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The world of investing is complex and scary especially when you are new to the game. A financial advisor is positioned to provide advice and guidance on the investment products on offer.
Before investing, it is important that you do research and due diligence on the financial advisor, and the investment product.
This is according to Derek Smorenburg, CEO & Founder of South African Independent Financial Advisors Association (SAIFA). SAIFA aims to promote the value of independent financial advice in a modern financial services market, and their role in society.
“Investors should use accredited, professional, and possibly independent financial advisors to guide their investment journey. There’s little doubt about the value of such a relationship,” says Smorenburg.
A US research shows that consumers using financial advisors enjoy better financial results between 35% and 40% than those who don’t.
“In my career spanning over five decades, people have been exposed to a range of products and services. These are often not explained properly resulting in horrendous impact on investments.”
Seven questions to ask a financial advisor
Research and due diligence involve asking the financial advisor pertinent questions about their qualifications and views on investments. This process will reveal the financial advisor’s investment philosophy and strategy and benchmarks they use for example.
For years now, Saifaa has been researching and reviewing concerns and issues around financial advisors and what questions to ask. Saifaa developed 21 Due Diligence Questions to determine if the financial advisor is a right fit.
Here are Smorenburg’s seven of 21 Saifaa fundamental questions to ask:
- What is your appropriate experience and your suitable qualifications as a financial advisor?
Asking this question will provide information about years in practise and financial advisor qualifications. The Certified Financial Planner certification is internationally recognised, and may only be conferred on someone with relevant qualifications, for example. Qualifications include a university degree, a Postgraduate Diploma in Financial Planning and several years’ experience.
- Do you belong to a relevant industry body that indicates a certain competency level?
These include Saifaa, the Financial Planning Institute, the Financial Intermediaries Association and the Institute of Retirement Funds Africa.
- Do you represent a wide range of insurance companies’ products and various investment houses, which ones and why?
A Product Supplier Agent only represents their employer’s products. However, the employer’s investment platform may carry a wide range of underlying investments from an array of asset managers. On the other hand, an Independent Financial Advisor should be able to offer products from a range of suppliers.
- How do you get paid?
The financial advisor may receive a commission from the product provider on the products that investors buy. A fee may be charged based on a percentage of the investment assets, or time-related hourly rate.
- Do you or your practice have interests in third-party administrators/ financial services providers, and would this create conflicts of interest?
The financial advisor may be a shareholder in a third-party company providing services to the practice. From this, they may receive dividends, and the arrangement may also result in an additional layer of fees. Where the financial advisor is aligned with a discretionary fund manager (DFM), this is beneficial to the investor. This enables them to invest on the client’s behalf at a low institutional rate instead of the higher retail rate. Smorenburg says these business relationships must be fully disclosed so it’s clear whether or not they conflict with the investor’s interests.
- What are the all-in costs of products and services, including and excluding advisory fees?
According to the Financial Advisory and Intermediary Services (FAIS), all costs should be fully disclosed to clients. These include investment costs, administration costs, commissions and financial advisor’s fees. In addition, possible penalty charges on early termination of contractual endowment policies and retirement annuities should be disclosed. A financial advisor aligned with a DFM or uses third-party investment platforms like Glacier by Sanlam may charge additional costs.
- How would you answer the following: “Is the client’s money your client or is the client your client?”
A financial advisor with their client’s best interests at heart will look at more than just their finances. They take a holistic approach to the client and family’s well-being, for example, when the client is close to/or in retirement. An IFA with Saifaa’s Certified Post Retirement Professional programme is suitable to provide professional advice. They would guide the client on lifestyle matters such as post-retirement accommodation, and general mental and physical health in retirement.
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