In much the same way you’d enlist the help and advice of a professional when dealing with issues of a medical or legal nature, financial planning generally requires the same type of specialised input from a financial adviser. Calculations around life expectancy, replacement ratios and drawdowns are often complicated, and as a consumer you might not be aware of all the financial products on offer, which is why the help of a professional can be invaluable.
Valuable guidance
Gareth Stokes of the Financial Intermediaries Association of Southern Africa (FIA) maintains that financial advisers are important given the complex nature of investment and risk products. This makes it “difficult for a consumer to structure a product portfolio that meets all of their needs. A good financial adviser will conduct a comprehensive overview of your financial needs and assist in structuring a portfolio of investment and risk products that matches your income and life stage. A financial adviser can offer valuable guidance when critical financial decisions must be taken and often dissuades clients from making ill-thought-out decisions with costly consequences.”
Take the time to find a financial adviser that you can trust; this will increase the odds of it becoming a long-term relationship. “Trust is the most important aspect in the client-adviser relationship,” says Stokes. “Trust is built on a number of character traits, including honesty, integrity, competence and a commitment to acting in clients’ best interests. Trust sustains the business relationship between the financial adviser and the client.”
Stokes also says that building a relationship over time makes sense, especially where a comprehensive portfolio of financial products is concerned. And, given that your financial adviser will have the knowledge and context of your situation over time, they’ll be well-placed to conduct a “thorough review of your financial product portfolio on an annual basis”. This ensures the best chance of being able to identify shortcomings and implement the “necessary corrective actions”.
Regulated industry
There are some checks to ensure you find the right financial adviser. The industry is regulated and financial advisers, and the firms they work for, need to be registered members of the Financial Services Board (FSB). Many financial advisers are also members of the industry’s trade association, the Financial Intermediaries Association of South Africa (FIA). Stokes says it is also helpful if your financial adviser has a professional qualification. “The Financial Planning Institute (FPI) is an accreditation standards body for financial services professionals, and issues the Certified Financial Planner (CFP®) accreditation in South Africa.”
It may also be useful to ask any potential adviser some basic questions in an initial meeting. Stokes says these questions could include: “What are your qualifications?”, “What is your value proposition?”, and “What value do you offer in return for the fees you charge?”
“Most practices will provide this information – and more – in their introductory letter to clients,” he points out. Financial advisers would also typically be able to provide detailed answers to questions about their investment philosophy during the financial needs analysis process, and subsequent structuring of an appropriate investment portfolio.
Fees and commission
You should expect to pay your financial adviser for their professional advice.
“Where the financial adviser is remunerated by commission, the maximum commission is prescribed by law,” says the FPI’s David Kopp, “however, some financial advisers charge a fee for their services. This fee could be a monthly retainer, a fixed amount for services or a percentage of your investment.”
Stokes says: “There has been a growing trend towards financial advice practices that base their businesses on a combined fee and commission model with recent legislation encouraging them to focus more on fees than commissions.”
There is no standard fee for financial advice, given the vast amount of variables and uniqueness of every person’s situation. The Retail Distribution Review (RDR), currently underway and being driven by the FSB, is focused on reforming the way financial products are sold, and it’s this review that has strongly encouraged fee-based remuneration.
Fees tend to fall into one of three areas: an initial planning fee (a consultation-based charge for planning), an implementation fee (a charge for work done to execute the agreed-upon plan) and an annual advice fee (a charge for the monitoring and review of a strategy and portfolio). The last of these is often overlooked, as financial planning is misconstrued as an event, not an ongoing, long-term process.
“But,” says Stokes, “how the financial adviser is remunerated is less important than the value that the financial adviser adds for what he or she charges.” A financial adviser should be able to demonstrate the value they have added in return for the fee they have charged.