Getting Financial Advice

Understanding your statement of advice

A good statement of advice will be clear, concise and effective. You're paying for the advice, so it must be clear to you. Only follow advice that you can understand. Jot down any questions that cross your mind as you read the advice, to discuss with your adviser later.

Here's a checklist of the most important things that a good statement of advice will tell you or help you do. If you can't find or understand the information, ask your adviser.

Your advice checklist

Information to look for
The advice	A document marked as a statement of advice. Who's covered by the advice: you, your partner, or anyone else? The extent of the advice: all or just some of the issues you asked about?
Your needs and circumstances	A correct summary of your financial and personal situation. (Check for any mistakes or anything important left out.)
What's recommended and why	What financial strategies and products has your adviser recommended? Can you see how each strategy and each product will help you achieve what you want? Why is each preferred over other reasonable possibilities? What risks and uncertainties are associated with the advice? What conflicts of interest may influence the advice, including adviser benefits?
What you'll pay and what for	Costs you'll pay for the products recommended, now and in the future Costs of switching products, including charges or loss of benefits, for example if you switch your super fund Costs of the advice, now and in the future
How you act on the advice	Steps you must take to carry out the advice. Whether your adviser will review your situation in future

Do the general recommendations suit you?

Good advice makes sense and fits well with your own needs and personal preferences.

See if you can explain the general recommendations to yourself simply in your own words. Or try explaining them to a partner or friend. If you understand them, and they feel right, then you can start taking a closer look. If you feel uncomfortable or feel in the dark, there's not much point drowning in all the details. Sort things out with your adviser.

Here are comments and issues to consider about some common general recommendations.

Recommendations	Comments and issues to consider
Saving more and paying off debts	Often the most sensible step. Make sure savings targets are realistic so that you can stick to them. Will you have spare cash for an emergency?
Getting tax and government benefits	It's sensible to avoid paying unnecessary tax and to make sure you receive the government benefits you're entitled to. However, artificial tax and social security arrangements can prove expensive and risky
Topping up your super	Putting more into super is often an excellent option, although you generally cannot get your money out of super until reach your 'preservation' age (55 year or older). Find out more by visiting the Super Choices website.
Meeting short and long term needs	Good advice considers both your immediate and long-term needs. Generally, cash is fine for the short-term, but won't build wealth. Shares and property are usually fine if you hold them for 5 years or more, but your could lose money if you give yourself only a year to two.
Spreading your risk	Investing small amounts regularly can reduce the risk of investing everything just before the market drops. Spreading your money across different kinds of investments (for example, shares, property, and cash), and even different fund managers can reduce your risk of losing heavily on a single choice.
Switching out of one asset or product for another	Getting rid of poorly performing products or assets can make sense, especially if performance has been poor for 5 years or more. Switching just to catch the latest wave can often be a mistake. It may involve extra fees. Ask your adviser to spell out the reasons in full
Borrowing to invest	This is a riskier strategy to build wealth more quickly. Your advice should explain why this risk is necessary, and discuss alternatives. It should discuss risks like rising interest rates, losing your job or income, and how you pay back the loan. 'Margin' loans involve additional risks that should be explained

What products are recommended?

After you've grasped the general recommendations, take an overall look at the recommended financial products. These may include investments, retirement income products, super and insurance.

Many products could suit you, and even experts may not keep track of them all. Here are some things to consider about the more commonly recommended products.

In many cases, your adviser will receive a commission for selling you a financial product. They may also receive other side benefits. You have a right to know about these benefits because they could sway your adviser's judgment.

Even if the product's suitable, there may be other less expensive alternatives that are otherwise just as good or even better. If you're going to be putting a lot of money into something, ask your adviser if you'll be buying a more expensive product. If so, ask for written reasons why the more expensive product is better for you.

If you want to shop around, you can find independent information about financial products to help you compare them. Newspapers, personal finance magazines and websites often carry research reports about various super and managed funds. Consumer organisations, like Choice (also known as The Australian Consumers' Association), also compare financial products.

Recommendations	Things to consider
Superannuation	Super's and excellent way to invest for your retirement, but you generally can't get the money until then. Compare retirement and insurance benefits, features and fees carefully, as funds can differ widely. Keep fees and charges down. If you pay an extra 1% in fees each year, you could lose up to 20% of your retirement benefit over 30 years: see ASIC's super calculator. There may be lower cost funds that could suit you instead. Switching funds can involve extra fees and affect any insurance cover you have through your super, so get your adviser to check this very carefully.
Insurance	The right insurance can protect your or people who depend on you from serious financial risks such as your disability, illness or death.
Insurance	Make sure you've told your adviser and insurer everything that might affect and insure's decision to cover you. If you leave something out, the insurer may be entitled to reduce or refuse a claim or cancel your policy.
Investments outside super	Investing in products outside super means you can get your money readily than if you put it in super, but you'll miss out on tax concessions that apply to super and which would usually let you save more over the long term. Generally, the longer you hold the investments, the greater the impact of fees paid to your adviser, any master trust, and to your investment fund manager: see ASIC's managed funds calculator. Make sure the benefits are worth the costs
Retirement income products	Buying retirement products that keep your money inside super can save tax and give your access to government benefits. Keep enough money outside super for emergencies, because large withdrawals from retirement income products may be difficult or may complicate your tax or social security arrangements. Fees for these products will reduce your retirement funds so make sure you'll be getting value for money, see ASIC's allocated pension calculator.
Retirement income products	Make sure your super fund has your tax file number. If you don't then from 1 July 2007 you may face extra tax on your contributions for not providing it. You will also not be able to make personal after tax contributions to your super fund if you fund does not have TFN. Build up your contributions regularly, even by small amounts. This can make a big difference to what you retire on. Rushing to make large extra contributions just before you retire could cost you extra in tax. You may be eligible for Government's super contribution depending you you assessable income and fringe benefits. Note: Military Super is an untaxed scheme. The tax treatment is different for untaxed funds under the new changes (1 July 2007). In this case, it depends on the age of the member as well as chosen type of payments (i.e. lumpsum or pension or both) an separation form the Defence Force.
More complex products	Some products may offer special tax features, more unusual investments or extra personal control and flexibility (for example wrap accounts). Special features often cost more, so consider if you'll really use them.

