The need for financial advisors is a touchy subject and has been an on-going debate for some time. In practice, the metrics they are measured by (whether this is correct or not) depend mostly on the returns the investments have generated and the fees they charge. More importantly, the risk taken to generate these returns need to be considered, as well as tailoring the balance of the investment according to a client’s unique circumstances and objectives. Service levels, reporting, and transparency are also important in determining whether you are getting any bang for the advisory bucks you are paying out of your investment growth.
A broken industry
Scrutiny of the industry stems from traditional advisors being incentivised to place client funds into products where commissions and fees were earned (both upfront and ongoing as a percentage of the investment) which might not have been suitable to the investor. Often these product structures were quite complicated and unintended consequences such as a lack of subsequent liquidity and large penalties for withdrawals or switches into different products. Many advisors were not qualified to render these services and merely understood a couple of products which they were incentivised to sell. Typically, a qualified financial advisor should have a proper, recognised qualification such as a CFP, CFA, Financial/Investment Management degrees or even CA’s and lawyers. They should, as a minimum, have knowledge in the following fields:
- Portfolio Management
- Asset classes, currencies, commodities, and their risk and return metrics
- Estate Duty and Planning
- Risk products and structures
Is your advisor a tied agent to a specific asset manager, insurer or bank? Are the only investment options he is offering you coming from one specific institution or asset manager? It is highly unlikely that a single fund manager will continue to deliver above benchmark returns or outperform his peers indefinitely in a specific asset class, industry or geographical region over the long term. A good financial advisor will be independent and try to identify the best in each (at least annually) and try to allocate the investments there.
Passive Investments – A more direct approach
If you feel you don’t need to use an advisor and rather want exposure to the asset manager directly, Sharenet offers a range of passive solutions for different levels of client risk both locally and offshore. ETFs are traded on the market directly like equities so there is no need for an expensive advisory, platform or LISP (listed investment service provider) fees. This can be seen as a more direct approach in cutting out the middle man, so a significant saving in what you are currently paying is highly likely. These investments should reduce your overall risk because of the sheer number of underlying constituents.
Benefits of a good advisor
There are, however, circumstances and instances where a good financial advisor can really show his worth and be a critical part of your financial planning. Examples are:
- Spouses or beneficiaries that need to have their money managed and investments need to be placed in separate entities such as trusts or under curatorship
- Tax efficient investing by making use of your R350 000 retirement savings deduction and your R33 000 per individual tax-free savings account
- Splitting of assets between spouses under different marital regimes to take maximum advantage of income and capital gains tax exemptions
- Cash flow analysis and budgeting
- Making use of endowments and wrapped financial products for tax and estate planning purposes
- Holistic Estate Planning
- Tax implications of investing offshore, especially inheritance and situs taxes (offshore death taxes)
On-going fees (advisory charges)
From what we are observing in the industry, clients are charged between 0.5% - 1% per annum taken as a percentage of the investment. On every R1 million invested, your financial advisor is earning R5000 to R10 000 per year for as long as this investment structure is in place. Is this worthwhile if he did an asset and fund allocation on your initial investment and you hardly hear from him/her again? Are they reviewing with you at least annually to reallocate these investments based on a change in your risks, objectives or circumstances? Examples would be divorce, inheritance, birth of a child, retirement, etc. Life happens and your investments need to adapt as well, this is where your advisor needs to add value.
It’s also important to note that if you’re investing into a unit trust or a Retirement Annuity, chances are you will still have to pay the fund manager fee, LISP/platform fee, transaction charges, performance fees, etc. Your total ongoing charges are above 2%, which could be 20% of your nominal, before-tax returns if you are maintaining a 10% return on a balanced portfolio over your investment horizon.
As with most things in life, a cost-benefit analysis of the value-add you are getting from your advisor versus what you are paying would have to be done at least annually. If you are having any trouble understanding or collecting this information or the data you would need, kindly contact us directly for a free assessment.
Martin joined Sharenet Wealth in June 2018 to lead our Investment Strategy Group. Prior to this, Martin was a Portfolio Manager at Standard Bank Stock Broking heading up offshore investment strategy. He was previously Head of Trading at PSG Wealth and has more than 7 years experience in the investment management industry. Martin holds a B.Com Honours degree in Accounting, is a qualified Chartered Financial Analyst, holds the CFP designation and is a member of the Investment Analyst Society of SA.