The Chairman of ASIC, Mr Greg Medcraft, suggested on page 1 of last Friday’s Financial Review that investors should be made to sit an online test before being able to invest your money. The test would “test” investor knowledge of financial “products” such as “margin loans, contracts for difference (CFDs), derivatives and hybrid securities”.

A nice idea, Greg, but I fail to see how making 600 retirees take this test would have saved them from investing in a Financial Institution that offered seemingly safe debentures (fixed interest loans).

I see a couple of reasons why investors continue to wind up in hot water –

1. They do not understand what they are investing in.

2. They are not seeking any financial advice.

Mr Medcraft goes onto say that investors “just don’t have time. We are in a world where everyone is busy”. Reading this statement made my blood boil. How we invest our savings is one of the most important things we will do in life. If we cannot make the time to read a product disclosure statement, then we do not deserve the opportunity to invest and grow our money. Best it is left in the bank.

The Financial Review’s article goes to what I believe to be the heart of the problem. In the article, the word “product” is used 7 times. A “product” is a term generally used to describe an investment that has been manufactured by a financial institution. They are more often than not complicated in structure, laced with fees and controlled by a “fund” manager who gets paid first, before returns are paid to the investor.

What is the difference between an “investment” and a “product”?

An “investment” is generally easy to understand because the ownership is held in the “investment” itself, e.g: a share in BHP, property, or bank term deposit. Owning an investment also means you are in control of that “investment”. You will ultimately decide whether to buy or sell.

A “product” means that you do not have direct ownership of the assets themselves, but you are paying a manager to own them for you and consequently control them.

What is the answer? Seek Financial Advice!

The financial planning community need to face the fact that our industry has a less than glowing reputation when it comes to professionalism. Why is that? Because for decades it has been filled with representatives of large financial institutions, or Advisers paid by these institutions to sell their “PRODUCT”! This of course creates an immediate conflict of interest.

Questions to ask a Financial Adviser to avoid poor or conflicted advice –

1. “What are your qualifications?” If they do not hold the Certified Financial Adviser (CFP) professional designation, walk out the door.

(Would you believe that in 10 years as an Adviser I have never been asked what my qualifications are as a Financial Adviser)

2. “Are you independent, or affiliated with someone else?” If they are owned by a larger dealer group, such as a bank, I recommend you exercise caution. It is likely that dealer group will have “products” to sell and we all now know who gets paid first, not you.

3. “What services do you provide?” You should ensure your adviser can provide a holistic service.

4. “How do you charge?” Whatever fee model is used here, the agreement should be between you and the Adviser. They are providing you with a service therefore you should be paying them directly.

Nothing is for free, so if they say it is, they are lying. They are being paid by a “product” provider to place your money in their “product”.

5. “Will I deal with only you & how often will I have access to you?” Communication is paramount to understanding.