article 3 months old

SMSFundamentals: How Do We Rate Financial Advice?

SMSFundamentals | Apr 11 2017

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals section on the website.

How Do We Rate Financial Advice?

By Greg Peel

National Australia Bank’s Behaviour & Industry Economics team survey 2,200 Australians to produce an MLC Special Report, Financial Advice; Do we use it; Do we value it? The respondents were asked whether they had received any financial advice over the past few years, where it came from, why such a source was chosen and how helpful it was.

The survey focused particularly on attitudes towards financial planners.

The survey found seven out of ten Australians sought no advice at all on savings, investments or superannuation. Nine out of ten sought no advice on funding their children’s education.

Of those who did seek advice, savings, investments, superannuation, retirement and tax planning were the primary areas of enquiry. That advice came mostly from financial planners, family and friends, financial institutions and accountants (particularly with regard tax planning).

Of those who used a financial planner, 29% did so because they trust their advice. While this might suggest 71% don’t trust the advice, other reasons given by respondents were because they’ve used one before (28%), which is a bit of a circular argument, because of the reputation of the institution or planner (22%), or because the advice was free (25%), which would suggest service provided by the respondent’s institution of choice for investments.

Once upon a time there was a lot of free advice going around, but not of the necessarily helpful kind. Around fifteen years ago in the economic slowdown of 2002-03, ahead of the China-driven commodities boom that was to follow, many Australians found that while the performance of their superannuation fund was reasonable on a gross basis, by the time the institution’s fees and charges were extracted, many had found their wealth go backwards.

It was this period that saw the first big shift towards self-managed super funds, which to that point had represented only a small part of the investment market.

In subsequent years it was also found many a financial planner was advising clients to invest in the products of particular, well-known funds managers, not because they necessarily offered that client the best alternative but because the planner was receiving kick-backs from the fund manager. These were typically in the form of trailing commissions, locking the planner into “loyalty”.

Since that time the government and the regulator have done a lot to clean up the financial advice industry, outlawing the most insidious of kick-back relationships between planners and institutions. To that end we might take heart that 29% of respondents trust the advice of their financial planner. Some 40% seek advice from family and friends because of the trust factor, but that’s not a surprise.

In terms of how they rated the advice they received, 25% suggested the advice provided by an accountant was “excellent” and 35% “very good”.  Again we see a tax planning element in play. But only just next in line for positive service were financial planners, who scored 24% excellent and 37% very good.

The favourable ratings for financial planners were greatest from the over-50s, less so for the 30-50s and least for the 18-30s. No doubt the the latter group, not focused on retirement, was expecting overnight riches.

By comparison, family and friends as advisors rated only 16% excellent and 26% very good. This is not surprising either. Family and friends are not, by default, financial experts. Indeed, providing advice to family and friends is to potentially risk destroyed relationships were that advice not to prove beneficial.

Of the group of respondents favourably rating financial planners, 50% claimed this was because that advice was tailored to specific needs. Identifying and understanding investment purposes and goals was also a factor (33%), as was discussing ways to minimise risk (28%). For 28%, fees and charges represented good value, while 26% appreciated the planner’s objectivity.

Again, that latter result harks back to those bad old days. The financial planning industry in general should be pleased with these survey results, as should ASIC.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms