Confessions of an Estate Planner: Part 3 An Uninsured Advisor

Part II Post Script:

Before discussing the advisors you will be aware that the since Part II was published there has been a lot of public debate about the banks taking advantage of consumers. The Government has beefed up ASIC with $120,000,000.00 to go towards their watchdog functions. The Labor Opposition is calling for a Royal Commission. 

And the CBA is in the news again. The Financial Sector Union is alleging that CBA staff are being put under pressure to push products:-

Click here to read "CBA staff pressured to push products, says Finance Sector Union" 

After a while it all starts sounding the same.

Another level of risk - An uninsured advisor 

Part III

It is likely that apart from Warren down at the RSL you will get estate planning, wealth/debt management and retirement planning advice (solicited and unsolicited) from Accountants, Financial Planners, Lawyers, Banks, Superannuation Funds, the Public Trustee/Curator and Professional Trustee Companies, Life Insurance Salesman, Mortgage Brokers and the like. 

I will identify their usual fields of expertise and specific focuses and, where appropriate, the things they should not be doing. 

There are many excellent, reputable and affordable advisors out there.  This is written with a view to helping you find the best advisors in all fields (getting the best out of them).

Minimum Legal Requirements 

The minimum legal requirements to give Investment, Tax and Legal Advice are set out below.  

Legal Advice

State Legal Profession Acts provide that a person must not engage in legal practice unless they are legally admitted to the legal profession and hold a current practising certificate. 

It is illegal to charge fees for anything done in contravention of these laws.

Investment Advice

For someone to be able to provide you with advice on a financial product or deal in financial products they must hold an Australian Financial Services License (or be a representative of someone who holds a license). 

They must also meet the training standards set out ASIC Regulatory Guideline 146 (RG146).

RG146 compliance can be obtained after completing a 12 week online course at a cost between $1,500.00 and $3,000.00

It is illegal to provide financial product advice or deal in financial products without having attained RG146 compliance.

Tax Advice

Tax advice can only be given by someone who is registered with the Australian Taxation Office as a Tax or BAS Agent. You can check by searching the Tax Practitioners Board Website which contains registration details of registered and de-registered BAS and Tax (financial) advisors. Financial advisors who provide tax (financial) advice services had until 31 December 2015 to register.

It is illegal to provide tax advice without being registered with the Tax Practitioners Board.

The Unusual Suspects

The Lawyer

“Lawyer”  a person whose job is to guide and assist people in matters relating to the law.

An Estate Planning Lawyer, advises on and prepares legal documents such as Wills, Enduring Powers of Attorney, Advance Health Directives, Trust Deeds for Family Discretionary Trusts and Self Managed Super Funds as well as SMSF Pension Documents and Binding Death Benefit Directions (and variations to such documents).  

Estate Planning Lawyers advise on the various legal structures forming part of your estate as well as the affect of external events (with a view to your assets being protected from various forms of attack). 

In the Estate Planning context, their job is to build fire walls around your assets to protect them from a variety of (usually) unlikely but possible calamities. They should also be aware of the tax effect of such structures when advising you and know when to make sure that you receive specific tax advice. Doing their job properly they will have in mind protecting your assets whilst you are alive as well as securing them for your loved ones when you have departed.

A Lawyer advising you about Estate Planning matters should be fully versed in at least the following:-

• State Succession Acts, Partnership Acts, Property Law Acts, Land Title Acts, Supreme Court Rules, Powers of Attorney Acts, Trust Acts and Duties Acts;
• Commonwealth Family Law Act, Superannuation Laws (the Superannuation Industry (Supervision) Act and Regulations) and Tax Law (including CGT, GST and Income Tax);
• The Common Law as it applies to Enduring Powers of Attorney, Wills, Trusts and Estates;
• Trust and Estate Litigation (including Family Provision Applications, Construction and Administration actions) and Mediation.

 I will refer to these laws for convenience sake as “Estate Planning Laws”.

They charge fees based on hourly rates.

To become a Lawyer you must obtain a Law Degree (which takes 4 years full time) and then complete obtain a Graduate Diploma of Legal Practice (which takes 1 year full time). 

