Can you recommend a financial planner?

This is the question I most dread being asked, as do most of my non-practitioner colleagues in the industry.

How do you choose someone to recommend? What options do I have? What questions should you ask, can you ask, of the person seeking your recommendation?

If it is a close friend or relative, you probably know something about their circumstances, and therefore you have some idea about the type of advice they might be seeking. But if it isn’t someone you know well, should you ask some questions, what questions can you ask? (How much money have you got? Are you thinking of a divorce?)

Well, why should you ask questions? Aren’t all advisers competent? Aren’t they all authorised and in accordance with PS 146? But, just to be safe, should I recommend a Certified Financial Planner (CFP) or should it be a Certified Practising Accountant (CPA) with a PFP — specialist in financial planning designation. How do I find one?

If it’s a CFP I’m going to recommend, I tell the person requesting the recommendation to ring the Financial Planning Association (FPA). The FPA then tells them to ring two or three dealers. The two or three dealers then either get them to ring an adviser, or have an adviser ring them. And then there is no guarantee that they will have been referred to a CFP or even an FPA member. So I don’t consider this a real option.

But, why should I even recommend a CFP? Are all CFPs equal? Do they all have the same competence? Really what I am asking is — can any client go to any CFP or, for that matter, any adviser? Do CFPs or advisers want any and all clients? To me the answer is ‘no’ and ‘no’.

Which gets me back to why I dread the question — can you recommend a financial planner? How do you select one or more? Well, if the FPA’s cumbersome referral process is not the way, what other ways are there. One answer is David Child’s adviser rating service.

But what I don’t know is how the rating system works, how many advisers are rated or how the advisers are monitored on an ongoing basis. So I don’t consider this a real option either.

Many financial institutions provide a referral service on their Web site, even some of those that do not have tied distribution. But how does the referral work? Is it based on geography, support for the institution or what? Obviously, I don’t consider this an option either.

Some might say, that I should recommend independent financial planners. I have two problems with this.

Firstly, I’m not quite sure what is meant by independence. Are we talking about ownership or the quality of the advice? Some of the most competent advisers in the industry are aligned to institutions.

Secondly, I am concerned about support and liability. A number of the large institutions provide resources that only they could provide, especially in the private banking area. And, if something does go wrong, they have deep pockets.

What options are left? Should I say, ‘I can’t help you?’ I do sometimes, but that is not really a satisfactory answer. As there is no easy or obvious industry-accepted way to refer, you are then left with asking questions and seeing if any of the advisers you know are suitable. But this is really not a proper way to do it either.

You have to ask questions, because people do have different needs and all advisers (even CFPs) can’t satisfy all needs and a lot of advisers do not accept all clients. But how much can you ask the client before it might become embarrassing, or before the Australian Securities and Investments Commission (ASIC) regards it as more than a mere referral.

A broad range of people have asked me to recommend an adviser. They vary from small business people, public servants, chief executives of major companies, to young people wanting to become investors. Usually I ask why they are seeking advice. I then try to get an understanding of how complex their situation is.

I don’t believe there is one adviser who can properly and competently cover all aspects of financial planning. I also know there are advisers who are very selective about which clients they will accept — and they’re usually the better ones.

Which leads me to ask if this problem of referrals is unique to our industry? Is there the same problem in law, accounting, medicine, dentistry, engineering, architecture and so forth? There is, but as a lot of those disciplines specialise, they either have a general practitioner level or identify what their specialty is. Even for those that don’t, it is usually easy to pick who does what. Also, many of these professionals will refer you on if they believe they cannot help you.

How many advisers would refer someone on if they knew they were out of their depth? Even if they wanted to, there is no mechanism for them to do that easily.

The Financial Services Reform Act (FSRA) has further exacerbated the problem, as now the one licence covers more types of advisers. In the past, if one had a dealer’s licence or a proper authority, it was reasonable to assume the person was giving advice on investments. However, now with an Australian Financial Services (AFS) licence, what is the person doing? Are they handling investments, risk insurance, general insurance, stockbroking — or just travel insurance?

However, the FSR licence does detail what the licensee can provide advice on and deal in. The categories are broad, and they do not cover a lot of the activities that an adviser is involved in (for example, technical advice) but at least they are a start.

It is time the industry looked at the possibility of structuring financial planning into a generalist-cum-specialist type arrangement, based on the FSR licence. However, this would have to be at the individual adviser level because, even within a dealer group, advisers’ experience, expertise and knowledge vary greatly. This could be done by accreditation after some particular training or experience criteria. My recollection is that originally the CFP was to be a generalist designation, with specialist designations to follow.

How much easier would it be to recommend an adviser if financial planners were structured as generalists and specialists? You could refer the person to the generalist if you didn’t know the person very well, comfortable (hopefully) in the thought that the generalist would refer the person on if they needed specialist help.

Then, all we would need is a directory. Now, there’s a business opportunity for someone.