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February 10 newsletter

Finding Independent Financial Advice

Having independent advice is something we take for granted when accessing the services of our doctor, lawyer or accountant. The New Zealand Herald bravely promoted a number of independent investment advisers late last year who charge fees. Quite rightly the assumption is that your advice will be independent. This is because the adviser is being paid for the advice and not for the implementation of the investments through which commissions might otherwise be earned.

This newsletter would like to address two points. The first is to go on record and reaffirm several advisory firms on the Herald’s list that the Shape of Money has come across over the last decade:

And we list one firm we suggest you ignore – Lyford Investments.

The issue of commission

Of course, the method of the adviser payment is not the complete issue. You need to consider a framework which also encompasses competency and integrity. However, commission versus fees is a good place to start when choosing an adviser.

A simple calculation explains the dilemma for all advisers (or any commission-based sales people) who accept commission as part of their remuneration. Consider the example of an adviser who gets 0.25% of the funds invested. Based on a $30,000 investment that’s $75. Now if an alternate investment paid 0.50%, the adviser would get $150. That is a 100% increase in their income. To be fair, not too many employees would turn down that pay increase if it was on offer. Investors are actually well catered for when it comes to the provision of investment advice. As noted by The New Zealand Herald, there are a number of advisers who provide advice for a fee and of course, investors have the funds with which to pay for that advice.

Commission and insurance

The second part of this newsletters look at another group. Life, disability and medical insurances are sold on a commission basis. Life insurance, for the bread winner with the young family, is generally paid for with the last available dollar. So paying a fee for independent insurance advice on the rare occasion an adviser offers that service is not an option. So how do you avoid being caught by an adviser selling you a product which is primarily recommended for the commission it will pay rather than its fitness for your needs?

The starting point is to cover off the basics such as qualifications and professional membership. In addition, we recommend that you ask for the following information:

  • A full disclosure of the commissions that will be earned, and
  • A recommendation and details of the same product from another insurance company (including commission). If they only have one product to showcase, you can be almost certain that there is a more effective and cheaper product out there.