If you’ve never met a financial adviser before, it can be a little intimidating to think about what might happen. In this series, our financial adviser Jordan Vaka wants to unpack how he works, in the hopes that it helps you feel a bit more comfortable getting started.
So what, exactly, does a financial adviser actually do?
Well, we give advice.
Well, actually, it’s not.
What Is Advice?
It feels vaguely silly to be trying to define what ‘advice’ is, but it’s actually really important that you know what it is, what it isn’t – and what it means for you.
At the basic level, we all know what advice is – it’s guidance, or suggestions, from somebody to help you decide what to do.
It can take many forms, from a friend suggesting a new recipe, or a doctor explaining why your high blood pressure isn’t all that good, or a well-meaning child telling you you’re doing Lego wrong.
But when we’re talking about financial advice, things get a little more complicated.
The complexity arises because, in Australia at least, ‘financial advice’ is a legally defined term. (Well, actually, the term is ‘financial product advice’ and we’ll come back to why that’s problematic a little later).
For the legally minded, s766B of the Corporations Act details the ins and outs of this definition. It is, well, complex as most of these things are.
But, in essence, it defines financial advice as a recommendation, or statement of opinion, that intends to influence a person’s decision about purchasing, keeping or disposing of an interest in a financial product.
And not only does this recommendation or statement of opinion have to actually influence somebody – if it could also be ‘reasonably’ expected to influence somebody, then it’s financial advice.
One Big, Glaring, Shortcoming
Now, to step to the side for a brief digression – the big issue with this definition, to my mind, is it solely defines ‘advice’ by its relation to financial products.
So it completely ignores any of the other elements of what a financial adviser does.
Helping somebody set themselves a practical and sustainable budget?
Preventing somebody from buying an expensive car they don’t need?
Meeting with somebody to discuss their likely Centrelink entitlements?
There’s a range of issues that come with this that are really only of interest to us geeks in the game itself, but one big problem is that this focus on ‘financial product’ puts the production, sale and service of financial products at the heart of financial ‘advice’.
Which is like defining medical advice by it’s relationship with pharmaceuticals.
It’s odd, is what I’m saying…
What Does This Mean For You?
The reason I wrote this post was to help you recognise that there are different types of financial advice.
Because the definition of financial product advice – as though it wasn’t complex enough – then also divides into two different ‘types’ of advice.
General Financial Advice
This financial information that could be reasonably expected (by ‘a reasonable person’) to influence your decision about a financial product – but that has not considered your individual circumstances at all.
It’s the generality of the information, and the lack of consideration of you that makes it ‘general advice’.
General advice has its role – if you’ve ever called your super fund, or been on their website, it’s likely you’ve received general advice – but it’s also quite limited in how it can help you make decisions about your finances.
As ASIC put it over on the Moneysmart website:
“General advice may help you to identify and narrow down your options. But it won’t tell you how to make the best financial decision for your personal situation.”
Because of its (relative) lack of involvement and risk, general advice is often cheaper to provide. You do, however, need an Australian Financial Services License to be able to provide general advice.
Personal Financial Advice
Personal advice, as the name suggests, is financial (product) advice that has been tailored to your financial situation, objectives and needs.
This adds a step to the process, because the person giving the advice (the ‘adviser’, in other words!) has to actually find out what your specific situation, objectives and needs are.
This process – we call it the Discovery part – involves many discussions, some meetings, gathering of data and research so we can have a fully formed, accurate and reliable idea of your current financial situation, objectives and needs.
We can then prepare specific financial advice personalised for you, based on that understanding.
So if general advice is stuff like:
“salary sacrificing $100 per week into your superannuation could grow your balance by $100,000 by retirement”.
Then personal advice is “you should salary sacrifice $100 per week into your ABC Superannuation Fund, as we believe it could increase your balance by $127,500 dollars by the time you turn 65, your preferred retirement date.”
Again, ASIC’s MoneySmart website has a great rundown of the difference, and a handy list of times when you might like to get personal financial advice.
Broadly speaking, personal advice is for when you need help with something about your unique circumstances:
Planning for your retirement
Rebuilding after your divorce
Pursuing your desire to retire at 58 and travel around Australia in a small caravan with your two dogs.
It’s specific, and only useful, to you and your individual life.
General advice is far broader and, while useful, the limits of that usefulness should be considered when taking it on board.
After all, salary sacrificing that $100 could be a good idea in general – but not if you only have $50 left in your budget each week.
Yes, But Who Cares?
Fair enough – we’re in the arcane weeds here and, truth be told, most people never really know the difference.
But there’s one reason why you should care: your protection.
The obligations that come with giving personal advice are far greater than those required under general advice.
Which makes sense, when you think about it – the obligations on a super fund providing advice that doesn’t take into consideration individual callers circumstances should be lower than the ones we have.
Your Best Interests
Because, as personal financial advisers, we have strong professional obligations to make sure the advice we give you is – always – in your best interests.
We even have a formal, legal duty to always act in your best interests.
To do so, we need to take the time to get to know you, where you are now, where you want to go, and the unique complexities that exist in your personal, financial circumstances.
This depth of knowledge requires a deep level of research and discussion. All of which must be documented, secured and referenced.
Which makes the Discovery phase of our process the most important element. What we learn in that phase forms the foundation for everything follows.
Naturally, this means that personal financial advice is more expensive than its general counterpart – but it also means it’s a great deal more valuable to the person receiving it.
I wouldn’t blame you if you were! It’s a complex landscape of laws, regulations and case law. And I’ve tried – honestly, I have! – to keep it as simple as possible.
But, at a high-level, what you need to know is relatively simple:
Financial advice, in Australia, is defined by what it influences to you to do with financial products.
Advice that doesn’t take into account your individual circumstances is called general advice.
It can be useful to help you learn about your finances in general, but is limited by its disconnection from your own personal situation.
Personal advice is based upon an understanding of your personal circumstances, and is tailored accordingly.
It’s more expensive, but it’s also a good deal more valuable.
Personal advice comes with a suite of protections under the law and regulations, all basically in place to ensure that personal advice is always in the best interests of our clients.
Why does any of this matter?
Well, I feel that you should know that we provide personal financial advice. Along the way, some general advice might fall out, but our focus as a practice is to provide valuable, personal financial advice to the people we work with.
Our advice is literally bespoke, drafted for each individual person to reflect their specific circumstances, objectives, needs and wants.
This is why we ask so many questions, why we collect so much data and why we’re nowhere near as cheap as calling up your super fund for some general tips and advice.
As always, if you have any questions, please don’t hesitate to get in touch!