A financial planner needs to remain current on taxation changes, to have a solid understanding of all areas of investment and needs to have a high degree of ethics and candour when dealing with clients.
It is necessary for a financial planner to obtain the maximum amount
of information about your specific financial case so as to come up
with an optimised holistic solution. A financial planner is obliged
to seek this information by law, under the 'know your client's rule'
and at the initial consultation will ask a great many questions in
order to assess:
The planner also needs to know such things as your willingness to transfer money to or from your spouses account as necessary, which may help satisfy certain asset tests for social security and taxes.
The information given is treated with absolute confidentiality, and is not routinely forwarded to the ATO or anyone else. Nor is the information used as a means of calculating how much money they can milk you for with commissions. This information is absolutely essential if the planner is going to be able to write a realistic financial plan to suit your needs.
There are two types of financial advisers.
The first type of financial adviser is a salesman, dealing in insurance or whatever, who has noticed that many clients are being lost to comprehensive financial planners. The information they can give is frequently limited and amateurish, relying on help from friends and collegues who are solicitors and accountants, and always centres on the very limited array of products that one salesman has to offer.
Often the transfer from insurance salesman to financial adviser consists only of getting a new business card, though new requirements for minimum competance set by ASIC have put a lot of guys out of business.
True financial planners have specific educational qualifications and are part of ongoing professional programs that involve large amounts of postgraduate study in order to keep their knowledge current. The best people to deal with hold the official title of 'Certified Financial Planner' and have completed specific degrees and diplomas related to the distinct profession of "Financial Planner".
To become a CFP a number of very rigid criteria must be met concerning education, work experience and ongoing professional development.
Financial planners may be independent or attached to a firm offering a limited range of products available from their employer. The latter category may well be perfectly legitimate financial planners and non-independence is not necessarily going to prevent the adviser from giving good financial advice, but disclosure regulations force all financial planners to advise clients at the first consultation, in writing, of any limits on advising capacity and conflicts of interest. Financial planners may work for organisations such as AMP or AXA and still give excellent advice, even if they are limited to suggesting retail investment products only recommended by those firms.
(NB: I used to be an authorised representative of one of these big, well known dealer groups, our recommended product list was a who's who of investments in Australia, the list wasn't complete in that we can't recommend every fund from every manager, but the list was 20 pages long and had a wide variety of investment products from a variety of managers. As far as I know, aligned advisers (advisers who are attached to a large group owned by a fund manager, bank or insurer) usually do have large lists to work from. The most restrictive lists I know of are the authorised product lists of bank financial planners, where the choice is very narrow and often limited to bank products or the products of bank affiliates. If you go to an adviser from AMP, AXA, Zurich or someone of that ilk, you will not be limited to AMP, AXA or Zurich products. "Independent" dealer groups don't always give their advisers free reign to select any investment at all either, most groups have a recommended product list of some kind, where only products passing certain criteria are listed. What matters more than where the adviser is from, is who the adviser is. The personal qualities of the adviser will make more difference to you than which sign is on the door.)
An ethical challenge to financial planners is what to do when a client already has very specific ideas of how to construct their portfolio. A client who is a real estate agent may well insist on having a portfolio consisting 100% of real estate properties, however the financial planner may strongly advise the client to seek at least a certain amount of diversification into shares and managed funds as well, depending on his professional judgement. The real estate agent example is not hypothetical either, back in 1989 this situation did present itself. After much wrangling the real estate agent consented to having his portfolio adjusted to "only" 75% property and 25% shares. After the bust of real estate prices in 1991 this same agent sued his financial planner for a supposed failure to exercise proper professional judgement with regard to diversification.
The same problem presents itself when people approach the financial planner with strong preconceived biases against other forms of investment, usually shares. A 30 year old seeking a wealth building program really must have shares as part of a growth portfolio, but sometimes in comes someone with a previous bad experience with speculative penny stocks or who lost big money in a crash and now makes it quite clear that his investment plan should not have anything to do with the stock market. It is the role of the planner whenever possible to educate clients as to the realistic risks of any form of investment, and a 30 year old has no business getting into such an investment as long term bonds, which have seldom outperformed inflation over time and are practically worthless to a young wealth builder as a long term investment.
A financial planner also advises on taxation matters. A financial planner needs to know taxation as it applies to investment and will give a good assessment of what strategies can be implemented to enhance your investments. Often financial planners are confronted with clients who take the idea too far however, and it is not uncommon for clients with large taxable incomes to insist on certain types of investment to produce tax benefits, even if they are inappropriate investments in the judgement of the financial planner.
Financial planners may be licensed to deal in securities and receive direct commissions from investment product suppliers, or may be entitled only to act as an adviser, without actually dealing in securities. From the client's viewpoint it usually makes little difference which license the financial planner holds, the planner must disclose the full amount of any commissions received from each purchase, and is barred from other practices such as 'churning', which means excessive trading in securities on behalf of the client, thus making large commissions for himself at the expense of the client.