As a financial services lawyer, I had the privilege of getting to know many financial advisers. I reviewed thousands of client files, prepared by hundreds of financial advisers.
When I started, advice files often landed on my desk because they were the subject of regulatory scrutiny or a client dispute. Needless to say, there was plenty of advice that broke my heart.
As the years went by, however, my role became less about seeing the worst advice, and more about considering the appropriateness of the advice of samples of files provided by organisations that wanted an independent professional opinion about the services their advisers were providing.
Some of the advice I saw was inspiring. There were instances where it was clear that the advice was life-changing. It’s one of the reasons I’m deeply passionate about financial advice.
All of the lessons I’ve learned from those experiences have informed Fairhaven Wealth’s business model and my advice processes. I’ve adopted the practices of those advisers who provided the highest quality advice and applied them to what I do.
For example, I’m independent of financial institutions and brokerage services. I don’t receive commission. The only remuneration I receive is paid by clients. The focus of my business is on providing high quality, tailored professional advice.
There are many people who, for various reasons, don’t receive financial advice. I want to help those clients. One of the unique aspects of my business model is that I can advise clients with investment portfolios that are lower than most investment advisers would consider advising.
But if I’m honest, I also want to save clients from advisers who aren’t providing high-quality advice.
Don’t get me wrong. Many advisers provide terrific advice. Even if they’re aligned with financial institutions or have a different business model, it’s possible to provide high-quality advice.
Enjoying this article? Sign up!
Sign up to the NZ Wealth & Risk mailing list, and receive a free PDF book, plus a series of emails explaining How to build your own financial plan.
It’s also rare for advisers to provide advice that’s likely to leave clients worse than if they’d never engaged them.
But in many cases, clients would be better off with another adviser.
One of the things I’ve observed in my years in the financial advice industry is that this is often the case with firms that convey themselves as being “high status”. These are the firms that often put their names on buildings. These are the firms with brands that people often recognise, and try to pitch themselves as the equivalent of top tier legal or accounting firms.
Their advisers dress well. They often wear expensive watches. Their offices are impressive. When they talk about their services, they often use terminology that is esoteric to many people.
In other words, they talk in jargon. A litimus test is whether they use the terms “fixed interest” or “discretionary investment management service” (or “DIMS”), refer to current interest rates, or talk about a specific stock within the first few minutes of speaking with them.
If you’re a client and meet with one of these advisers, you’ll often find that the adviser did a lot of the talking and didn’t really focus on you. They haven’t focused on whether your circumstances have changed; whether your needs have changed; or discussed your constantly-evolving goals. You’ll also get the sense that they’re a little myopic, and focused on how to invest in financial assets rather than other how to invest in other ways and address the broader risks in your life.
They’ll often talk about how they how they take “compliance” seriously. They’ll talk about the regulatory environment and how complicated and important compliance is. This might be part of a sales spiel, to give clients confidence about how they do things. But part of it is that typically they have policies, procedures, and a compliance team that they consider to be the bane of their lives. They can’t help but talk about it, because it’s a big part of their day to day life.
With respect to compliance – what I’d mention is that compliance departments, often out of necessity, focus on the minutiae of regulation, and spend less time assessing quality of advice. They also tend to ask whether the advice can be justified – ie, whether there is a reasonable basis for the advice, and if the business is protected from regulatory scrutiny or bad public relations. The question is not whether the best quality advice has been provided. In fact, they are usually mindful that there are often commercial conflicts that prevent the best possible advice from being provided.
It’s not true in every case, but as a general rule, the more status signals a financial adviser presents, the less aligned their interests are with clients, and the lower the quality of the advice they provide.
Fancy offices, tailored suits, and expensive watches may give wealthy clients a sense of reassurance (not to mention the top-tier law, accounting, and consultancy firms who refer clients to these “top-tier” advisers).
But invariably, the fees are too high, and too much emphasis is placed on the adviser’s ability to pick investment assets that will generate “alpha” (ie, outperform the market), rather than providing tailored services that are in the best interests of clients.
Often these advisers characterise themselves as “wealth managers” rather than financial advisers. If this is the case, they are really wannabe investment managers. If they’re so good at generating “alpha”, they should set up a managed investment scheme, collect huge funds under management, and cream a percentage of those funds under management. Dealing with individual clients is small fry when they could be dealing with institutions or other advisers who might place their funds under advice. Trying to pick markets also removes their focus from working with clients, and developing plans and strategies to help their clients meet their lifestyle and financial goals.
I think there’s something to be said for paying top dollar for legal and accounting advice, especially where the circumstances are complex and the stakes are high. (Arguably less so when the circumstances are less complex and the stakes aren’t so high, but that’s another topic.) But with financial advice, it’s rarely a case that the more you pay, the better your outcomes.
Because ultimately, one of the best things a financial adviser can do is to de-louse your financial situation, so you aren’t paying unnecessary fees. A good financial adviser will act as a bouncer and keep empty suits and rent seekers out of your pockets.
If they’re charging you substantially more than they need to, why should you believe that they’ll do the same with your investment portfolio? Isn’t it more likely that they’ll be in the pockets of fellow empty suits and rent seekers?
In short: I want to save clients from wealth distribution schemes masquerading as wealth management providers.
If you or anyone you know has an adviser like this, you may want a second opinion about the service they’re provided. The raison d’être for Fairhaven Wealth is to ensure people receive high quality, tailored financial advice. In some cases, it’s necessary to save clients from other advisers.
With most other investment advisers, you will pay ongoing fees as a percentage of your investment funds – for example, if you have an investment portfolio of $1 million, and are charged at a fairly typical amount of 1% per annum, you are paying $10,000 per year for your financial advice.
I typically charge a fraction of what other advisers charge for a portfolio of this size. Nor do I insist on clients engaging on an ongoing basis. I will typically save clients a significant amount in product and transaction-related fees, not to mention advice fees. If you have a relationship with an existing adviser, I encourage you to meet with me and discuss your situation. I can provide a “second opinion” service about your existing financial arrangements, and give you insight about whether you could improve you situation.