Lawyers do not, generally, provide investment advice. If they do warning bells should start ringing.  There are many examples of mortgage based investment schemes promoted by lawyers (that have failed disastrously) amongst other schemes.  If you live on the Gold Coast you will be aware of what I am referring to. It should be of no surprise to you to know that the vast majority of professional indemnity claims against lawyers relate to investment schemes.

Most lawyers do not provide specific tax advice. There are specialist tax lawyers who provide tax advice much like a chartered accountant would. They do so very well and have the proper qualifications and legal right to do so. 

Financial Planner

“Financial Planner” is a qualified investment professional who helps individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve that client's goals.

Financial Planners prepare financial plans and advise on debt management and how to fund retirement incomes through investments in a range of financial products including margin lending (much like a stockbroker) but usually only in managed funds. 

They also sell life insurance.

Presently, there are no formal requirements (such as a Bachelors Degree or other training) other than holding the necessary RG146. 

A financial planner who offers a complete financial planning service to clients would need to be compliant in all specialist knowledge areas forming part of the RG146 training course. They must also comply with the Future of Financial Advice reforms. The key reforms are:-

• Best Interest Duty (they must always act in a client’s interest and follow prescribed steps when providing personal financial advice);
• Conflicted Remuneration (monetary and non-monetary benefits which could influence their advice to you or choice of a financial product and some fees altogether are banned);
• Annual Fee Disclosure Statement (must be given where there is a ongoing fee arrangement).

There is no requirement to have any training in Estate Planning Law or Taxation Law in order to obtain an RG146.

If your Financial Planner has a Tertiary Qualification you should inquire to see what specialist topics were studied in obtaining it.

The Accountant

“Accountant” One that keeps, audits, and inspects the financial records of individuals or business concerns and prepares financial and tax reports.

Accountants prepare accounts and tax returns and advise on tax. They charge fees based on hourly rates for their services. 

To become a Chartered Accountant, the Chartered Accountants Program must be completed which includes study of the Graduate Diploma in Chartered Accounting (GradDipCA) and three years of practical experience. Entry to the Program is available for graduates who hold an accounting degree (most likely a Commerce Degree which usually takes 3 years full time to complete). 

The areas covered by the Graduate Diploma are:-

“Taxation, Audit and Assurance, Financial Accounting & Reporting, Management Accounting & Applied Finance and Capstone Module.”

The requirements to become a Certified Practising Accountant (CPA) are similar (but generally less onerous). 

Most Commerce Degrees cover core subjects such as Accounting, Actuarial Studies, Economics, Finance, Management and Marketing.

The study programmes for both Chartered Accountants and CPAs do not include topics on Investment Advice, Trust and Estates law or Estate Planning. 

Elective law and investment subjects may be studied.

Some Accountants promote to their clients investments in managed property trusts. Proceed with caution and ask to see their RG146 and professional indemnity insurance policy to see if they are covered to provide you with such advice. More of these schemes have failed than have succeeded. 

Accountants who do not hold an RG146 are not allowed to and should not provide investment advice or deal in financial products or provide you with advice about Superannuation, SMSFs or Pensions.

Accountants, unless trained and admitted as a lawyer as well, are not qualified or licensed to provide advice about Estate Planning Laws.

The Stock Broker

“Stockbroker” a broker who buys and sells securities on a stock exchange on behalf of clients.

Stockbrokers advise on the purchase and sale of shares, managed funds and other derivative products as well as margin lending. They are required to be RG146 compliant. There are no formal requirements (such as a Bachelors Degree or other training) other than holding an RG146 to operate as Stock Broker.

Their fees are commission based. 

The Real Estate Agent

Real Estate Agent - a person with a state/provincial license to represent a buyer or a seller in a real estate transaction in exchange for commission.

Real Estate Agents act as brokers in the sale and purchase of real property and businesses. They also act in leasing transactions. Their fees are commission based. They must enter into an Agency (commission) Agreement in writing with you.

