. You may prefer to do this at home, in your own time, so you don't feel rushed.

Write down any questions that come to mind as you read the SOA and PDS so you can ask your adviser to clarify these before you implement the advice.

Some things to look for in the SOA include:

  • Needs and objectives - Does it address your goals and personal circumstances, or does it seem generic, like it could have been written for anyone?
  • Financial details - Does it accurately refer to your assets, liabilities, income and expenses?
  • Risk tolerance - Does the stated risk profile seem appropriate for you?
  • Scope - Is there an explanation of what the advice does and doesn't cover?
  • Options - Does it compare more than one strategic option, and outline the advantages and disadvantages of each?
  • Cash flow - Does it show (where relevant) how the recommended strategy will fit your income and expenses?
  • Products - If product recommendations are included, is it clear how they fit into the overall strategy, why they are appropriate for your risk tolerance, and what you could gain or lose by accepting the recommendations?

Don't feel pressured to accept the adviser's recommendations. If you're unhappy with any aspect of the advice or service, talk it over with the adviser.

If you're still not satisfied, you can make a complaint. For more information, see problems with a financial adviser.

Master trusts and wraps

Master trusts and wraps are investment structures that allow you to hold a portfolio of investments under one umbrella. They provide centralised reporting and are often used by financial advisers as an easy way to manage their client's portfolio. This may lower costs as buying, selling, and reporting is much simpler.

Smart tip

Watch out for up-front fees when moving an existing investment to a wrap or master trust. Ask your adviser if any fees can be reduced or rebated to you.

Master trusts

Master trusts typically have the following features:

  • Investments are held by a trustee in its name, on behalf of the investor.
  • The value of an investor's account is determined by the trustee, based on the value of the underlying investments.
  • Fees and some taxes are bundled into the unit price of investments and allocated to each investor.
  • Income from underlying assets is paid to the trust and then distributed to members.
  • Franking credits are incorporated into the unit price of the underlying investment.
  • The underlying wholesale funds are usually specific to that master trust which means they are not portable. If you want to change your investment, you'll need to sell it, which may trigger a capital gain, which you may be taxed on.

Wraps

Wraps typically have the following features:

  • They are operated by a trustee but the investor retains beneficial ownership of the underlying assets.
  • The value of a member's investment is determined by the underlying assets.
  • A cash account is used for each member for income and expenses to pass through.
  • Fees and taxes are unbundled from the unit price and disclosed separately.
  • Any income from the underlying investments is paid into a member's cash account.
  • Franking credits are distributed to individual investors through the cash account.
  • Members' assets are portable, making it easy for an investor to change wrap services.

Pros and cons of master trusts and wraps

Although master trusts and wraps have different structures, most of these pros and cons are common to both.

Pros Cons
  • Access to wholesale funds - You can access a wide range of wholesale funds that you may not be able to access individually.
  • Cost - Having all your investments under the one umbrella may reduce your investment costs and financial advice costs as the administration service makes buying, selling, and reporting much simpler.
  • Online access - You can usually check your investments online at any time.
  • Portability - With a wrap service you own the underlying investments which gives you the flexibility to move them into or out of a wrap service.
  • Suitability - If you are only invested in one or two diversified multi-manager funds, for example growth funds, you may paying costs for an administration structure you don't need.
  • Cost - Fees may include administration fees, fees for moving money in and out, management fees for investment options, and service fees. Fees reduce the money you can invest and will impact the value of your investment over time so make sure you only pay for services and features you need.
  • Lack of portability - A master trust usually consists of investments in managed funds that are specific to that master trust, which means if you want to change advisers you may have to sell your investment, which could result in a capital gain. Ask your adviser how many advice firms use this brand of master trust. A 'unique' offering may be a disadvantage. 

 

 

 

Cash management and managed discretionary accounts

A cash management account is a transaction account used to hold surplus funds to actively manage your investments. If you have given your financial adviser access to this account (known as a 'third party authority') so they can buy and sell securities on your behalf, it is known as a 'managed discretionary account'.

Make sure you understand exactly what type of authority your adviser has and the risks associated with it.

Types of adviser third party authorities

Third party authorities can be classified by the amount of access you give your adviser:

  • View access - your adviser can see the account transactions but cannot operate the account.
  • Withdrawal access - your adviser can make transactions, including withdrawals, on the account.
  • Complete access - your adviser can do all the things you can do with the account, including changing contact details, changing or adding authorised signatories or closing the account.

The risks of giving your adviser third party authority

Giving your adviser access to your account places a lot of trust in them. You risk having your money invested in products that may not be suitable for you, and make it easier for your adviser to commit fraud, even if this is a remote risk. See ASIC's media release on a former stockbroker who dishonestly used clients' funds.

You can limit your risks by:

  • understanding the level of authority you have given your adviser
  • getting all account details, including any authorities you have provided, in writing
  • insisting on being notified when your adviser makes a transaction on your account
  • making sure you receive all correspondence relating to the account, even if your adviser also receives the information
  • regularly checking the account transactions and talking to your bank if something doesn't look right.

Ongoing financial advice

If you have agreed to ongoing advice, you should get a review of your financial plan, at least annually, to make sure it's still appropriate for you.

Your annual advice review should include discussions with your adviser about:

  • any changes to your goals, personal circumstances or financial situation (including income, expenses, assets or liabilities)
  • whether your current personal insurance cover is still appropriate
  • how you are tracking against your goals
  • whether you could be affected by any changes to legislation, the economy, or financial products
  • whether any adjustments need to be made to your financial plan.

After your annual review, you should receive a new SOA or Record of Advice (ROA) if any changes have been made to your financial plan.

Use the yearly review as an opportunity to think about whether you're getting value for your ongoing advice fee. See financial advice costs for more information.

Updating your adviser between reviews

It's important to update your adviser about any changes in your circumstances so they can adjust your plan to keep it relevant to you.

Your adviser should keep you updated about any changes to the economy, legislation or markets that impact the advice and products they've recommended for you.

If there are any changes to your current plan, your adviser should give you a record of their new advice.

Ending your relationship with an adviser

If you decide you no longer want ongoing financial advice, there are some things you should consider.

Some financial products, like master trusts for example, can only be accessed through a financial adviser, so if you decide to end your relationship with them you may also have to leave the products they recommended, or get a new adviser.

If you leave or switch advisers you will have to consider:

  • selling and buying costs
  • changes to any government assistance you're receiving
  • being out of the market (which could be an advantage or disadvantage depending on timing)
  • income and capital gains tax.

If you decide to switch advisers or leave an investment product, you need to be satisfied that it is worth the cost of doing so.

Sometimes all you'll need from an adviser is initial advice. At other times it can be useful to have access to their expertise on an ongoing basis. The important thing is that you decide how much involvement you want an adviser to have and know how much you are paying for it.


Related links


Last updated: 03 Dec 2018