How to not get ripped off! Questions to ask…



Over the past few weeks I have seen a couple of financial plans produced by firms that have experience in providing advice on investing in residential property (i.e. not the traditional managed fund/shares type advisors).

Unfortunately, the quality of the advice was very poor and not worth the fees paid in my opinion. It upsets me to see people pay several thousands of dollars for financial advice and receive virtually nil value. Therefore, I wanted to write this blog to tell people what questions to ask before paying for any financial advice.

Before I get to the questions, there are usually two failings with poor quality financial advice:

Potential problem # 1: Limited in scope

In most situations, limited financial advice is risky. Advice can be limited to a specific asset class (e.g. only consider shares or property but not both) or be limited to a specific investment such as superannuation.

A useful analogy is going to the doctors but telling your GP that they can only examine the left side of your body. No doctor could ever be confident with their diagnosis as they wouldn’t know what they may have found if they could have examined your whole body. That’s why when it comes to quality financial advice, you really need to consider if limited advice will be worth paying for. Often, it is what you don’t know that can hurt you the most.

Potential problem # 2: Just a guise to sell you a product

Continuing with my medical analogy above, would you feel comfortable going to a doctor that could only prescribe one type of medication?

If a financial advisor can only recommend one type of investment (be it shares or property or something else), then there should be no surprises when they recommend that you should invest in that asset too. As Warren Buffett says, “you never ask your barber if you need a haircut”.

However, what if you have already decided to invest in a particular asset class? Even then I think it’s prudent to seek advice from a financial planner that can consider all types of investments. The reason being is that if you have missed something (i.e. if you were not aware of an issue that might compromise your investment success). Surely you would want to learn about it before jumping into an investment and costing yourself in lost time or money?

I am very careful to not let my clients self-diagnose. That is, a new client might come to me and say; “we have decided to invest in property”. However, I always ask myself, is property the right asset class for them?

Here are some questions I suggest you ask…

Below I list some questions that you can ask any advisor before agreeing to pay them a fee. The answers to these questions will hopefully help you understand if there are any limitations or hidden agendas behind the advice that you may subsequently receive.

What strategies will you compare or consider?

Any experienced financial planner should be able to highlight two or three strategies that you might be able to utilise. Alternatively, and often just as useful, they might be able to articulate which investment strategies or asset classes are definitely not appropriate for your circumstances (and why).

In this answer you aren’t looking for definitive advice – as the advisor hasn’t had any time to complete any analysis and financial modelling. However, you’re looking for evidence that the advisor has the knowledge and experience to consider various approaches, asset classes and strategies.

Ask for a copy of some advice that they have issued in the past month?

Ask to see a copy of some advice that the advisor has issued in the past month or so. The first thing to look for is how generic the advice document (report) is. If the report is mostly template paragraphs, then it might be an indication that the advice you receive won’t be customised. Similarly, if the report is very thick (i.e. 30 or more pages), it typically indicates that it contains a lot of generic information. You don’t need to pay a lot of money for generic information – a book will have 50,000 words and only costs $30! You only want to pay for customised advice.

Will they consider all asset classes?

Holistic advice should consider whether it is appropriate for you to invest in all investment asset classes (i.e. the main ones include shares, direct property cash and bonds). Ask the advisor if there are any asset classes that they are not (licensed) able to advise upon.

Will the advice cover the four main financial planning topics?

Holistic advice should consider four main areas:

  1. Investment strategy formulation (i.e. what to invest in, when, how much and ownership structures);
  2. Cash flow management/projections;
  3. Risk management (insurances and ways to mitigate risks); and
  4. Estate planning and asset protection (wills, power of attorney, financial agreements, etc.).

Ask the advisor if their advice will cover these four main topics.

Do they eat their own cooking?

Consider whether the advisor is a doer or teacher. That is, do they follow their own advice? Do they invest in the same things as they advise their clients to invest in. Are they on the path to building a strong financial asset base. Whilst this is not imperative, it goes towards the advisor’s authenticity and to some degree, integrity. Also, it makes sense to take advice from people that have achieved what you want to achieve. Therefore, only listen to people that are successfully building wealth themselves.

Do they have a vested interest in the advice?

Of course, as I have written about previously, the advisor must be independent. That is, they should not have a vested interest (i.e. make money from) in whether they recommend you invest in shares, property, super funds or nothing at all.

The reality is, financial advice businesses are not scalable

The easiest way to build a stainable and profitable business is to develop a product that you can sell at a high profit margin and then sell a lot of it (i.e. scale up the business). The reality is, a financial advisory business is not scalable. As soon as you turn advice into a product, you destroy a lot of its value because it becomes templated, you have to build in a lot of controls and restrictions and it’s difficult to scale “experience” (not everyone has the same experiences). The banks are a very good example of this.

This is why good quality advisory business tend to be small in size and the principal advisors tend to be very hands on.

Ask questions and go with your gut

The above questions should help you ascertain whether an advisor will be able to give you valuable, customised and holistic advice. Do not be shy to ask questions before you engage their services. In fact, its is your obligation to do so.

Also, trust your gut feeling. If you don’t feel perfectly comfortable with an advisor, move on and find one that you do. The best way to find a good advisor is by referral i.e. ask friends, family and colleagues that you know and trust. Good luck.