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There’s a story that Henry Ford was having problems with a generator in one of his plants so he hired General Electric (GE) to fix the problem.
The engineer from GE climbed up on the generator and made a chalk mark and told Ford’s people to replace sixteen windings from the field coil.
The job took 5 minutes.
Ford was thrilled until he got an invoice from GE for $10,000.
He balked at the figure and asked for an itemised bill.
It was provided as follows:
- Making chalk mark on generator $1
- Knowing where to make mark $9,999
Ford paid the bill.
I don’t know if this story is true or not but it is a wonderful analogy for the value of professional advice.
Perhaps it is summed up in the following saying; price is what you pay, value is what you get.
Ford was able to get his plant running again and that would have made him a lot more money than $10,000!
So the advice was cheap.
What do Australians think financial advice is worth?
ING published some research in January 2016 which concluded that Gen X and Y believe that fees for comprehensive, personal face-to-face financial advice should range from free to $250.
Obviously, many Australians don’t put any significant value on the advice provided by financial advisors.
The financial advice industry only has themselves to blame for this.
There have been too many horror stories about dodgy financial advisors ripping off their clients and the industry (including the banks) has been very slow to clean up its act. In fact, the banks are still resisting cleaning up their act.
People just don’t trust financial advisors so any advice they give is viewed as unreliable (because of their conflicts and self-interest) and therefore valueless.
Fair enough!
Is information a perfect substitute for personal advice?
20 years ago, if you wanted to find out how to invest in the share market you would have to go and see a financial planner or stockbroker because they were the gatekeeper of this information.
Today, everything is a Google search away.
There’s a plethora of information available – more than enough to help you develop your own financial plan.
However, information is not a perfect substitute for personalised advice.
Yes, you need information and knowledge to give advice but there are two more important components that are required; being experience and skill.
When you hire a professional for advice what you are paying for is their experience.
You are paying for the 10,000 hours of practice they undertook to master their skill as popularised by Malcolm Gladwell.
What is a good outcome worth to you?
People develop a financial plan because they want to feel financially secure and ensure they have enough money to enjoy a comfortable retirement.
If I could give you a ‘magic bullet’ (or piece of advice) that guaranteed that your financial plan would be a success, how much would you be prepared to pay me?
A lot right?
I remind you of the above saying; price is what you pay, and value is what you get.
Therefore, the right financial advice can be very valuable.
How to choose a financial planner you can trust
Ok, I have a conflict here because I am a financial advisor and maybe I have my own biases and opinions.
That being said, I have some pretty clear rules on finding an advisor you can trust that are universal.
The first thing is you MUST remove all conflicts of interest.
You want to deal with an advisor that has no stake in the outcome of the advice.
This means that they can’t sell you an investment property or accept a referral fee for doing so, they can’t take commissions on shares or managed funds, and they shouldn’t charge percentage fees (fixed fee preserves independence)… essentially all they have to sell you is just their advice, nothing else[1].
The removal of conflicts would have avoided 99% of the financial advisor horror stories that you read about in the newspapers.
It is absolutely critical.
Once all conflicts are removed the only things you have to consider are:
- Does the advisor have enough ‘smarts’ and experience to help me? Things to consider include education, years of experience, the profile of a typical client, the advisor’s investment
philosophy is the advisor financially secure (do they eat their own cooking) and so on. This is usually relatively easy to assess – most people know whether they are talking to someone that is a master in their field or not. - Do you like the advisor? Your gut feelings are important – listen to them. It’s important that you and your advisor can get along well and that they are enjoyable to work with because it’s very difficult to trust someone you don’t like or respect.
Don’t discount the value of advice
I would agree that there are plenty of financial advisors out there that you wouldn’t pay a cent for their advice.
However, of course, there are some very trustworthy and smart independent financial advisors in Australia that offer a very valuable service.
Take the time to find them.
This blog was originally published in July 2018 and has been republished for the benefit of our many new subscribers.
Stuart was a Chartered Accountant before establishing mortgage broking firm ProSolution Private Clients. He has authored two books and shares his experience with readers of Property Update. Visit www.prosolution.com.au
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