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EDINBURGH — I went off financial advisors in my late 20s after I discovered I’d been persuaded to switch my savings into a long-term vehicle that allowed the advisor to make huge sums churning, which is essentially swapping underlying investments regularly to generate income. Thankfully I worked for a man whose name made financial advisors tremble. My boss didn’t hesitate in summoning the offender to his Newspaper House, Cape Town office, and put him on the spot in a Hard Talk style interrogation. Sweaty and flushed, the advisor wrote out a cheque to repay the lost money on his way out, in the hope that this formidable editor wouldn’t mention his company in his weekly column. In this piece, Johannesburg-based intermediary Dawn Ridler reminds us of the pitfalls of paying for financial advice as well as the benefits of finding a financial advisor who can save you money across your financial affairs. – Jackie Cameron
By Dawn Ridler*
Who needs a Financial Advisor anyway? Paying for ongoing investment advice – is it worth it?
Fees have become front and centre of investment advice – specifically asset management fees and financial advisory fees. The major reason for this is the relatively low growth environment we’ve seen all over the world in the last decade. Those heady days of 30% plus annual returns are a dim memory, but look at it this way… If your portfolio had made 30%, losing 1% to a financial advisor – even if they do almost nothing for that remuneration – is a pittance. When returns are 7% or even less, it’s a whole different perspective.
Investors globally have been bringing down the cost of investing in a number of ways:
- Once-off Fee-for-plan
ETFs or Exchange Traded Funds bring the cost of the investment down by merely using an algorithm (computer) to track an index, say the All Share Index. Simple ETFs in the US have certainly become extremely inexpensive, here in RSA? Not so much – you can get excellent active funds for the same price if you know where to look (and you have the ‘critical mass’ (enough invested).
ETFs have also evolved, and many of the new ones (offshore) are really not ‘passive’ at all – just active funds riding on the ETF bandwagon, at active investing fees. The 10-year offshore bull market has propped up this Passive investment vehicle and when it inevitably sinks, those millions of relatively inexperienced investors are going to see chunks of their capital go down the tubes. There is definitely a time and place for ETFs – if you’re decades off your retirement and these are excess funds (your retirement funding is sorted), and you can get the ETF at very low cost (.1 to .3% or less) then go for it. There are however very low cost and well performing balanced (diversified asset classes) funds that can be had at almost the same price or cheaper than ETFs.
Robo-advisors are programs or algorithms which, after asking you a few questions, will come up with an ‘ideal’ portfolio made up of investments (usually Unit Trusts (called Mutual funds overseas)) on the platform that sponsors or has developed the Robo-Advisor. In other words, the advice is not independent, and you’re paying the fees elsewhere. Many of these Unit Trusts are largely passive (in other words they are mostly managed as, or like, an ETF by a computer/algo).
“Fee for Plan” was considered by many advisors as the pinnacle of the profession – if you were qualified enough and good enough at what you did, then someone was prepared to pay good money upfront for this plan – saving you the ongoing annual fees. I hate to break it to you but this is an illusion. If you’ve been around a while then you ‘paid’ for this plan anyway (often spewed out from a program), especially if you have an insurance company investment (and this is still happening).
In terms of the regulations, an advisor can charge up to 3.5% of the investment as an upfront fee, but few professional planners actually do so, but rather offset the upfront costs against annual ‘asset under management fees’ (levied monthly on the investment at 1/12 of the annual amount). With insurance companies, the fees charged have been historically opaque and only now starting to come to light with the requirement that they disclose “EAC” the Effective Annual Cost (and those EAC reports I have drawn have costs as high as 5.7% per annum).
This isn’t going to win me any favours with my fellow “Fee-only” advisors but I think that “Plan for Fee” is a complete waste of time for clients, and will always damage the advisor’s reputation because unless the advice is continually monitored and tweaked for changes to their personal circumstances, economic, political, taxation and regulatory environments, it will ultimately fail, and the advisor will be blamed. In other words, a plan is dynamic, each plan is merely a snapshot in time and correct for that moment in time – but nothing stays still. The plan does not need to be out by much to go wrong over time.
Say a plan is one percent off, and not corrected, that error will compound over time and after a decade it will be very noticeable and that is time you’re never going to get back. For those of you that play golf, it is like hitting a ball down the fairway – if you are 10 degrees off, but only hit it 100m, you’ll probably still be on the fairway. If you give it a good smack sending it 250m off 10 degrees from centre, you’ll probably be in the rough, and it may cost you a shot or two to come right.
Financial Planning is a profession. (For those of you that question the validity of that designation, ask yourself why the ‘oldest’ profession is called that but the designation ‘professional’ has to be preserved for doctors or lawyers). Stockbrokers and Asset Managers have always taken fees for ‘assets under management’, today though this is inclined to be on a sliding scale, getting cheaper as the portfolio increases but usually bottom out at 0.5% with portfolios over R20m.
One thing is common in all professions – people will always try and pick your brain (for free). In financial advisory, for many years this advice was ostensibly ‘free’ so it is little surprise that there is resistance to paying ongoing fees for ongoing advice. The fact of the matter is that if you have (or still do) buy insurance-based investments, you have been paying for it anyway but the fee is hidden (and you only become aware of it when you try and get out and then get nailed by ‘early termination penalties’.)
Firstly, put the fee into perspective. Don’t be a cheapskate because you’re used to getting professional financial advice free. Say you had most of your investments in listed property or REITs (safe as houses, right?), your portfolio would be down 20-30%. Property is changing, and the internet is largely responsible for that – and advisors and asset managers started pulling their clients out of property exposure three years ago because the writing was on the wall. Say you have to pay 1% per annum for financial advice, that 20% drop is 20 years worth of advisory fees. If you want to put it another way – have a look at an index any day of the week, a 1% or more drop in a day is normal.
Secondly, the advice you get from a professional planner should save you money right across the board, reducing estate duty and executor’s fees, less tax, recommending investments that they take no fee from (money market for example), right medical aid plans, competitive ‘life’ policies and more besides. Look at these as ‘gift with purchase’. Sure, you might get plenty of free advice from well-meaning friends and acquaintances – probably the same ones that chip in with legal and medical advice too. You’ll be doing them an important service by boosting their ego and need to be seen as important, but the effect on your wealth is less certain.
Action: Without delegation, we’d all be overwhelmed by everything that needs to be done. Trust is key when it comes to all professions and financial advisory is no different.
- Dawn Ridler, founder of Kerenga Wealth Ecology. CFP® BSc Hons, MBA
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