Advice on Advisers From The Horse's Mouth

By Mary Holm

Saturday 7th July 2001

It's one of the questions I'm most often asked: How do you select a good financial adviser?

Some time ago, when I wrote on this topic, a Mount Maunganui investment adviser, Charles Tomlinson, wrote a not-for-publication letter in response. He said that some of what I had written was all wrong.

His letter made so much sense that it came to mind recently when the question came up again. I dug it out and asked him if I could quote it.

Here are excerpts:

"You suggested looking for a member of a professional association, getting a free one-hour interview, and preferably hiring someone who had been in business for a while.

"But your advice would often turn up an ex-insurance agent who was grandfathered into being a CFP (Certified Financial Planner) and who still sold what he/she was required to by their main supplier, or what pays the most commission.

"The free interview I also have trouble with. I used to offer this but found I got too many folk who were just tyre kickers.

"Often, with firms who offer a free interview, you get to see the new hiree (often on commission). You get hard sell to invest, and little good advice.

"A few suggestions for people looking for an adviser:

- "Ask all your friends who they use. A personal recommendation is best. A caveat [dash] a wealthy friend's adviser may only take clients with $x.

- "If the adviser is a CFP, did they actually pass the diploma?

- "How do they earn their money? Ask for it in writing. You want someone who earns mostly from investment advice, not insurance sales, mortgages, or trust work.

- "Where is their own money invested? Some 'planners' invest mainly in direct property, but recommend (high commission) master funds and property syndicates.

- "How do they charge you, and what do they and their bosses receive from each investment? Favour fees over commission.

"You need both questions to uncover the 1 per cent-plus 'trail' that many master funds kick off to feed the head office, franchisee and your own adviser.

- "Be suspicious of monitoring fees of much more than 0.5 per cent, unless they can be shown to have added value to real portfolios. "I wouldn't pay to have a portfolio adjusted every quarter in line with a New Zealand research house asset allocation.

- "Ask if the adviser has ever recommended a product that has lost 100 per cent of its value, or has locked the capital up for more than a month after the investment was due to mature.

"Most sharebrokers and those who use contributory mortgages or junk bonds will have to own up. Note, though, that if the client had sought aggressive investment then obviously a loss is to be expected now and then.

- "Preferably get a copy of a plan written by the adviser you will deal with. Bigger is not better. Look for advice specific to the client, not just a template.

"You shouldn't need to visit advisers to get this info. Write or phone. Then be prepared to pay to see those who qualify." Tomlinson added: "If people like your passive fund approach, all they really need is a simple asset allocation and honest advice on the best passive funds for their situation. This should only take an hour or so.

"But I suspect such advice would not be that easy to get."

Food for thought, isn't it? I'm particularly interested in the bit about advisers charging fees rather than commissions. More on that in my next column, in two weeks.

Mary Holm is, freelance journalist and author of "Investing Made Simple", is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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