How do you know you're having good financial advice conversations?
What are the things to listen out for, to query, or to notice to confirm you having good advice conversations to ensure you're on track for your best possible financial future?
It's not easy.
The Royal Commission into the Misconduct of Banking, Insurance and Financial Services has made us think more about the financial advice we receive.
I reckon it will have a direct effect on all of us delivering or seeking financial advice for many years to come.
So how do you know you're having good advice conversations.
What's an advice conversation?
Ok - I reckon there's a big difference between financial advice and product advice.
Financial advice is the type of advice you're seeking when:
- stakes are high - i.e. you really want to get the right advice because in your opinion there is a fair bit at stake if you don't get it right; and
- the options available are complex - i.e. there are so many options and those options are complex to you - you want to know what's best for you right now; and
- emotions can be fairly strong - i.e. there's strong emotions, feelings, beliefs surrounding getting your 'right' outcome.
Product advice, on the other hand, doesn't have all three of the above.
Or doesn't have the level of 'intensity' of each of those.
For instance, getting 'your tax done' each year can be viewed as a 'tax conversation' rather than an 'advice conversation.
Or moving a relatively small amount of your superannuation from one fund into another might also be viewed as 'superannuation advice' rather than the 'advice conversation' such as I am referring to here.
So what are the factors to listen out for, to notice, to query when seeking financial advice (as compared to product advice.
The above animation tries to explain it.
Three Elements of Financial Advice
Keeping it simple, I reckon there are three fundamental elements that comprise Financial Advice:
- the advice;
- the trust;
- the value.
The advice element...
Whilst most advisers will disagree with me - this is the least important (and hardest) piece to really understand when in an advice conversation.
Their disagreement is totally understandable because they have dedicated their careers and spent years developing their advice via their technical knowledge, their study, degrees awarded, their on-going technical development, as well as their growing experience which is absolutely required for them to deliver your advice.
Experts like Commissioner Hayne will recommend better standards for future delivery of financial advice to improve the delivering of this piece - which is good.
Because whilst there have been 37 enquiries into the provision of financial services in Australia in the last ten years alone, judging by some Royal Commission headlines it seems still too easy to drive a fairly sizable truck through some of the holes in the current structures that deliver advice whilst in plain view of the 'police' (i.e. ASIC) meant to protect us from such practices.
This makes too many of us wonder if the advice we receive is good advice, or bad advice, or conflicted advice, or in our best interests or the interests of the provider.
The trust element...
But when in advice conversations we can listen or notice some clear signals that might smell a bit when it comes to earning or keeping our trust.
For instance, is your advice conversation:
- focused on those giving you the advice, their expertise, their process, their offerings, their experience, their team, their qualifications, their awards; or
- focused on their range of products, their services, their special exclusive offerings; or
- contains too much of them talking at you with their jargon or language or content that might sound impressive, but doesn't relate or make sense to you; or
- going to be paid for based upon how much money you are investing, or how much insurance you are buying, or how much you have in your superannuation account...
then, some bells should be going off which needs clarity so there is no question that might affect the trust of your advice.
When it comes to earning your trust, what should you expect in an advice conversation?
- focus on you (not them) - including quality questions about why you're seeking this advice, what are you hoping this advice will achieve or help you manage or resolve; and
- doesn't use language or specific product features that you don't understand or leaves you confused or worse makes you feel like 'you just have to trust us' Really?; and
- involves an understanding of what the significant others in your life also want to achieve or overcome (i.e. life partners, spouses, business partners) if you're after advice that provides better outcomes, even if they differ from your own, for them as well; and
- don't use the amount of money invested, or amount of money in your super, or the amount of superannuation you have as the main measure for how you will pay for their advice - why buy financial advice like you buy prawns - the amount you pay should be solely based upon the value of the advice rather than the quantity of product, shouldn't it?.
The value element...
We can also listen out in advice conversations for signals about what is valuable and what isn't.
For instance, to help you identify or notice if your advice conversations are valuable:
- is the value being explained by the past performance of the products you are being offered e.g. "our recommended products beat all the benchmarks" - a good feature IF you are seeking product advice, but when seeking financial advice you expect the products to perform; or
- is value based upon how 'easy' or how 'convenient' or how 'much money you are going to save' with this 'advice' compared to previous 'advice' - a good feature IF you are seeking product advice, but your advice should firstly be relevant and valuable to you before being cheap or 'easy' - in fact, when stakes are high, options are complex and emotions are strong, it's good chance the advice may come with some needed habit or belief changes which may be 'hard' to accept, implement and live by (which you'll only do if the outcomes are 'worth it' or valuable to you);
- if your on-going advice fees are determined by the amount of money you have. This needs a query why the amount of money you are being asked to pay for advice in the coming year and every following year is determined by the amount of money in your superannuation or your investments or loans or insurance premiums rather than based upon the quality of the advice - listen for a clear explanation of how the value of your fees is directly linked to the amount of money.
Rather, identifying value in your advice conversations, listen, notice or query about:
- the path you are being advised to take that clearly demonstrates to you in terms and outcomes that makes clear sense to you about what is real progress for you in your financial life, rather than the products being offered if in fact any products are required at all;
- any fee payment that is not determined by the quality of the advice as you will judge by the progress you are now making because of the advice every year as compared to the factors beyond the influence of the specific advice;
- advice fees that are re-valued every single year to ensure every single year you can see the progress that makes that advice valuable to you.
Advice is crucial
Product advice and financial advice are both crucial for better lives for us and everyone important to us.
I applaud better financial literacy for us and future generations to better understand aspects of the technical aspects of financial advice.
But I reckon greater awareness by more of us of the aspects that increase or decrease our sense of trust or our sense of value from our current financial advice conversations will enable more of us to access and value the financial advice we deserve and need particularly when we know the stakes are high, the options appear complex and emotions are involved.
What do you reckon?
About Jim Stackpool
For nearly 30 years Jim has influenced, coached, and consulted to advisory firms across Australia. As founder of Certainty Advice Group, he leads a like-minded team of professional advisory firms seeking to create greater certainty for their clients. As an author, blogger, columnist, and keynote speaker, Jim is regularly called upon for his professional insights into the advice industry. His latest book Seeking Certainty is available now.