Thinking of hiring a financial advisor? Financial expert Lacey Filipich explains how to keep your cool when seeking professional advice.
Not everyone was fortunate enough to have a thorough financial education growing up. As a result, many Australians still feel lost when it comes to making big personal finance decisions. It’s natural to turn to someone you trust for advice.
The problem is, we aren’t always good at choosing who to trust, and professional advice comes at a cost. It may be a significant change.
On top of that, the Banking Royal Commission has laid bare some terrible experiences Australians have had at the hands of financial planners and advisers, especially among the big banks. Our inner skeptics are on the alert when it comes to finance professionals, which can be a good thing as it can make us savvy clients.
It can also be a bad thing, as some are looking to fill the role of a professional with a bunch of strangers online.
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When looking for professional financial advice, it is essential that you do your own research first. Image: iStock.
Crowdsourcing financial decisions is risky
Every day, I see someone posting a question on Facebook that I would consider “no-brainer” for professional advice. I hope people asking such questions in Facebook groups don’t blindly follow what other group members are saying – my comments included – or what they hear in a podcast, read in a book, find on YouTube. or watch on FinTok.
Personal finances are staff. One size rarely fits everyone. The rules supposedly touted by media personalities or “influencers” are most often not rules. These are just options. Some of them are not even Well options, and I have seen shared advice that is just plain wrong.
If you are going to follow the suggestion of someone you do not know personally and who does not hold a qualification and / or license in the relevant personal finance field, remember:
1. If they own an asset, they are biased
When Elon Musk uses Bitcoin and the price goes up, Tesla wins because Tesla owns Bitcoin. It’s the same with stocks, property and the like.
If someone owns them for the purpose of making a profit through capital growth, they want the price to rise. Encouraging purchasing benefits them through demand-driven price increases. This is why people are supposed to report the assets they own when making suggestions about what to buy. Spoiler alert: they don’t always do it online.
2. If they are exposed, they are biased
Not everyone wants asset prices to go up. Some will want it to drop because they have bet it will go short. Others want the price to drop so they can buy it cheaper and get a good deal. And in case you were wondering, no – these are not ethical behaviors. In some cases, they are illegal. Which brings me to the most important point …
3. If they are not made redundant, they are not bound by a formal code of ethics.
If you choose to get your financial advice from someone who is not qualified, you cannot guarantee that they have received the training necessary to make good decisions. If they are not members of the professional body that represents this group – for example, Chartered Professional Accountants (CPAs) – they have not signed up to meet ethical standards which are a prerequisite.
They can still be prosecuted for practicing without a license, and the Australian Securities and Investment Commission (ASIC) is cracking down on this behavior. It is hardly comforting if you have followed their suggestions and lost money.
I’m telling you that anything you get from a book, podcast, the internet, or social media should be treated as education, not advice. It is up to you to make sure that the education you receive is valid and true, that it matches your personal circumstances, and that it does not put you in an unnecessarily risky position.
If you can’t figure this out on your own …
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Perform due diligence and contact member organizations to verify that your potential financial advisor is registered. Image: iStock.
… it’s probably time to get professional help
Personal finance professionals include accountants, advisers, and planners. They know the numbers, they know the law, and they can help you put the general information in context of your personal situation. Obtaining a professional designation means that they have completed an education. Becoming a member of their professional body means that they commit to meeting certain standards.
While professional advice is not without risk, it should be less risky than unverified participatory advice.
This doesn’t mean that professionals never do the wrong thing. The Banking Royal Commission has shown how incentives that strain an advisor’s bonus against a client’s best interests are not always going to work best for the client (to put it mildly). It is important that you take the process of hiring a professional seriously. Here’s how:
1. Due diligence is a must
Don’t just assume that someone is qualified and that they are a professional member. Call the member’s organization and verify that they are registered. Ask if there have been any disciplinary actions or adverse findings against them, or if they have ever had their license suspended. Depending on the policy, you might not get a clear answer, but it can’t hurt to ask.
While you are checking their professional status, don’t just take online reviews as a guarantee of success. It’s not hard to pay for fake reviews so that you look great on Google. Ask for the phone numbers of other clients and call them to check their references. Find out about the service they received, the quality of the advice provided, and if there is anything they would have liked to have done differently. This will help you make a more informed choice.
You can also “try before you buy” with free discovery sessions offered by many professionals.
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Stay involved with your finances and be healthy skeptical of your advisor. Image: iStock.
2. Maintain your healthy skepticism
I just finished reading the story of how Bernie Madoff maintained a Ponzi scheme that took $ 65 billion from his clients because everyone was willing to believe in the impossible. In this case, the impossible was consistent returns that have always beaten the market.
It’s a case study of how humans want to believe something that is clearly too good to be true. Don’t let it be you.
3. Stay involved
Hiring a planner, advisor or accountant does not replace your responsibility. No one will ever care about your money more than you do – so act on it. No blind signing of reports, no delegation of everything. Keep an eye on what’s going on, take the time to understand the reports, and cross-check the information provided to you with independent sources.
4. Think carefully about commissions
I don’t see why we still allow commissions. It is asking for trouble. For laws and codes of ethics to be 100% effective, we must ensure that every professional makes the ethical choice every time, even when it will be to their own financial and / or professional detriment. It won’t happen – someone will always do the wrong thing. As we saw at the Royal Banking Commission, it can be several people; commissions are at the heart of an unresolved systemic problem.
Until commissions are abolished, you should ask your professionals how they are paid. If it’s through an hourly rate or a fixed rate, so much the better. If they get a bribe from the sale of a financial product or service, there is a risk of conflict of interest. Use extra caution in these cases.
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Continue to educate yourself for tax purposes with podcasts, books and online sources. Image: iStock.
5. Continue your education
Podcasts, books, and online sources may not be a substitute for professional advice, but they can help you better understand your finances. They can help you decide what questions to ask your professional supporters. You may find the answers you were looking for in common sense educational texts. There are only advantages to becoming more financially competent and capable.
6. Don’t forget the free options
If you are trying to get professional help because you are struggling with debt or making ends meet, you can still talk to a professional without incurring huge costs. Try a financial advisor or Centrelink’s financial information service as your first point of call.
Lacey Filipich is the author of Money School: Become financially independent and take back your life. She is a financial educator, chemical engineer and TEDx speaker.