Do I need a financial adviser?


Jason Prowd  |  16th May 2018  |  5 min read

Key points:
  • In Australia there are two main types of financial advice: general and personal – understand the difference to work out which is right for you.
  • Financial advisers can be very valuable, especially at major life events.
  • Not all financial advisers have your best interests in mind, so do your research.

It hasn’t been a good month for many in the financial services industry. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has revealed deep problems; from dubious—yet legal—practices to potentially outright theft. It’s as shocking as it is sad.

Australians deserve better. We need better.

Research from Morningstar on the impact of financial advice shows that done effectively, financial advice can add over 1.5% per year to your returns. That might not sound like much but over 30 years that little difference can leave you with 61% more than you otherwise would have had.

Financial advice is valuable. So where should you start?

Let’s unpack the options.

 

General or personal advice: what’s the difference?

In Australia, there are two main types of financial advice – general and personal.

General financial advice relates to advice about a specific product like a stock, ETF, managed fund, or bank account. It can only be provided by someone with an Australian Financial Services Licence (like us). It does not consider your personal circumstances at all and is often free.

Personal financial advice is quite different. It takes your situation into account. Traditionally this is when you sit down with a financial planner/advisor who questions you in depth about your goals, income and debt and then (more often than not) suggests that perhaps it’s time to stop buying gadgets or shoes if you ever want to own a home. Increasingly it’s being done digitally too. Personal advice results in a ‘Statement of Advice’ – specifically for you – which typically costs around $2,000 – $5,000. If this includes putting into place an investment strategy – then it usually includes ongoing fees based on the amount you invest.

Think of it like this: general advice is like a website, which outlines the latest diet and fitness plan. You copy the recipes, watch the videos and put yourself on an 8-week course. Because the advice is for ‘everyone’, it may (or may not) work for you. Personal advice is like hiring a personal trainer, who discusses your goals, evaluates your current diet, weighs you, puts you through a fitness assessment and then writes a personal program to help you achieve your goals. It’s more expensive yes. If the trainer is an experienced professional – it’s also more likely to get results.

Personal advice isn’t only for the wealthy. Good financial advice from an impartial source is, as mentioned above, tremendously valuable.

There are lots of offerings out there, from ASIC’s free financial counselling service to full service financial advisors, and choosing the right one for you can be intimidating. Bear in mind that there are some unscrupulous folks out there (like the one in this eyebrow-raising story) who promote certain products for a kickback, or are generally more interested in their profits than yours, so do your research. Consumer advocacy group CHOICE has a guide, as does ASIC, and The Financial Planning Association of Australia is also a good place to start.

 

Which type should I choose?

There are merits to both general advice and personal financial advice. Here are a few ideas to help you choose which suits you.

  • Do I need general advice?

General advice is about general financial literacy: understanding the options out there for investing, debt management, getting a handle on what inflation does to your cash savings and so on. It’s a great place to start, and is mostly free (like this blog), but doesn’t take your personal circumstances into account. For those with simple financial affairs this can be all that’s needed.

  • Do I need personalised advice? 

Personalised advice is brilliant but comes at a cost (which is falling thanks to new digital advice offerings). Your financial planner creates a Statement of Advice – a tailored plan just for you. Fees vary, as some charge a flat fee for the advice, and other for a percentage of the portfolio being managed. You may then authorise your adviser to put an investment plan into action on your behalf, which is a further charge, plus yearly upkeep – so make sure you thoroughly check your annual statement of fees, so you know you’re getting what you pay for.

 

When you can benefit from advice?

Here are some times when you might benefit from financial advice:

  1. You’re in a time of change

There are plenty of life events where you’ll benefit from having a trusted advisor at your side. These include:

  • Getting married
  • Starting a family
  • Buying property
  • Income increase
  • Inheritance
  • Redundancy
  • Retirement
  • Winning lotto (seriously)

 

Each of these events mean a change in your income, expenditure, tax liability or legal situation, so understanding their ramifications will stand you in good stead to navigate financial change.

  1. You’re struggling to stay on top of your finances

This one’s tough, because the last thing many people want to do when knee-deep in credit card debt is go and explain to an expert just how broke they are (and don’t want to part with the cash, either). But a financial adviser will be able to help you with budgeting, cashflow, paying off debt and setting goals. As will seeking out useful articles, videos and discussions online.

  1. You’re considering investing

If you’ve built up your savings and want to maximise growth rather than subject your cash to the ravages of inflation and low interest rates, getting started is key. You can either chat to a financial adviser about how best to achieve a wealth-creating financial plan or seek out simpler options such as ready-made investment portfolios.

  1. You’re under 35

Now, we’re not saying that financial advice is only good if you’re young but getting in early gives you the most time to put your plan into action. Only 20% of Australians receive financial advice[1], so having a meeting with a financial adviser puts you way ahead of the pack, whatever your age.

 

Act. Don’t hide.

Regardless of which option sounds most appropriate, getting started is critical. And it’s never been easier. With this simple check list, you should be well on your way to knowing the best type of financial advice for your circumstance and where to start.

Dive in today. Your future self will thank you.

 

— Jason Prowd leads Morningstar Next: ready-made investment portfolios. Get started today

 

[1] https://www.smh.com.au/money/planning-and-budgeting/eight-of-10-australians-dont-get-financial-advice-is-technology-the-answer-20170907-gyctqt.html

 

© 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.

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