The Royal Commission: cannot legislate good behaviour, so how do you protect yourself?

No comments

Warren BuffettFive key tips towards finding a trusted ethical financial adviser

Warren Buffett1

In this article we cover the following key tips:

  1. Being financially self-aware and literate is the best protection you can give yourself
  1. Do not be fooled by glossy brochures and flashy offices, qualifications  or professional associations or organisations
  1. Do not be rushed into to doing anything, and get it in writing
  1. Do not put all your advisers in one basket
  1. Pay for your own advice – nothing important in life is for free or cheap

The spate of current financial scandals involving greedy bankers and financial planners exposed by the  Royal Commission is making us all uneasy about who can you trust with your money.

High profiled politicians have even argued do our regulators need regulating!

The second most valuable thing (after your loved ones) is your financial security. Being financially self- aware and literate is the best protection you can give yourself.

The ever-trusting and time-poor medical practitioner is a key target for greedy financial planners offering one-stop accounting and financial services. Now is the time to stop and look beyond the glossy brochures and seemingly inspiring and enticing seminars to see why your ‘busyness’ is putting your entire financial security at risk!

Be warned.. even high profiled and educated people have been burned. The Royal Commission into the banking sector reveals how increasingly difficult it is to protect your nest egg. We explain why this is, and what to do about it.. and it does not involve keeping your money under the pillow.

It’s clear that the top end of town have been enjoying a gravy train of money for some time, leaving ordinary people hungry.

Even high-profiled and educated people are not immune

Ego

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

The Royal Commission has criticised even our corporate regulator  ASIC for being a toothless watch dog in not acting on serious complaints. It may seem that not even your own bank is a safe place to invest. The pillow under your bed may seem to you a safer option.

Now more than ever, the Royal Commission into the banking industry shows it is important to ask the right kind of questions of your financial advisor(s) …then get the right answers.

But we can learn from other people’s mistakes.

Professional bodies are not a guarantee of protection

Do not push the button

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

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

(Source: Royal commission shows us why financial planning, in its current form, isn’t worth the risk)

Many accounting firms have not heeded this warning. We see many offer commission based lending, financial planning and wealth advisory services. The APEB says this in itself creates a conflict of interest.

It has emerged from the Royal Commission that many people do not realise their fees are being significantly subsidised by commissions and were unaware the advice they were receiving was not always in their best interest.

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

What about the FPA? Well, according to the Royal Commission’s findings so far, the Financial Planning Association (FPA) are worse at regulating their members.

So, unfortunately, the problem is probably a lot bigger than you think. This is why we, as a professional Medical and Health Accounting and Practice Advisory Firm, do not engage in this practice, contrary to our own professional bodies’ position and our own bottom line. We agree with the APESB. We do not believe this is ethical.  

How do you find a great adviser?

Family Consulatation

Finding a decent financial planner can be hard.

As the Royal Commission shows, being penny-wise and pound-foolish, or being taken in by someone’s fame or credentials, can easily leave you vulnerable, without being aware of it, no matter how informed or educated you think you are. Ego and ignorance is your greatest enemy.

1. The best form of protection is to be financially self-aware and literate

Do you have all of your personal information

Being financially self-aware and literate is the best protection you can give yourself. A great adviser can simply explain back your arrangements. If they cannot keep looking until you can find one that can. The house rule is if you do not understand it do not do it. Proving this to yourself means keeping a written key record of all your financial affairs, including:

 

 

  1. Your legal and tax structure – a diagram explaining how and why it works;
  2. Financial statements – they should show how much you earn annually, and what you own and control, based on your legal and tax structure. It is cost effective to get this information daily;
  3. Legal and personal documents – these provide written proof of just what you legally own and control. They include business and personal agreements e.g. succession planning agreements, a Power of Attorney, healthcare directives and wills. They could also include other information such as computer access, passwords to your email and on-line accounts, and the keys or codes to your bank safe. (Also included are clear final instructions to your loved ones in the event of your untimely death).
  4. List of trusted advisers – this is critical in the event of a catastrophe, such as an overseas airplane accident. It is important your loved ones know who to call and where to find things in the event of an emergency.

Contact us for our free Personal Portfolio example checklist.

2.Do not be fooled by glossy brochures and flashy offices, qualifications or memberships of professional associations or organisations

Magician

These are unsettling times. We have had to question the integrity of our leading (and once highly reputable) institutions. Shareholders of companies and members of professional bodies are facing a clear lack of ethics or even adherence to law and order.

Having a ‘Gun Shy’ regulator in ASIC erodes our confidence in the entire financial system.

While becoming an accountant takes years of undergraduate and post-graduate studies and while accountants must strive to meet the requirements of the requisite professional memberships, historically it is not hard to become a financial planner.

Yet, the response by the Financial Planning Association to the Royal Commission thus far provides little consumer comfort or protection.

We would expect the professional bodies to respond to the evidence revealed at the Royal Commission. But we can’t take their response for granted. In any case, changes will take time.

3.Do not be rushed into to doing anything, and get it in writing

bTime-poor professionals are a key target. So make time and take your time. Do not be star-struck with celebrity advisors. Be wary of pressure sales.

Do not agree to anything over a bottle of wine or over dinner. Be wary of overt hospitality like free tickets to a grand final football game. Keep your relationship professional. Don’t feel under obligation to respond.

