How to choose your financial adviser

A good adviser has a mix of qualities; it’s not just about financial acumen.

Only one in 10 Australians has access to financial advice, despite many more needing it. Picture: iStock

Only one in 10 Australians has access to financial advice, despite many more needing it. There are many reasons for this – not just the cost, but the dwindling number of advisers, and the bad reputation the industry has acquired from scandals and inquiries that have exposed its failings.

On the other hand, what does the Rolls-Royce of the financial advice industry look like?

“There is not a lot of research on the value of financial advice to clients,” says Carsten Murawski, an associate professor in the department of finance at the University of Melbourne and a co-­director of the university’s Brain, Mind and Markets laboratory.

Murawski specialises in researching how individuals make complex financial decisions, and says that after the scandals aired at the Hayne royal commission in 2018, many Australians remained hesitant about using the services of a financial adviser, often worrying about whether they would get “value for money” if they decided to hire one.

“A lot of the studies are more interested in isolating instances where financial advice doesn’t go well,” says Susan Thorp, a professor of finance at the University of Sydney Business School.

“It’s much easier to measure problems than it is to measure good outcomes.”

And not knowing what good advice looks like means we are often poor at judging the quality of our financial advisers.

A shadow shopping study conducted by the Australian Consumer and Investments Commission in 2011 demonstrated this.

As part of the study, ASIC sent mystery shoppers – people interested in retirement planning – to seek advice from financial advisers. The overwhelming majority said they were satisfied with the plans they were given but ASIC found that two in five had received poor advice and only 3 per cent had received good quality advice.

“You have this asymmetric information problem where a client going to an expert asking for help, because they need it, is never entirely sure of the quality of the advice that they are getting back because they themselves are not an expert,” Thorp says.

We tend to then apply heuristics (mental shortcuts) to evaluate the quality of advisers, but research shows that this is done in ways that are not necessarily related to the quality of the product ­offered.

“People like financial advisers who share similarities with them,” Thorp says. “Men tend to prefer financial advisers of the same age and gender, while women often prefer advisers who share their marital and parental status.”

Beyond those unconscious biases, what makes a good adviser?

According to anecdotal evidence from several experts interviewed for this article, being a good communicator, being trustworthy, being able to put people at ease and showing empathy are all key traits.

However, all those interviewed also emphasised that a basic characteristic of a good adviser was a solid education.

“A primary financial discipline is essential to understand how financial markets are connected with each other, with the economy and with the government,” says Simon Mills, an executive director and financial adviser at Morgan Stanley.

That means a specialised undergrad degree in financial planning, or a degree with a major in finance, economics, business, or commerce, with postgraduate studies in the field.

In addition to technical knowledge, academic qualifications show a commitment to the profession, a high level of discipline, and can help build trust with clients.

Industry designations such as the Chartered Financial Analyst or the Certified Financial Planner certification are often valuable and encouraged among top advisers.

In Australia, financial advisers need to have an approved qualification, pass an exam set by ASIC and take at least 40 hours of continuous professional development.

“That’s not enough,” says Murawski, adding that interpersonal and communication skills hold almost equal importance for good advisers.

“Financial advice goes beyond just technical finance knowledge. For most people, managing their finances is a very daunting task, some of which has to do with financial literacy, but the bigger issue is that many tasks in personal finance can be very complex and you only make them a few times in your life.

“So you would also want (advisers) to have a good understanding about how to work and communicate with individuals in a way that doesn’t involve jargon – just like a good doctor or a good physiotherapist is good at talking to patients to help them understand what is wrong with them when making a diagnosis. You need them to know how to elicit someone’s goals, how to translate them into cash flows or financial needs, how to explain to someone that the goals that they just presented to you are maybe not feasible.”

Mills agrees and says patience and a willingness to listen are ­essential steps in order to do that: “At the end of the day, this is primarily a human contact job. All of the actions that we take affect other people’s lives. And I think a like, an understanding, and an interest in human beings is essential for the role.”

Just as with other high-performing professionals, preparation never stops for excellent financial advisers. And they not only ­embrace it, they are passionate about this side of the job and thrive on it.

“Good advisers read extensively,” Mills says. “They read on markets, they read on policy, they read on economics, they read on products, they read industry news. A good adviser should always be reading and always trying to understand the world around them and how it affects their job.”

Mills’s clients have a minimum $5m in wealth, but he says the qualities of an excellent adviser catering to less affluent Aus­tralians should be largely the same as for those servicing wealthier clients.

“The difference is mainly on delivery,” he says. “I don’t think it makes any difference to the technical competence of the advisers. Advisers work very hard to have a good knowledge base of what they do and they’re all trying to do the best they can to deliver for their clients. The types of assets in a very high-net-worth portfolio tend to be different from the types of assets that sit in smaller retail port­folios, but a lot of that is driven by what the client’s demands are.”

Angus Woods, chief executive of Adviser Ratings, an independent financial adviser ratings agency, says while being “highly qualified” academically is a must-have for a good adviser, experience is essential too, even if it means great advisers tend to be on the older side.

“It’s a bit like your doctor,” he says. “You want someone who has been through the rounds, who has the time in front of clients to understand, say, the economic cycles that they’ve gone through.

“I would say at least five years’ experience in front of clients on a regular basis, who has seen clients going through experiences like births, marriages, divorces, retirement, and all of these sorts of things which are life stage events, so that they can identify what are the issues at each of those points in life.”

The medical analogy seems fitting. The broad knowledge of a truly good financial adviser can solve many problems, just like a GP.

“They should also be able to identify issues that may require a specialist and make those specialist referrals if required.

“Good financial advisers are much more than just good at investing money,” says Paul Heath, chief executive and partner of independent wealth management firm Koda Capital.

“They have a general understanding of the role of tax, structuring, estate planning, intergenerational wealth transfer, philanthropy, and investments in financial advice.”

He agrees technical skills are just the beginning.

“Part of this competence is qualifications, and part of this is experience,” says Heath.

“Good financial advisers are great listeners and have great empathy. They use these skills to understand what a client needs, how they are feeling and how they can best support a client to achieve their financial goals.”

This is no small feat and it’s an important part of the job.

“These skills are critical because the client’s needs and attitudes are constantly changing with their life circumstances and the state of financial markets,” he says.

Great advisers should be able to respond to that, he says.

Another attribute identified by almost every expert interviewed is an ability to communicate effectively and to effectively use technology.

On this point, Woods from Adviser Ratings notes advisers of all ages have lifted their game on technology.

“A lot of advisers still don’t use technology, but the good ones are using great technology platforms and client management ­systems,” he says. “If I’m a client, I want to know that I can log into that tool and I can manage and map my investments.”

Given that experienced advisers tend to skew older, it is important for advisers of all ages to learn the new technologies available: “You don’t need the latest technology, but they do need a pathway to be implementing good technologies in their practice,” says Woods.

He also notes women make up about 20 per cent of advisers, and a larger proportion of them are considered good ­advisers compared with the proportion of good male advisers.

“Women, through their empathy and their ability to listen, tend to be better advisers,” he says. “Women financial advisers tend to be less brash and more conservative, and they receive fewer ­complaints through the AFCA than male advisers, relative to their representation.”

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This article appears in The Deal/Barron’s Top 100 Financial Advisers 2023 magazine, online and in The Australian on Thursday.