They are not required to be RG146 compliant as real property is not considered to be a financial product. They are not required to have any formally education or training but must become registered as a real estate agent under State Consumer Legislation.

They will generally run away bravely at the thought of providing any legal or tax advice but some consider themselves GST experts. Your property or tax lawyer should advise you about GST as it applies to sale contracts and leases.

The Insurance Broker

Insurance Broker - a person or company registered as an adviser on matters of insurance and as an arranger of insurance cover with an insurer on behalf of a client.

Insurance brokers sell all forms of insurance including life insurance. They are required to be licensed under the Financial Services Reform Act 2001 via the Australian Securities and Investment Commission.

Fees are commission based (paid by the insurance company but ultimately factored into the premiums paid). 

There are no formal requirements (such as a Bachelors Degree or other training) needed to be able to lawfully operate.

If advice and products are to be sold relating to Life Insurance, Total & Permanent Disability, Trauma, and Income Protection are to be given RG 146 certification must be obtained.

The Bank

“Bank” a financial establishment that uses money deposited by customers for investment, pays it out when required, makes loans at interest, and exchanges currency.

Banks are incredibly large financial institutions that make millions of dollars in profit annually. They answer to their shareholders who are looking for dividend income.

As a means of not losing customers to other financial institutions (as well as not wanting to see commissions paid to other Banks) the Banks have set up huge Financial Planning divisions that have effectively farmed their extensive lists of banking customers. 

The raw numbers are worrying. The banks have the largest 'salesforce' of financial advisers and their grip on the sector continues to grow through acquisition and expansion. They establish entities to hold the necessary Australian Financial Services License (ASFL) and away they go.

They are also very active in selling margin lending products (which allows them two bites at the cherry i.e. commissions on the products and interest and fees on the margin loans). Margin lending involves borrowing money to fund the purchase of financial products. It can be a very useful strategy to the right person, at the right time in the right market.  Recent disasters (like Storm) have resulted in margin lending strategies not being embarked upon so bravely as once was the case.

Professional Trustees

Professional Trustee  - a person or institution hired to administer a personal trust. The various duties of a trustee include following the instructions included in the trust, managing and investing the assets within it, and distributing money and assets among beneficiaries as stipulated.

Professional Trustee Companies and the State Government Public Curators or Public Trustees offer a varying range of Financial Planning services. As a matter of course you should investigate the background of the individual advising you. 

It is prudent to ask these institutions (just like the Banks) about their policies on employee relocation and position change to prevent malfeasance. Some Rogue Traders are fully entrenched in large financial institutions (including Professional Trustee Companies) and weeding them out can be difficult.  

As with any advisor you should inquire about the range of investment products that they are able to recommend to you. With many Trustee styled organisations the range will be surprisingly limited. 

Similarly if Trustee services are offered you should receive a complete disclosure of all commission and fees to be charged. They are usually frightening.

The State Legal Profession Acts usually allow them to perform some limited legal work (like estate administration and will preparation). If they are providing financial advice or dealing in a financial product the advisor must be RG146 compliant.

Professional Indemnity Insurance

If you engage a professional to do something for you and they muck it up horribly for you (i.e. they give you negligent advice that causes you to suffer loss) you have rights at common law to sue them for damages (to put you back in the position you should have been in but for the negligent advice).

All professionals should hold professional indemnity insurance. For some professionals (like lawyers) there are compulsory professional indemnity schemes.

It is not a rude question to ask your advisor about their insurance (level of it and things that are not covered) as this ultimately affects you. 

If your advisor is not insured you may win your court case only to find the defendant does not has the financial means to satisfy any judgment you obtain.

It is also not a rude question to ask your advisor about their compliance with minimum legal requirements to advise you about a certain matter. 

Why? 

You may be aware that insurance companies (usually owned by a bank) always do their utmost not to pay out a claim. The terms of your advisors policies will almost certainly say that if the advisor is operating illegally by providing advice outside of the minimum legal requirements (for example an accountant providing advice about trust law or superannuation laws, a financial advisor providing advice about Estate Planning Laws or a Lawyer providing financial advice they will gleefully refuse to indemnify your advisor.)

