4 P's useful when selecting the right financial adviser
With interest rates at their lowest levels in living memory and a government that seems determined to try to break New Zealanders’ love affair with property, I have noticed a significant increase in the number of people shopping for financial advice. As a profession, it is a great opportunity to help more New Zealanders, but from a consumer’s perspective it creates some challenges.
The decision about who to work with can be confusing and difficult. The old truism that “you don’t know what you don’t know” comes to mind.
Some years ago a research house developed a framework to allow comparisons to be made between investments. Its rationale was that using a consistent framework helps remove the biases that naturally creep into our judgement, especially when it comes to assessing people.
Although it was designed to help compare specific investments, I believe that, with some modifications, the framework can be helpful when comparing financial advisers and their offerings.
Perhaps best of all, it has a catchy name — the four Ps. The first ‘P’ refers to people. The adviser you meet is generally the starting point: what qualifications do they have and how experienced are they? Do they work in isolation or as part of a team? How are they remunerated? Are they paid a salary, or do they work on a commission basis? What staff succession plans are in place?
In a wider context the term ‘people’ also refers to the organisation. What is the focus of the organisation the adviser works within? Is its main business financial advice or is it potentially distracted or conflicted by other business areas? Is it New Zealand-owned and how large or small is it? Can it point to a track record of helping clients in a range of market conditions and through a number of business cycles?
The second ‘P’ refers to process. What advice process will the organisation take you through? Will it help you define your objectives? How does it explain risk in the context of the investments it recommends? Does it consider who the most appropriate owner might be? How comprehensive is its processes to protect your funds against fraud and other operational risks? What are the tax implications of the advice it offers? What are its views around referring to other specialists (e.g. accountants and lawyers)? How will you know if the financial planning process is helping you achieve your goals? Does it use any computer modelling?
The third ‘P’ stands for portfolio. What mix of investments is it recommending? Remember, it is the asset allocation that is the most important contributor to the return that you receive. How well diversified across asset classes and geographic regions of the world is the portfolio? Are any ethical considerations applied to the investments that are held? How frequently will the portfolio be rebalanced back to the agreed allocations? How much manager diversification is being offered? How are currency risks managed within the portfolio? What techniques are used to protect against so-called ‘black swan’ events — events which are impossible to predict but can have catastrophic implications?
The final ‘P’ stands for performance. In this category there is also a further consideration, price (in other words, costs). Why I always leave this comparator to last is because past performance is not a good predictor of future returns.
I believe that if you pay attention to getting the first three Ps right, then performance will take care of itself.
Remember, it is the return that you need to achieve your objectives that is the key.
Knowing what this figure is, rather than just chasing a ‘high’ return, is a critical part of the planning. In life we make many purchase decisions where we rationally understand that buying the cheapest is probably not a good idea; financial advice is no different.
This list is not exhaustive and there will of course be other considerations that will reflect your individual needs.
However, I recommend that the four Ps are a good starting point when deciding who is worthy of helping you make better financial decisions.
The decision about who to work with can be confusing and difficult. The old truism that “you don’t know what you don’t know” comes to mind.
Some years ago a research house developed a framework to allow comparisons to be made between investments. Its rationale was that using a consistent framework helps remove the biases that naturally creep into our judgement, especially when it comes to assessing people.
Although it was designed to help compare specific investments, I believe that, with some modifications, the framework can be helpful when comparing financial advisers and their offerings.
Perhaps best of all, it has a catchy name — the four Ps. The first ‘P’ refers to people. The adviser you meet is generally the starting point: what qualifications do they have and how experienced are they? Do they work in isolation or as part of a team? How are they remunerated? Are they paid a salary, or do they work on a commission basis? What staff succession plans are in place?
In a wider context the term ‘people’ also refers to the organisation. What is the focus of the organisation the adviser works within? Is its main business financial advice or is it potentially distracted or conflicted by other business areas? Is it New Zealand-owned and how large or small is it? Can it point to a track record of helping clients in a range of market conditions and through a number of business cycles?
The second ‘P’ refers to process. What advice process will the organisation take you through? Will it help you define your objectives? How does it explain risk in the context of the investments it recommends? Does it consider who the most appropriate owner might be? How comprehensive is its processes to protect your funds against fraud and other operational risks? What are the tax implications of the advice it offers? What are its views around referring to other specialists (e.g. accountants and lawyers)? How will you know if the financial planning process is helping you achieve your goals? Does it use any computer modelling?
The third ‘P’ stands for portfolio. What mix of investments is it recommending? Remember, it is the asset allocation that is the most important contributor to the return that you receive. How well diversified across asset classes and geographic regions of the world is the portfolio? Are any ethical considerations applied to the investments that are held? How frequently will the portfolio be rebalanced back to the agreed allocations? How much manager diversification is being offered? How are currency risks managed within the portfolio? What techniques are used to protect against so-called ‘black swan’ events — events which are impossible to predict but can have catastrophic implications?
The final ‘P’ stands for performance. In this category there is also a further consideration, price (in other words, costs). Why I always leave this comparator to last is because past performance is not a good predictor of future returns.
I believe that if you pay attention to getting the first three Ps right, then performance will take care of itself.
Remember, it is the return that you need to achieve your objectives that is the key.
Knowing what this figure is, rather than just chasing a ‘high’ return, is a critical part of the planning. In life we make many purchase decisions where we rationally understand that buying the cheapest is probably not a good idea; financial advice is no different.
This list is not exhaustive and there will of course be other considerations that will reflect your individual needs.
However, I recommend that the four Ps are a good starting point when deciding who is worthy of helping you make better financial decisions.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and a Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 10 May 2021, as '4 Ps useful when comparing advisers.'
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