Know what to look for
When you ask someone to fix your leaky skylight, you only have to wait until the next downpour to know if they did a good job. With financial advice it’s not so simple, as the results of good or bad advice can take years to play out.
So what should you be looking for from your adviser?
While financial advisers may differ in the way they work, they do operate in a highly regulated industry. That means there are certain guidelines they should be following when they provide financial advice,such as acting in the best interests of the client.
In addition, financial advisers are governed by the Australian Securities & Investments Commission (ASIC) which regulates financial products such as insurance and superannuation, and the Australian Prudential Regulation Authority (APRA) which monitors the safety and soundness of financial institutions when it comes to meeting their financial commitments.
Here are a couple of case studies, summarised from a report by ASIC^, that will give you an idea of what good advice and poor advice might look like.
Indira (54) and Sandeep (50) have two children aged 11 and 7. They earn $250,000 p.a. and $100,000 p.a. respectively, jointly own a home valued at $1.8 million (with a $580,000 mortgage) and have a combined superannuation balance of $120,000 with no other savings. Indira contacted an adviser looking to cover her debts and provide income to her family in the event of sickness, accident or death.
What the adviser recommended
The adviser determined Indira’s primary objectives were to cover her income, reduce debt, cover education costs for her children until age 24, and provide replacement income of $50,000 per annum for Sandeep for 20 years.
The adviser compared four insurers and recommended Indira take out:
- Life insurance of $2 million and TPD cover of $1 million for any occupation (inside superannuation)
- Stand-alone TPD cover of $1 million (own occupation) outside superannuation
- $500,000 of trauma cover in her own name
- Income protection of $15,625 per month, with a 30-day waiting period and a benefit payment period to age 65
- The premium was stepped and the total payable in year 1 was $23,305
Why this is good advice
- Indira’s adviser took the time to find out what Indira really wanted from insurance, documenting those goals and using them as the basis for the recommended sums insured.
- The adviser also compared four different insurers before making a recommendation, and explained to Indira that her income protection premiums are tax-deductible.
Michelle is 50, earns $56,800p.a. and jointly owns a home valued at $800,000 and an investment property valued at $500,000 (with mortgages totalling $600,000). She has a cash account of $10,000 and $80,000 in superannuation but no other savings. Michelle contacted her adviser because she wanted her insurance to be paid from super and not from her personal cash flow.
What the adviser recommended
Here’s a snapshot of Michelle’s insurance cover before and after the adviser’s recommendation:
Michelle’s level of cover has increased substantially, particularly for trauma cover, and she now has income protection. However, Michelle’s premiums have increased to the point where:
- Michelle’s premium paid from super ($5,353 p.a.) exceeded her superannuation guarantee contributions of $5,254 p.a.
- Michelle’s premium for trauma cover ($5,419), which she pays out of her personal cash flow, represents 9.5% of her gross income.
Why this is poor advice
- Firstly, this advice ignores Michelle’s original objective that she wanted her insurance to be paid from super, not her personal cash flow.
- Secondly, while trauma cover generally can’t be paid from super, Michelle’s high level of trauma cover means her annual premium is a high percentage of her income – which is likely to make affordability an issue in the future.
- Thirdly, Michelle’s adviser didn’t ask about her partner, even though her assets were jointly owned. Without this information, the adviser can’t demonstrate why the insurance recommendations are appropriate and in Michelle’s best interests.
- Finally, Michelle’s adviser didn’t consider retaining her existing life insurance cover in her superannuation, even though her premium was cost-effective.
^ Report 413: Review of retail life insurance advice, Australian Securities &Investments Commission – October 2014
The case studies are for illustrative purposes only.
While OnePath Life has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, OnePath Life does not accept any responsibility or liability arising from your use of this information.