Every Sunday morning when I flip open the newspapers, I always see articles or advertisements regarding “Financial Advisers”. Nowadays, just like the once prestigious word “Banker”, which is misused in the modern financial industry and misunderstood by many consumers, the term “Financial Advisers” has become widely misunderstood.

To some people, any sales person in the bank is a “Banker”, and anybody who is selling a financial product is a “Financial Adviser”.

Almost every Sunday, The Straits Times features a financially successful person in the “Me & My Money” section. When asked what has been your worst investment to-date, many of the persons featured answered that they have lost thousands of dollars in stocks or unit trusts. While these people are successful in their own business and career, it always makes me ponder why they seem to be unable to make right decisions in their financial products.

I blogged about how information overload may lead to unwise investment decisions. The crucial part of this process is probably due to the source of financial advice they receive from their “Financial Advisers”. Investors may not find the right financial advisers because they do not understand the differences between Exempted Financial Adviser,  Licensed Financial Adviser and Independent Financial Adviser, or the importance of the differences.

By asking two simple questions before engaging a person to provide financial services, you will be more likely to find a more suitable financial adviser for yourself, and thus reduce the chances of making improper financial decisions.

1. Are you a stock­bro­ker, insur­ance agent, relationship manager or independent financial adviser?

This question cuts through all the mar­ket­ing hype and makes the fact clear to you. No mat­ter what title (private wealth manager, financial consultant, personal banker, blah blah) or des­ig­na­tions (ChFC, CFA, CFP, etc) printed on the person’s name card, the answer will tell you how he or she earns a liv­ing — and what kind of prod­uct rec­om­men­da­tions you are likely to get from him.

No mat­ter what he might claim to the con­trary, a person who’s solely a bro­ker, a relationship manager or an insur­ance agent makes a liv­ing sell­ing invest­ment or insur­ance prod­ucts, or in another words, makes a living from having transactions.

It does not take a PHD holder to understand that a transaction-based model will inevitably affect the basis of the recommendations given.

2. How are you compensated?

In today’s context, many service providers hold mul­ti­ple licenses.You can walk into a bank to buy an insurance product, and a General Insurance Broker can sell you a Unit Trust.Your stock broker will send you “Tips of the day”, and your online fund providers will email you “Best Idea of the Week”. You probably have attended some FREE Seminars unleashing the best kept “Investment Secret”.

They all seem to be trying to help you.

But wait, didn’t you often hear that there is NO FREE LUNCH?

Have you asked how are they compensated? How do they cover the costs of:

• Putting up full page marketing campaign in the newspapers or magazines?
• Offer you FREE gifts when you sign up their products?
• Renting a hotel room to hold seminar with FREE buffet?

Did you really ever think those research reports flying into your mail box gives you genuine, unbiased and sound advice? Just read their disclaimers.

The title, Financial Adviser, is always mis-used in the industry and misunderstood by the consumers.

On 10 October 2002, the Financial Advisers Act came into effect and all financial institutions are expected to comply with all its requirements from 1 April 2003, so what can consumers expect from financial advisers and their representatives? What are the likely benefits to consumers, and what are the things that they should look out for?

There are three types of Financial Advisers:

• Exempted Financial Advisor
• Licensed Financial Advisor
• Independent Financial Advisor

Before consumers seek for financial planing advice, they should be clear about what kind of advisors they are dealing with and what are the implications. The players in Financial Advisor Market are

While Exempted Financial Advisors and Licensed Financial Adviso are allowed to distribute insurance and investment products without offering a choice. Only an Independent Financial Advisor (IFA) is required to offer choices and
provide fair and objective advice and recommendations.

The article, The ABCs of the Financial Advisers Act, published in SmartInvestor has more detailed discussion about this topic.