Your Money & You – May 2012
Finding Financial Advice That Fits
As ADF members you know the importance of relying on expert advice when making decisions. When it comes to investment decisions, you may decide to use a financial adviser; and if you do, it pays to do some research to ensure you find one that's right for you.
ASIC's recent ‘shadow shopping’ research (Report 279 Shadow shopping study of financial advice) underlined the importance of shopping around before you engage an adviser.
Look for an adviser with experience and expertise. Don’t just rely on recommendations of friends or family. Professional associations such as the Financial Planning Association and CPA Australia can provide a list of advisers in your area.
Once you have a list of firms or advisers names, phone them to find out about their business. Explain that you want to talk about their services but not make a commitment at this stage. Also visit their website to make sure they have an Australian Financial Services licence and get a copy of their financial services guide.
ASIC’s shadow shopping research found that people can be swayed by an adviser's confidence, approachability and friendliness, and find it difficult to assess the quality of the advice they receive. So it's important to focus at the outset on the services an adviser offers. Here are some questions you can ask an adviser, and tips about what to listen for.
Professional experience
- How long have you been giving financial advice? You may prefer someone with more than 5 years experience.
- What type of clients do you mostly see? Are the clients in a similar situation to you?
- What investments do you advise on? What about the investments I currently have? If the adviser is restricted to certain types of products they may not be able to advise on your current investments. Make it clear whether you want comprehensive advice or limited advice about an existing investment.
Puts client's needs first
- What information will you need from me? An adviser should ask about your income and expenses, what you own and what you owe, your dependents and your financial goals, both short and long term.
- How do you deal with a client who has a few different financial objectives? An adviser should help you prioritise your financial objectives, explain and discuss choices with you and develop a realistic strategy to achieve your objectives.
Qualifications
- What qualifications do you have? A diploma or degree qualification in finance, economics, accounting or financial planning is desirable. Also look for professional designations such as 'Certified Financial Planner'.
Fees
- How much will it cost and how are you paid? A fee-for-service model charges a set amount for a specific piece of work. Some advisers are paid a mix of fees and commissions. If they charge ongoing fees, you should expect regular reviews. However they charge you, make sure you understand completely by asking lots of questions, especially around commissions.
For more information on finding a financial adviser, see ASIC’s consumer website moneysmart.gov.au
Greg Medcraft
Chairman
Australian Securities and Investments Commission
Why are sharemarkets in the first world doing better?
The first world economies seem to be struggling to get out of recession. Most Governments and banks are awash with debt.
The same cannot be said of emerging countries such as China. The Chinese economy has increased by 40% in the past 4 years but in the US by only 1%.
Given these differences it would be natural to assume that the Chinese sharemarket would be performing than the US market. But this is not the reality.
There are several issues which impact share prices. Likely growth in the economy, the level of profits, the direction of interest rates and inflation are all important influences.
At the moment US corporate profits are at record levels, US interest rates and inflation are both very low.
On the other hand the sharemarkets believe the economic prospects of emerging economies are gloomy. First they believed that the emerging economies would be impacted by the first world recession. Then they thought they might need to increase interest rates to contain inflation. Now the markets think these economies will experience a slowdown which will cause growth and profits to fall.
What the future holds is anybody’s guess.
What it really shows is that market sentiment is nearly always impossible to understand or predict.
Investing in Property
Many ADF members are attracted to owning a residential investment property.
Right now there are several different property opportunities which ADF members might have heard about that must be approached with quite a deal of caution.
They are US residential property and houses in outback mining towns in Queensland and Western Australia.
We have heard the outrageous claim that you can earn substantial profits in very short periods of time using both these strategies.
Sadly this is not new. Over one hundred years ago it was made during a property boom in Melbourne in the late 1880s and 90s during a significant property boom in that city.
Here are some tips which you should consider:
- Never assume that property only ever increases in value; most recently we have seen in the US, UK and Ireland significant reductions in property prices
- If you buy a house in outback Australia near a mine then how long will it take you to buy the property and how many people will live in the town once the mine is closed
- If you borrow money to buy a house make sure you can cover quick increases in interest rates
- Can you afford the property if you have no tenant for an extended period of time
- Could you afford to pay annual maintenance costs – the ANZ Bank has estimated that maintenances is generally 1.2% per annum of the property’s market value.
- Agents typically charge about 7% of rent received for the cost of managing the property on your behalf. Have you factored that cost in?
Finally in relation to buying a property here are two useful stories: