Mary Holm, one of New Zealand’s best selling personal finance author and columnist, offers the following advice when selecting a financial adviser:
I strongly recommend using an adviser who charges you a fee — just as a lawyer or accountant would. If, instead, the adviser is paid by commission from a provider of financial products, they will be incentivised to receive the highest commission, rather than putting you in products that are best for you.
Of the advisers who charge a fee, some charge by the hour while others charge a fixed fee and/or a percentage of the money you invest with them. Generally, I think hourly or fixed fees are preferable. But some advisers put up good arguments for percentage fees. Discuss with a potential adviser how they charge and why.
Some advisers who charge ongoing “monitoring” fees don’t seem to do much for that money. A good adviser should be happy to explain how they monitor. Ask. (If this or any other question feels awkward to ask, say Mary told you to!)
At Simple Money, we agree with Mary! We only charge fixed fee for services. We don’t know how commissioned based advisers can honestly say they are putting client’s interest first, when they are restricted in the investment options they can recommend.
We also don’t charge a monitoring fee. We don’t want to monitor your money. That’s your job. We’re happy to check in occasionally and see if there’s any updates, but we’ll be upfront about our fees for that service.
- Do you understand what the adviser is telling you? If you’ve read “Rich Enough?” you should be able to follow what they are saying. If not, it’s their fault, not yours!
- Is what they are proposing fairly simple? I’ve seen some ridiculously complicated plans, which I suspect are used to justify high fees. In most cases, you will invest in funds, and you shouldn’t need to invest in more than three or four diversified funds at different risk levels.
- Confirm that the adviser does not receive any commissions. See above.
- As well as paying for advice, you will pay fees charged by the funds you invest in — which will be subtracted from the returns you make. Research repeatedly shows that high-fee funds don’t necessarily bring higher returns. The Smart Investor tool on sorted.org.nz shows the average fee on non-KiwiSaver funds is around 1.5%, and on KiwiSaver funds it is lower. Don’t pay more than that — preferably less.
- Are there any other fees? Ask the adviser to estimate the total fees and charges you will pay.
- Ask who checks the work your adviser does? It’s worrying if one person makes all the decisions with nobody else to back them up.
A good way to test an adviser
A good adviser — who is putting your interests first — should always ask every client at the start if they have debt. If yes, and the interest is higher than mortgage rates, the adviser should recommend repaying that before doing any investing.
Again, we couldn’t agree more with Mary. During our onboarding process at Simple Money, debt is one of the first questions we ask. We’re not going to recommend a savings and investing strategy for you until you’ve handled the basics: getting out of debt (except possibly mortgage and student loans).
In regards to fund fees, we would never recommend a fund with an expense ratio above 1%. That is far too dear a price to pay. Most of the funds we recommend have expense ratios under 0.50%. Our favorite funds have annual expense ratios under 0.10%. That is far more reasonable than a 1.5% fund.
We like questions from our clients. Informed clients are the best kind of clients.
There are no secret formulas or dark magic in successful investing. We believe in the power of low-cost, automated, diversified, and simple investing.
If you’re interested in partnering with us to help your money grow, reach out today.