You will find that you have been left in the lurch.

Intuition

The most important quality in your advisor (in any field) is “intuition”. 

When things look right some advisors have a sixth sense that makes them dig deeper or ask extra questions or press you on difficult matters you do not want to talk about.

An intuitive advisor will ask more of the right questions when something they are told does quite stack up or sounds too good to be true. For instance, a very risk tax strategy, an investment in something no one has ever heard of or a legal opinion that defies logic.

Intuition is not a quality you will find in:-

• any online estate planning, financial planning service or stock-brocking service;
• in someone you have not actually met in person;
• in financial or legal products purchased for you from a bulk service provider;

Separation of Powers

You are most certainly reducing your risk by choosing separate Investment, Tax Legal Advisors. 

Investments should not solely be for tax deductions like the schemes that were once in vogue in forestry and the film industry. And negative gearing needs a very close friend called a rising market to actually be worthwhile.

Tax should, in my view, always be a secondary consideration. The primary one being asset protection, wealth maximisation and making sure your desired beneficiaries actually get what you want them to get.

The advisor you choose should know more about how to invest, manage and save you tax and protect your hard earned than you do. 

You pay them a lot of money to know more than you.

What to do?

It goes without saying that you should invest a lot of time in researching and choosing these advisors (who have your future and your families future in their hands) by:-

• contacting the respective professional bodies for referrals (as well as checking if the person you want to choose has not been involved in any disciplinary action);
• asking around your community (and people you trust) for referrals (generally the names of the good guys will keep coming up).
• ask the advisors for their CVs and details of their relevant experience (make sure they are RG 146 compliant) together with the names of other clients (they may not reveal this but it is worth asking);
• check out your advisors ASFL provider and their track record;
• remembering that, in my view, relevant experience over an extended period of time is always more important that than the background education someone has received (i.e. someone working at the coalface will be of much more use to you than someone who has only completed a course of study);
• interview several advisors so that you can get a feeling for them and choose the one that makes you feel most comfortable (this will be the person you feel is not trying to ram something down your throat and is seemingly not bothered if you sign up with them or not);
• ask for fee disclosures and the scope of work that will be performed for you (i.e. you want to know exactly what you are going to be charged and what they are going to do for you).

Be careful not to be taken in by slick advertising campaigns, promises of endless riches and a joyful retirement. Do not be afraid to ask the smiling person sporting the nice smelling cologne and fancy clothes (showing you a multitude of upward moving graphs on large computer screens in a very fancy rented office) the hard questions.

If there is a reluctance, avoidance (or even a momentary hesitation) or refusal to answer your questions start digging deeper.

You should be ready to pay for the right advice. The experienced professionals that are out there are very busy people for a reason i.e. they know what they are doing, they have a lot of happy clients and naturally, are, in high demand. 

The tragedy for many is that they spend small fortunes with the wrong advisors. 

They find this out when it is too late.

And if you were really smart you might obtain the RG146 Compliance yourself. I did (but have no plans to do anything other than provide legal advice).

I am not suggesting at all that you become an advisor (or worse still that you advise yourself). If you complete the course you will have a much better understanding of what your Investment Advisor is recommending to you and the environment they (and you) are operating in. It will also help get the very best out of them.

It could be the best investment you ever make. It would also not be a bad idea to spend as much as possible on your medical advisors. Find the best and pay them whatever they want.

Some Golden Rules

•  Lawyers who don’t specialise in Estate Planning Laws should not do wills  - to do Estate Planning properly you must have substantial experience in and exposure to all facets of Estate Litigation and work on a daily basis with the Estate Planning Laws.
•  Accountants should not advise on Trusts and Estates or Investments. They should only advise on Tax.
•  Financial Planners should not advise on Tax or Trusts or Wills or Estates. They should only advise on Investments and Life Insurance.
•  Lawyers should not advise on Investments or Tax (but they should have a solid working knowledge of Tax Law to be able to identify potential tax issues).
•  If something is too good to be true it is probably too good to be true.

In Part IV I will focus on Estate Litigation. So you have amassed a fortune. 

Here's how to lose it.