The Royal Commission: can’t legislate good behaviour, so how can you protect yourself?

The current financial scandals involving greedy financial planners as well as bankers exposed by the Royal Commission is making us all worried about who can we trust with our money.

Even high profiled politicians have argued do our regulators require regulating!

After your loved ones, the second most valuable thing is ofcourse your financial security. Being financially aware as well as literate is one of the best protections you can give yourself.

Today, the trustful & time-poor medical practitioners are the key target for greedy financial planners providing one-stop accounting as well as financial services. It’s time to look beyond the glossy brochures as well as seemingly inspiring & enticing seminars to see why your ‘busyness’ is putting your financial security at risk!

Remember, even high profiled & highly educated people have been burned. Today the Royal Commission into the banking sector shows how difficult it is to safeguard your nest egg.

It is clear that the top end of town has been enjoying a gravy train of money, leaving normal people hungry.

Even high-profiled & highly educated people are not immune

When people like Donna McKenna, the national Fair Work Commissioner, was duped of up to $500,000 by her celebrity financial adviser, it clearly revealed that no one was immune to this deceptive behaviour.

Even the Royal Commission has criticised ASIC – Australian Securities and Investments Commission, for being a toothless watch dog in not taking actions on serious complaints. It appears that not even our own bank is a safe place for investing. The pillow under your bed seems to us a better & safer option.

Now more than ever, the Royal Commission shows it’s important to ask the right kind of questions of your financial advisors & then get the right answers.

Professional bodies are not a guarantee of protection

In 2012 the APESB- Accounting and Professional Ethical Standards Board ruled that taking commissions based on the amount of money a client has invested compromises objectivity, “integrity, competence & due care”.

The APESB said, “no safeguards could reduce this threat to an acceptable level,” lumping other forms of payment like those from third parties, & soft dollar benefits, in the same boat.

Many accounting firms have not paid attention to this warning. Many offer commission based lending, financial planning as well as wealth advisory services. The APEB says this in itself creates a conflict of interest.

Many people don’t realise their fees are being significantly subsidised by commissions & were not aware that the advice they were getting was not always in their best interest.

And it seems that CPAA- Certified Practising Accountants Australia (also known as CPAs), as well as CANNZ- Chartered Accountants Australia and New Zealand as well as the IPA- Institute of Public Accountants have ignored this recommendation by the APESB.

According to the Royal Commission’s findings, FPA- the Financial Planning Association are worse at regulating their members.

How can you find a great adviser?

Remember, being penny-wise as well as pound-foolish, or being taken in by someone’s credentials or fame, can leave you vulnerable easily, without being aware of it, no matter how educated or informed you think you’re. Ego & ignorance can be your greatest enemy.

The best protection is to be financially aware & literate

Being financially aware as well as literate is undoubtedly the best protection you will be able to give yourself. A great adviser can explain back your arrangements. If they can’t keep looking until you can find one that can. The house rule is that if you don’t understand it don’t do it. Proving this to yourself means keeping a written key record of all your financial affairs, like:

Your legal and tax structure:  a diagram explaining why & how it works;

Financial statements: they should show what’s your annual income, & what you own & control, based on your legal and tax structure.

Legal & personal documents: these provide written proof of what you legally own & control, including your business & personal agreements such as a Power of Attorney, succession planning agreements, healthcare directives & wills. Also, they can include computer access, email & online accounts passwords as well as the keys or codes to your bank safe.

List of trusted advisers: this is particularly important in the event of a catastrophe. Your loved ones would know who to call as well as where to find things in case of an emergency.

Don’t be fooled by glossy brochures & flashy offices, qualifications or memberships of professional organisations

These are disturbing times. We have had to question the integrity of our leading institutions. Shareholders of companies as well as members of professional bodies are facing a lack of ethics or even adherence to law & order.

Having a ‘Gun Shy’ regulator in Australian Securities and Investments Commission destroys our confidence in the entire financial system.

Although becoming an accountant takes several years of undergraduate & post-graduate studies & although accountants should strive to meet the requirements of the requisite professional memberships, historically it’s not difficult to become a financial planner.

Yet, the response by the FPA to the Royal Commission thus far provides little consumer protection.

Don’t be rushed into to doing anything, & get it in writing

Time-poor professionals are the main target. Hence make time as well as take your time. Don’t be impressed with celebrity advisors. Be cautious of pressure sales.

Don’t agree to anything just over dinner or over a bottle of wine or. Be cautious of overt hospitality such as free tickets to a football game. Also, try to keep your relationship professional. Do not feel under obligation to respond.

Always demand transparency as well as openness.

Ask for estimated costs & risks & projected returns. Go over the fine print and ensure all the advice you are receiving is in writing.

Lat but not the least, if you don’t understand it, don’t invest in it. Just insist politely that you would like to think about it & also get a second opinion.

Never put all your advisers in one basket

Think carefully whether its time to separate your advisors as well as have a separate lawyer, accountant, as well as financial planner.

Remember the old saying; “Jack of all trades, master of none”.

Altough one-stop shops can be convenient as well as useful, they can do more harm than good. You may not be receiving the best advice in the area you require, or the advisor may be conflicted.

For avoiding future disputes, an ethical adviser would automatically declare when they have a conflict-of-interest, for instance, when they’re doing the personal financial planning work for an owner as well as are also at the same time acting on a profit-sharing arrangement for the group medical practice. Or when they are recommending you borrow more money so they will be able to enjoy a 25-year commission trailer on a loan that you may not have really needed.

Separating advisors would a very small price to pay for the inconvenience of having more than one advisor. On the positive side, it would place you in a less awkward situation if you aren’t happy with their advice or direction.

Pay for your own advice – after all nothing important in life is for free

If you want to reduce biased or conflicted advice, you need to pay a fair fee for the advice you get. Never let others pay for your advice. A low fee isn’t a guarantee that it is fairer or better. Always keep in mind that the cheaper a service, the less value you tend to place on it.

This is called as all care but no responsibility advice when things go wrong.

Often, we’re offered advice from our colleagues, well-intended friends, & these days, Facebook & LinkedIn. However, remember that this is piecemeal advice & it lacks the breadth & depth & the context of the advice that you get from a trusted adviser. Although friends may mean well, unlike your professional adviser, they will not take any responsibility for the consequences of that advice if it’s poor – after all, they are not experts. You can listen but then discuss their advice with your adviser before acting on any information.

And never be afraid to get a second opinion

Financial incentives may drive adviser behaviour that may not be in your best interests. The easiest way to make sure a financial adviser’s advice isn’t biased is to get a second opinion & compare. Remember, it is not about the price of advice, but it is about the value offered.