By Gillian Boyes, Investor Capability Manager
First published by The Spinoff on 12 August 2020.
What do they do? Do I really need one? And how much do they cost? Gillian Boyes from the Financial Markets Authority breaks down the basics.
When it comes to important money decisions, having someone to help can make a big difference.
A financial adviser can be your money coach – they can help you identify your financial choices and goals, to prepare you for the future. They can help you understand what’s right for you and what different choices might bring, such as the risks around certain investments.
There are strict rules around who and how financial advice can be offered. Here at the Financial Markets Authority (FMA), we’re the regulator for financial advice. So what do financial advisers do, how do you find one, and how do you know if they’re any good?
Before we jump in, it’s worth noting that a new financial advice regime comes into effect in March 2021. It’ll strengthen the regulation around financial advice and advisers, and there will be a level playing field around the protections that are in place. For example, advisers will have new disclosure obligations and duties, including to prioritise client interests.
What does a financial adviser do?
Financial advisers can recommend or provide opinions on financial products such as KiwiSaver, insurance, shares, or cash investments. This is different from just describing how financial products work, which isn’t financial advice.
Some advisers might be able to give advice on a wide range of financial products, whereas others may only advise on certain products such as a mortgage or insurance adviser. Others can develop a comprehensive financial plan, setting you up for years to come.
Financial advisers include:
- Personal financial planners and investment advisers
- Mortgage and insurance advisers
- Staff at insurers and banks who provide financial advice
Financial advice can also be provided digitally. Digital or “robo-advice” is automated advice generated by a computer program using algorithms, based on the information you provide. Only a few providers currently offer digital advice in New Zealand but it’s an area that’s growing internationally.
When is financial advice helpful? Why should I use an adviser?
Typically, people will seek financial advice when it comes to significant life milestones or financial decisions. For example, buying a home, starting a family, choosing the right KiwiSaver fund, or managing potential financial problems.
Since you’re not always in the best position to judge the options for yourself, financial advisers can point out things you aren’t aware of.
Advisers are particularly good at helping you take the emotion out of investing or buying a financial product. For example, if you’re worried about investment returns dropping, they can help you revisit your investment goals and provide reassurance about whether you’re still on track.
Where can I find a financial adviser? Should I use one through my bank?
Your bank should be able to give you financial advice about their own products and services, but if you’d like to think wider you should ask what they can advise on.
If your bank’s advisers are limited to advising only on their products and services, but you want to choose from a range of different providers’ products, you might want to consider a specialist financial adviser, such as a personal financial planner or investment adviser.
You can find searchable lists of advisers on various professional adviser association websites, such as Financial Advice New Zealand or the Insurance Brokers Association. You can also talk to your existing financial services provider to see what they offer.
What are some signs of a good financial adviser? Alternatively, what about a bad one?
A financial adviser who asks you questions to understand your goals and needs will be better-placed to make suitable recommendations. A good financial adviser won’t make recommendations until they know more about you. If you meet someone who starts talking about a financial product straightaway then that’s something you might want to be cautious about.
Look for an adviser who’s approachable, keen to work with you, and speaks to you in a language you understand. An adviser’s job is to simplify complex things and give you confidence to make informed financial decisions. They should provide all the information you need and be willing to spend the necessary time with you. A good financial adviser helps improve the quality of the financial decisions you make.
Your financial needs will likely change over time, so an adviser who checks in with you every so often – to see if your investments or financial products need adjusting – can provide peace of mind.
How much does the average financial adviser cost?
This is highly dependent on your needs. A consultation could cost $250 for some simple advice or up to $4,000 for a comprehensive financial plan. You may pay more or less than this depending on the adviser you use and there may be other ongoing costs, such as a percentage on your funds under management.
If an adviser isn’t charging you, it’s likely there’s an element of commission or remuneration. You should always ask for a clear explanation of how the adviser gets paid, as fee structures will vary.
How does commission/remuneration for financial advisers work?
Many financial advisers get paid a commission from financial or insurance products you buy through them, particularly mortgage and insurance advisers. They’ll receive a payment from the product provider as a percentage of your premium or, in the case of a home loan, a percentage of the amount you borrow. They can receive an ongoing commission too.
It’s important you ask up-front exactly how an adviser will be paid. Ask them about the commissions they’d receive from all the products they’ve considered, as they might receive higher commissions from certain products or providers.
If an adviser recommends you switch from one product to another, always ask for an explanation and what the consequences would be. For example, if you’re changing your life or health insurance, the new policy might have reduced cover or exclude pre-existing conditions that are covered under your existing insurance. Be aware that the adviser may receive a higher commission from switching you from one product to another.
Do I need a financial adviser if I want to be an investor? And do I need a lot of money to invest through one?
You can get straight into investing without an adviser. You may feel confident about investing in managed funds, shares and other investments without taking advice, but there are risks that you might buy a product you don’t understand and may not be suitable for you.
Many modern digital broking platforms now have a very low threshold for investing so they might be suitable if you have smaller sums to invest.
Advisers may be happy to give you general advice. If you’re just starting with investing and have a small amount to invest, an adviser might limit their help to very simple options like getting you started on KiwiSaver or a standard starter portfolio. This helps ensure the fees for the advice don’t outweigh the returns you’d make. You’ll be offered more services if your investment sums are larger.
No matter how much you have to invest, getting the right professional help will help you make better decisions.
What if I just want help with something simple like making a budget or finding the right KiwiSaver fund. Would enlisting a financial adviser be a good fit for me?
Some advisers do offer these services but there are other options you could consider and many of these are free.
MoneyTalks is a service funded by the government that helps with free, confidential budgeting advice either over the phone or at a local budgeting service.
Choosing the right KiwiSaver fund is an important decision as it can have huge consequences for your retirement savings. We expect all KiwiSaver providers to be able to help you with at least general advice on which of their funds are right for you. This might be via trained staff, in-house advisers or via a fund selection tool.
There’s also the Sorted website, an independent money guide that’s funded by the government as well. Sorted has tools for budgeting, selecting KiwiSaver funds and much more so it’s generally a great place to start.
I’m too busy to see a financial adviser in person. Can I get advice over the phone/online?
There’s no denying that getting financial advice can take time. But our research shows those who make the time are usually huge fans of the value they’ve received from it.
New options such as digital advice will offer some great alternatives though, particularly if your needs are more straightforward.