How to choose an adviser

2011-04-09 08:43

Despite the fact that I worked in the financial industry and have been a personal finance journalist for seven years, I still have a financial adviser. I don’t talk to him about products, I know those probably better than most, but I need him as a sounding board.

The time I spend with him, once a year, is the time that I am forced to put aside all there is and to look at my financial plan. I analyse what I have achieved, if there are any shortfalls, and discuss any life changes that I need to consider.

When choosing a financial adviser, you need to first understand what you want from the relationship. Is it someone who sells you a once-off product and disappears into the sunset? Or is it someone who will help you put together a financial plan for your future?

With so many products now being sold through the internet or the call centres, the traditional life broker is starting to lose relevance.

If you want life cover or funeral cover, you can buy it online. You can read articles like those in City Press and make simple investment decisions on your own.

But a good financial adviser is far more than a product salesperson. They are effectively a life coach. They are the people who sit down with you and look at your finances holistically.

They want to understand where you are now, and what you need to be doing to reach your goals.

The investment decisions that an adviser will help you make, like saving for your child’s education, not cashing in your pension fund and how much you need to be saving for your dreams, will have a material effect on your financial future.

This is the type of advice that is worth paying for.

Understand what you are paying for:
Commission paid to financial advisers is a hotly debated topic. Commissions have come under the spotlight mostly because they are not transparent.

The consumer does not know how much the adviser is being paid and therefore cannot gauge whether or not the product is being recommended because it is the right product or because commissions paid are higher.

The Financial Advisory and Intermediary Services (Fais) Act requires that commissions be transparent.

You have a right to ask how much commission the adviser is receiving and to ask what services the adviser will be providing for that fee.

If an adviser is taking an ongoing fee, either as a yearly fee or a re-occurring commission on your monthly investment, he or she is obliged to continue to provide you with a service.

Apart from regular statements and updates, this must include a meeting held once a year to ensure that your financial plan is working for you.

If they are not delivering, you are fully entitled to discontinue your fees.

For example, I recently received a complaint from a reader about the fact that he had taken out an investment product through his bank and now every time he adds to it, 4% is deducted and paid to the adviser, yet he has never spoken or heard from the adviser ever since he entered into an agreement. The bank’s response was that the reader was fully entitled to discontinue the commission payment!

Advisers have to provide ongoing advice to receive an ongoing commission.

Commission vs fees
There is a move internationally towards fee-based practices. In this case, the adviser would be remunerated professionally on an hourly basis for their advice rather than receiving commission on products sold.

In South Africa, the practice is still in its infancy. However, there are some advisory businesses that charge by the hour.

Personally this is the model that I prefer, however, the model does not necessarily work for all as some people prefer to pay for the advice as part of the fees on the product.

But what this does is focus your mind on what you are paying for.

Covering the basics: interview your adviser before you sign on the bottom line

1 Are you registered?
Advisers in South Africa have to be licensed with the Financial Services Board (FSB), so ask to see a licence. Ideally, your adviser should have a Certified Financial Planner qualification indicating that he or she has qualified as a financial adviser in accordance with the code of conduct of the Financial Planning Institute.

Sometimes you will find advisers with 20 years’ experience and good references who aren’t certified – that’s okay, provided they have a demonstrably solid track record.

2 Are you Fais accredited?
The Financial Advisory and Intermediary Services (Fais) Act protects you from improper conduct. Ask what products, solutions and services your adviser will be able to provide you with and, if the adviser is independent, ask to see a list of the companies he or she works with.

If none of the names rings a bell, proceed with caution. You should only invest in products that are registered with the FSB.

3 What are you qualified to sell?
Your adviser may be qualified to sell a standard funeral plan but not an investment product, for example. Be sure that your adviser is clear about which products he or she is qualified and able to provide advice on.

Not every adviser can be expected to know everything – but do find out what your adviser’s limitations are upfront. And does he or she have access to specialist support that you might need, such as tax planning?

4 Can I have a ‘no obligation’ consultation?
This helps you to assess an adviser’s approach and opinions. Be wary of someone who uses too much jargon; a person who rushes you and who makes assumptions about your needs. You want an adviser that asks you a lot of questions in order to understand you.

5 How often would we meet?
Your financial needs change often – if you marry; are retrenched or promoted; you have a child; buy a property and so on. You should meet at least once a year to review your personal circumstances and finances, to stay on track with your financial plan.

Make sure you receive your monthly, quarterly, biannual or other statements so that you can track where your money is going to.

6 Do you follow the six-step process?
Most advisers will follow the Financial Planner Institute’s six-step process that identifies a client’s current financial knowledge and experience, and current financial situation.

This is an internationally-recognised process that helps a client to put together a sound financial plan.

7 Will you conduct a needs analysis?
According to Hennie Franzsen of FNB Wealth, this is critical in order to establish your lifestyle goals and wishes.

A good financial planner will ask you the right questions in order to get enough information to assist you with your plan. For example, is your job secure? Do you have any medical problems? Do you have a will? Are you in debt? Are you planning to buy a house? A needs analysis will take into account your age, income, how many dependants you have and what your ultimate goals are.

8 What do you charge?
Advisers may charge fees for time and commission (earned by investing with certain providers on your behalf). Fees vary but your adviser is obliged, by law, to be completely transparent about how fees are earned.

“At FNB, clients are charged an advice fee based on the scope of the engagement, quantum of the assets and degree of skill and expertise required.

“All financial products have an administration fee, asset management fee and advice fee attached to them.

“Clients should ask how these fees are being charged,” says Franzsen.

» Once everything has been agreed upon, get all the information in writing and make sure you’re happy with
it before you sign off. Never sign a blank form or blank piece of paper.

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