Ask an Adviser - Finding An Adviser Who Can Make 8% Per Year

Dear Don

Thank you for your question which I find pretty interesting. Despite what the Royal Commission into the Financial Services Industry and Media may have made you think, there are still many great financial advisers around. In answering your question, however, I thought I should make this clear that what makes a great financial adviser does not mean he/she will necessarily get you the 8% + annual return on investments (ROI). Vice versa, financial adviser who gets you the 8% + ROI is not necessarily a great adviser. Let me explain why below.    

I do feel I should address your question by considering 2 related but uncorrelated subjects matters raised in your question, independently: 

1. What makes a great/ good financial adviser? 
2. What return you should expect a good financial adviser deliver – at least 8% ROI or something else?

1. What makes a great financial adviser? 

Let me start by explaining the main attributes of a good financial adviser and the role he or she play you should expect during a client relationship.

Here some general consensus as to what good financial advisers should have most if not all of the following

1. Good reputation - good referral from a friend or family and adviser(s) recommended on the Advisers Ratings Platform
2. Appropriately qualified and adequately experienced in financial services areas that suit your general and specified financial services need e.g. specialised knowledge in certain shares investment portfolio
3. An adviser should be a professional member of membership body like Association of Financial Advisers, Financial Planning Association of Australia, CPA Australia and Chartered Accountants Australia and New Zealand - he or she is required to be abide by stricter criteria and higher professional and ethical standards than required by law. He or she will put your interest first at all times.
4. A financial adviser fee structure and fee should be clear and reasonable and transparent, as required by law.
5. A good financial adviser takes holistic view of your financial situation, investigating and distilling your need and objectives and devising a meaningful strategic plan accordingly.
6. A good financial adviser is someone in whom you should have full confidence and trust, which is foundation for a long term and fruitful relationship. Simply, you should only work with someone you can trust.
7. A good financial adviser should have access to a broad arrange of experts to meet your specific needs. A team approach ensures any specialised investments, wealth management, insurance, and/ or debt management objectives are met.
8. Strategies prepared in a financial plan from a good financial adviser should be clear and concise. He/she makes sure you understand the steps/ tasks required and monitor and engage you every step of the way and make necessary changes if your circumstances change over time..
9. Most importantly, as said above, a good financial adviser has your best interest at heart.

In summary, a good financial adviser is an appropriately qualified and adequately experienced professional who has specialized knowledge and skills and is someone you can trust and work with and most importantly, has your best interest at heart.

2. What return you should expect a good financial adviser deliver – at least 8% or something else?

Many would consider average 8% ROI is pretty good return. But, is this sort of return good or appropriate for you??  Not necessarily. It really depends. What appears to be good or appropriate return worth pursuing for some are not necessarily good for others, often enough quite the opposite. Setting level of ROI can be a complex process which is an essential part of any investment advice piece within a financial plan prepared by a financial adviser. It often requires a financial adviser to consider, carefully study and understand the following aspects including but not limited to:-

1. Your immediate, medium and long term needs based on your current situation and goal and objectives (I.e. income and/or capital growth requirement over your investment horizon)
2. Your risk profile or attitude/ appetite/ tolerance for risk (understanding your tolerance level towards risk of an investment not performing as expected)
3. Knowing the underlying investment products/ vehicles - the risk/ return characteristics of underlying investment classes and assets with these classes *
4. Current investment market local and abroad - trend/ cycle (the good adviser should follow study and understand global events/ market trend, any potential/ identifiable local/ global distresses and financial impact on products under advice, e.g. impact of last Global Financial Crisis (GFC) can still be felt across the board to this date

* Broadly, there are 4 common assets classes and they are shares/ equities, properties, (growth assets) fixed interest and cash (income assets). Investment professionals include also commodities, futures, options and other financial derivatives and even cryptocurrencies. By far, derivatives and cryptocurrencies are the riskiest asset classes. Among the common assets classes, equity and property are riskier asset classes than fixed interest and cash.  The theory is that greater level of risk should generally perform better over the long term, compared to those investments with a lower level of risk. However, event like GFC certainly has an significant impact on this. Courtesy of article published by Canstar on 3 October 18,  in the wake of last GFC happened 12 years ago, over the last 10 year period,  average annual ROI for Equities - 4%, Properties - 8% Fixed interest – 6.2%; and Cash  - 3.6%. These are purely historical information. Past performance is not a reliable indicator of future performance.

As said, a good financial adviser will take a holistic view of your situation and distil what you want to identify your goals and objectives (financial or/and non-financial). He/she will help by devising and implementing different strategies to achieve these goals and objectives.

The different strategies serve different purposes and they can be to manage cash flow (e.g. saving plan), protect/safeguard assets and its income stream against unforeseen events (e.g. by using appropriate and adequate insurance policy), reduce or manage debt and strategically invest and manage wealth.

In devising an investment and wealth plan or portfolio, a good adviser is required to understand the risk/return characteristics/equation of the underlying investments to ensure the overall investment performance/return in terms of growth and ability to produce income, as expected from the assets within is compatible to your regular income and long term growth requirement (e.g. to pay for/supplement ongoing living expenses and/or reach certain assets level to fund retirement needs). As fundamentals can change for some investments within the portfolio (e.g. not performing as well as expected) or and your personal circumstances and requirement may also change over time, a good adviser should conduct regular review so that investments can be rebalanced/ adjusted timely and accordingly to suit your new requirement.

In summary, chasing ROI of 8% + is not for everyone, without knowing your circumstances and goals and objective, it is uncertain whether it is for you. The risk/ return equation of riskier investment needs to be considered carefully as it often impacts liquidity and value of the investment and if not done correctly, it will affect the investor’s ability to draw upon the income and realize the investment value as expected and when required.

Please also remember past performance is not a reliable indicator of future performance - investment or investment portfolio that had ROI 8% this/ last year make no guarantee of same or similar return in future year(s).

In closing, to illustrate why riskier asset/ higher return may not suit everyone, let’s take infrastructure related investment as an example, while it is a growth asset and may perform well in long run, this investment type generally has liquidity issues as income return and growth would not come in until the underlying project(s) are complete. Investing solely in this type of investment would not be appropriate for someone preparing for retirement who needs liquidity and growing asset value right from the outset to fund retirement.

We cannot stress enough. Talk to a good financial adviser near you and potentially someone who has specialised investment expertise. In the first instance, feel free to search through “Find Adviser Near You” on the Adviser Ratings platform to find a suitable adviser to discuss your situation and requirements. Good luck.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Johnson Leung

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