The value of a financial adviser

This was the quote with which Kenny Rabson, chief executive officer of Discovery Invest, opened the inaugural Discovery Investment Forum a few months back. According to the Fuhr Hughes team newsletter 2017, households who use a financial adviser have double the savings rate of those households who do not use a financial adviser, and their asset accumulation over 15 years is roughly four times more. “The newsletter as well as Vanguard says this translates to an extra return of 3% a year for households using an adviser, which is a strong endorsement of the importance of a financial adviser,” he said.

However, there are several factors when it comes to achieving the optimum investment outcomes for a client, including addressing a client’s savings behavior; persuading them to save the optimal amount to achieve their investment objectives; and the performance returns of the chosen investment vehicle.

Rabson used the example of a 40-year-old with 25 years to retirement, who expects to live a further 20 years in retirement; expects an investment return of 11% a year (after the deduction of fees); and saves just under 17% of their salary. “In that scenario, the client would be able to meet their target replacement ratio of 75% of final salary in retirement,” he said. However, Rabson notes that consumers and media have placed a strong focus on fees, exacerbated by poor market performance over the last few years.

“The impact of fees on the client’s lifestyle in retirement can be very significant. Our data shows that if fees are 0.5% higher, the replacement ratio drops to 68% and if fees are 1% higher, the replacement ratio drops to 61%,” he said. Another factor that comes into play is the low savings rate in South Africa, which at 15% is well below the international savings rate of 24% at its lowest level since 1972.

ASISA statistics show that the net flows into discretionary products have been low over the last two quarters, on the back of political uncertainty and highlighting consumer concerns around the economy. Rabson says if you assume that the 40-year-old saved only 12.3% of his salary, his replacement ratio in retirement would drop to 55%. If the savings contribution dropped to 7.9% of his salary, his replacement ratio would drop by more than 50%. “So, getting clients to continually invest for their retirement is a crucial aspect of the financial planner’s role,” he says.

The third factor is the issue of achieving the right performance. “It is a tricky time right now to be managing money for your clients, with an uncertain political environment around the world. It’s about maximizing these various factors to make sure that your client achieves the best outcome in retirement,” he says. Holistic advice is important to have the right product structures in place. Discovery offers exclusive products such as booster products to incentivize clients to contribute more and to make lump sum deposits when they are able to. “To answer to the questions around fees, Discovery offers 0% p.a. administration fees with model portfolios on all funds,” Rabson concluded.

^{Nothing contained herein should be construed as financial advice and is meant for information purposes only. Discovery Life Investment Services Pty (Ltd) branded as Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07}