Demand openness and transparency. Ask; how independent are the recommendations?

Ask for estimated costs and risks as well as projected returns. Go over the fine print and make sure all key advice you receive is in writing.

The ‘house rule’ is; if you do not understand it, do not invest in it or do it – it’s that simple. Always insist (politely) you would like to think about it and even get a second opinion.

4.Do not put all your advisers in one basket

drConsider whether is it time to separate your advisors and have a separate accountant, lawyer, and financial planner.

Remember the saying; if you are a jack-of-all trades, then you a master of none, and a conflicted one to boot.  

One-stop shops can be convenient and useful. However, they could be doing you more harm than good. You may not be getting the best advice in the area you need, or the advisor may be conflicted.

To avoid future disputes, an ethical adviser will automatically declare when they have a conflict-of-interest, for example, when they are doing the personal financial planning work for one owner and are also at the same time acting on a profit-sharing arrangement for the group medical practice. Or when they are advising you to borrow more money so they can enjoy a 25-year commission trailer on a loan you may not have really needed.

Separating advisors is a small price to pay for the inconvenience of having more than one advisor. On the plus side, it places you in a less awkward or intimidating situation if you are not happy to with their advice or direction.

Accountants are your first point of call like your GP!

aFor example, we are experienced specialists in setting up and running successful healthcare practices. This represents a doctors or healthcare owners primary economic engine. Without it, a successful and sustainable practice cannot exist. It is premature to take on lawyers or a financial planner unless you think you have money to pay and invest money with them. It is all in the timing.

Your accountant should be your first port of call. Your accountant is like your financial GP who coordinates and refers to lawyers, like a GP may refer a patient to a surgeon.

Your accountant may refer you to lawyers, who are employed at the time of setting up a practice, or for any personal or business agreements and for dealing with disputes. And/or they may refer you to financial planners who can be thought of as allied health practitioners who look after your financial wellbeing. It is impossible for any one firm to do everything well, all the time.

To get the best results look for accountants who sub-specialise in your area of need or industry

business con

For over 25 years we have specialised nationally in the setup and running of medical and healthcare practices. We are not experts in financial planning, nor do we want to be. Financial planners do this.

However, this does not mean we simply do your tax returns. Many accounting firms do doctors tax returns, but this does not mean the same thing as setting up and advising on how to run a sustainable practice. We are specialists, experienced in setting up and running successful healthcare practices. Without this advice, a practice cannot be successful and sustainable. We can advise you on SIP’s, Pip’s and government grants, pathology rentals, practice benchmarking and successful succession planning.

Few accounting and financial planning firms do this type of work and even fewer can boast the skills and expertise in this area that we do. Firms who carry a financial planning licence usually have financial planning, this is their core business it is called a Australian financial services (AFS) licence. We do not have one as, our core practice is accountancy and health practice management advice.  

This is an excellent article called Royal flush: 15 questions to ask a financial adviser now to find out if you have the right adviser.

For more information, the ASIC checklists below will help you find the right team of advisers.

  1. Choosing your accountant
  2. Choosing your financial planner.

5.Pay for your own advice – nothing important in life is for free or cheap

cIf you wish to reduce conflicted or biased advice, pay a fair fee for the advice you receive. Do not let others pay for your advice. A low fee is not a guarantee that it is better or fairer. In fact, the cheaper a service, the less value you tend to place on it.

Cheap advice from around the BBQ may burn you in the long run.

We call this all care but no responsibility advice when things go wrong. Look out for yourself, nobody else can.

We are often offered advice from well-intended friends, colleagues and, these days, email chatroom groups such as Facebook and LinkedIn. But remember, this is piecemeal advice and it lacks the breadth and depth and the context of the advice you get from your trusted adviser. Friends may mean well, but unlike your professional adviser, they won’t take responsibility for the consequences of that advice if it is poor – after all, they are (probably) not experts. By all means, listen but discuss their advice with your real adviser before acting on any information.

Fees

d

Rather than accept lower annual accounting or professional fees, which may have been subsidised by a percentage of asset fees, loan value or income arrangements, be prepared to pay on a ‘fee-for service’ basis.

This may be an itemised hourly rate or a fixed fee. Be clear about who is the paying client. It should only be you!  When somebody else pays your fees, lines can get blurred. Your advisor cannot have two clients.

Do not be afraid to get a second opinion

e

Financial incentives can drive adviser behaviour that may not be in your best interests. The simplest way to ensure a financial adviser’s advice is not biased is to ask for a second opinion and compare. Remember, it’s not about the price of advice, it’s about the value offered i.e. whether timely communications and quality market-tested advice is being provided.

Where to from here?

In the current investment climate, many people are turning to investing in their own businesses, or in do-it-yourself investments such commercial and residential real estate, or simply keeping cash ‘under their pillow’ or in a simple fixed term investment.  

Despite the inconvenience, direct control of your own investments and financial security can give comfort and certainty.

Contact David Dahm at pa@healthandlife.com.au for further information.

cellphone

Please note we are not lawyers, we are accountants and practice advisers. Please seek specific legal advice in relation to your own circumstances. We cannot be held responsible for any errors or omissions in this article. This is for discussion purposes only.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s