What's it all going to cost?

Fees and charges can cost you more than you might first think, and can be complicated to work out. The cost of the advice and the cost of the financial products can often get blurred together.

Get your adviser to write down

• the total costs in dollars for the advice AND the recommended products in year 1
• an estimate of your total ongoing costs in year 2.

The fees your adviser receives will appear in your statement of advice. Usually you pay fees in two ways

1. directly out of your own pocket, for example, to prepare a financial plan. This is generally a once-off fee.
2. indirectly through commissions paid out of the money you invest or spend on financial products the adviser recommends. This may include both once-off and ongoing fees charged every year you hold the product. (Only a few advisers don't charge this way.)

You can negotiate with your adviser on commissions, and it's well worthwhile to do so.

You'll also pay fees to the company that issues the financial products you buy. The fees for each product are set out in the product disclosure statement. Some advisory businesses may pay back or discount some fees, but will offer no advice when they do this.

An example of how fees work

Example: Alex's costs in year 1

Total costs to Alex		$5,500
What the adviser receives	Alex pays the adviser $1,500 for the once-off fee to prepare a financial plan The fund manager pays the adviser $2,600 out of Alex's account	$4,100
What the fund manager gets paid	The fund manager takes this out of Alex's account	$1,400

Example: Alex's estimated costs each year from year 2

Total costs to Alex		$2,400+
What the adviser receives	The fund manager pays this to the adviser out of Alex's account	$1,100+
What the fund manager gets paid	The fund manager takes this out of Alex's account	$1,400+

ASIC's super and managed funds calculators help you to compare fees charges, based on your own circumstances.

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Alex has inherited $100,000 and wants advice on how to look after it. The adviser recommends investing in a sharemarket fund, managed by the adviser's parent company. Alex also gets some financial advice about topping up super and insurance. The adviser offers to monitor Alex's investment and keep a general eye on things at an extra cost. Alex agrees to this.

This is going to cost Alex $5,500 in year 1, and around $2,400 each year from year 2 onwards. Alex needs to decide if the advice and the fund are worth the cost. This chart shows how the payments could get shared between the adviser and the fund manager¹.

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¹Based on $100,000 invested with 2% contribution fee, 2% management costs (that includes a 0.6% trailing commission to the adviser), a 0.4% adviser service fee, and the fund earning 8% each year before fees Adviser and fund manager receipts are broad estimates only.

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Investment risks and returns

Good advice explains the risks of any recommended financial products, such as possible loss of capital or lower earnings.

Different types of investments earn different rates of return, generally reflecting the level of risk. Properly managed, risks can increase returns. But if the risk is going to keep you awake at night, there's no point getting involved.

This table shows a range of returns that you might reasonably expect from different investment strategies over the long term.

However, each year your fund may perform better or worse than these averages, as markets move up and down. Fees and taxes will also reduce these returns.

Take extreme care with high rates of return, say more than 1.5-2% per year above the average return for the type of asset in which you invest. If your adviser suggests you can expect high returns, get a written explanation with the risks fully explained. If it sounds too goods to be true, it's probably best to say no.

Investment strategy	What it usually means	Expected return BEFORE you pay fees and taxes*
Growth	Invests 70-80% in shares or property. Aims for higher returns over the long term and so risks higher losses in bad years.	8-9%
Balanced	Invests 60-70% in shares or property, the rest in fixed interest and cash. Aims for reasonable returns, but less than growth funds in order to reduce risk of losses in bad years.	7.5-8.5%
Capital stable	Invests 60-70% in fixed interest and cash, although some invested in shares or property. Aims to reduce risk of loss and therefore accepts a lower return over the long term.	5.5-6.5%
Cash	Invests 100% in cash. Very low risk of losing your capital with a lower return over the long term than capital stable funds.	4.5-5.5%

ASIC obtained professional advice about these earnings rates from licensed independent actuaries. The actuaries consulted a variety of sources including assumptions used by industry groups, leading asset consultants and publicly available survey data about managed funds investment strategies. These rates are just reasonable long-term estimates, not guarantees.

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Check the fine print

Make sure you've received a product disclosure statement or prospectus for each financial product. (You don't get these documents for shares in a company already listed on the Australian Stock Exchange, but read a copy of the company's latest annual report and check for recent company announcements through www.asx.com.au.)

These documents set out what you need to know to make an informed decision, including benefits, risks and fees.

Make sure you're getting value for money. ASIC's FIDO website has super and managed fund calculators to help you work this out.

Read the documents your adviser gives you. If you don't understand something, ask your adviser to explain, or ask a solicitor or accountant. Always find out what the document really means before you sign. It's your money. Your adviser gives you advice. You make the decisions. Good advisers want you to ask questions now, not become an unhappy customer later.

Negotiate costs

Some advisers may agree to reduce fees on various products, especially if you ask. Check if your costs include a review of your investments from time to time or if you must pay for that service separately.

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