As South African investments have delivered very little growth for investors over the last few years, I have been getting more questions from readers about the fees they are paying financial advisors and whether these fees are justified.
Interestingly, when I give talks to financial advisors, they are also asking how to justify their fees to clients who are asking them to explain the value they provide.
The main themes are: do advisors add value, what is a fair way to pay them, and how do you know if you are with a good advisor?
It is always tricky writing articles like this because I have a few different interests in the world of money management.
Firstly, I wrote a book helping people to become their own financial advisors.
I also teach financial planners to be better advisors, I am a financial planner and I spend a fair amount of time commentating in the media about money matters.
You could argue that I am very biased or very balanced – you decide!
Here are some good questions to ask your current or potential advisor.
• What are your qualifications, and how many years have you been advising people on their money?
The financial planning world has certainly become much more complex, and I don’t think it is appropriate for inexperienced advisors to assist clients unless they have an appropriate qualification, like the CERTIFIED FINANCIAL PLANNER® designation. You will often see this abbreviated as CFP®, which means the person has written post-graduate level exams on financial planning, has the requisite experience and continues to spend a minimum of 30 hours per year on ongoing education that is verified and accredited.
I can understand that more experienced, older advisors might not have a CFP® designation, but one would expect them to have a minimum of 10 years’ experience.
• Can you only recommend products from one company or from a range?
Typically, insurance agents can only sell products from their employer, but often call themselves financial advisors. While there is nothing wrong with insurance agents, it is important to note the limitations on what products they can offer you.
An independent advisor has no restrictions on what products can be offered to you, but it is impossible for anyone to be an expert on all the financial products offered by all the companies in South Africa.
• Will you be paid more to recommend some products over others?
This is a big problem in the industry and can lead to compromised advice.
• How do you charge for your services? Do you have different fee options? Is there a maximum amount that you charge?
High quality advisors are always happy to explain exactly how they charge and what they will earn. More importantly, they should be happy to offer you different types of fee models so that you can select what works for you.
In some cases, you might only need an hour of advice, or if you have very complicated finances, you might want a more comprehensive plan.
For wealthier people, it is important to note that advisors should limit their maximum fees. Unlimited fees don’t make sense.
• What are my total fees? Including advice, admin, fund manager etc.
Some insurance companies sell you life cover, investments and medical aids all in one package, which makes it very hard to know exactly what you are paying.
I prefer simple, transparent fees, and I don’t believe that a single, packed product works out better for most clients.
• Are there upfront fees?
I find it hard to understand how advisors can charge upfront fees on investments. They should rather charge you a fixed rand amount for initial advice and an ongoing fee for ongoing advice. I would be wary of advisors who want to charge you an initial percentage fee for investments.
• How much money can I expect to lose in a big stock market crash?
Every advisor who deals with investments should explain how much you can expect to lose in bad times. This is much more relevant to you than any promise of growth, as investors make more bad decisions after they have lost money than when they have made money.
• Will any of my money be invested in index portfolios?
Indexed investments (e.g. Satrix, Vanguard, CoreShares) are typically much lower cost than normal investments. Many fund managers struggle to beat the index and they charge a lot more, so indexing should be part of most investors’ portfolios.
I really like the idea of combining an index investment with an active investment to get the best of both worlds.
• On what basis do you select funds and fund managers?
Some financial advisors believe that their key advantage over their peers is their magical ability to choose better fund managers than everyone else. This is sadly not true!
It is important to understand how and why certain funds and managers are chosen by your advisor, if they can’t explain their methodology to you in an easy and understandable manner, find another advisor!
• Do advisors add value?
Good advisors can add great value to investors. They help to coach you to make the right financial decisions in difficult times. Vanguard is one of the world’s most respected index providers and their research on investments is highly rated. Here is a study by them that explains the value of good advisors: https://www.vanguard.com/pdf/ISGAA.pdf
Warren Ingram is a Wealth Manager at Galileo Capital. Twitter: @warreningram
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