- Trust is crucial in your relationship with a financial service provider.
- There are simple ways to determine who you can trust.
- Finding someone you trust means you can get on with investing sooner.
Trust. It’s the single most important element in any relationship. And finance is no exception.
Most of us, quite rightly, are extremely sceptical of the finance industry. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has unearthed dark behaviour right across the industry. Excessive fees, fees-for-no-service and other questionable practices need to stop.
Still, you know the worst part of not knowing who to trust? That you avoid or delay investing because you don’t know who to turn to. In finance, time means money (thanks compounding returns) so let’s not waste any more time and get on with answering the big question – how do you know who you can trust?
There are four main ways you can assess the credibility of your financial adviser or investment provider.
1. Mandatory licenses & certifications
A non-negotiable requirement is that the service provider has the mandatory licenses to operate in the financial services industry. There are different requirements for financial services companies and individuals.
When it comes to companies, each is required to have an Australian Financial Services (AFS) license. You can usually find a company’s AFS number at the bottom of its website. You can then verify their AFS through Professional Registers published by the Australian Securities & Investments Commission (ASIC). The license gives companies the authority to provide financial advice, market and sell financial products, and provide administrative services to the finance sector.
Individual financial advisers, on the other hand, must be personally licensed. They must also be working for a company that has an AFS license. ASIC recommends asking financial advisers “What is your representative number and who holds your AFS license?”
2. Past performance & reputation
You’ve probably read the phrase ‘Past performance does not necessarily indicate a financial product’s future performance’. That is true, but the past can be a good indicator of performance and reputation.
Compare it to performance in any other part of your life, say doing exercise. I go running regularly, so my past performance indicates that I’m more likely to stay fit in the future compared to my mate who jokes that ‘walking to the fridge to grab a beer is exercise’. I have a reputation for being fit(ish), my mate doesn’t.
What products and services your financial services provider is known for is also important. Anything less than an expert won’t cut it. Research your providers online and see what they have a reputation for.
3. Radical transparency
Why radical transparency? Because sharing the bare minimum required by law isn’t enough. As an investor, you have a right to know everything before you put your hard-earned cash into an investment. And you want to know that the advice you’re being given is in your best interests, not those of your adviser.
In 2014 ASIC embarked on a massive program to improve trust in the financial advice sector. A bunch of legislation and regulatory changes – called the Future of Financial Advice reforms – have put an end to most commissions for financial advisers. Now financial advisers have limited financial incentive to recommend one product over another. And if they are getting commissions, they must declare it to you.
The current Royal Commission is unearthing potential gaps in FOFA, and we’d like to see even more transparency from investment managers and advisers.
4. Simple & clear product information
Who wants to read product advice that feels like someone has copied and pasted jargon and technical language from a finance textbook? We’re yet to meet a human who does. It’s difficult to simplify complex information into ‘normal’ language, but it’s crucial.
If your investment provider or financial adviser is wowing you with words you don’t understand, how can you make a good decision?
The information you’re provided should have a clear list of all the fees you might have to pay, and explain the benefits, risks and technicalities of the product.
One smart way to determine whether information is simple, clear and complete is what I call the ‘asterisk test’. If you can see an asterisk on every page of the product documentation, then the information is too tricky.
So, there you have it. My top four ways to know who you can trust – because before you invest, trust you must.
© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment. Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.