We have all read the horror stories in the newspapers or seen them on television: Mum and Dad put their trust in a financial advisor. The advisor ‘sells’ them an investment that paid him a substantial commission. The investment was poor quality. Mum and Dad subsequently lose their life savings and the advisor goes unpunished. A new story like this comes up every few months. It’s frightening and very upsetting!
I propose you can only do one thing to eliminate 99.9 per cent of all these stories occurring: remove all and any conflicts of interest. Once all conflicts of interest have been removed, working out if you should and can trust a particular advisor becomes a lot easier. In that situation, it simply comes down to whether the advisor has enough experience, knows what they are talking about and has a track record of producing good results.
Let me put it this way, would you be comfortable if your doctor (GP) was employed by a pharmaceutical company? Absolutely not! And that is why laws in Australia prevent pharmaceutical companies from owning and operating medical practices. I believe that we should have similar laws in the financial services industry (but I suspect the banks’ political lobbying power will prevent this from happening). How do you choose which GP you visit? You make an assessment of whether the doctor knows what they are talking about, the results they produce and whether you feel comfortable dealing with them.
Therefore, before concluding that all financial advisors are crooks, I invite you to recognise that two types of financial advisors exist: independent advisors and conflicted advisors. When you read the next horror story in the newspaper ask yourself whether the advisor was independent or conflicted. I’ve no doubt you’ll find they are always conflicted. The golden rule here is that you should always avoid conflicted advisors.
To be truly independent I believe the advisor needs to satisfy five conditions
1. Take no investment commissions, referral fees or kickbacks
2. Offer fixed fees
3. Have no investments to sell you
4. Be privately owned with an AFSL and with no links to banks or investment providers
5. Demonstrate deep knowledge of all asset classes (especially property and shares)
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