The value of having a trusted financial adviser is not to be underestimated. Research in the US shows that advisers can boost clients’ returns by about 3% a year, on average. That’s not necessarily by putting clients into better-performing investments; it’s mainly about influencing their financial behaviour.
A recent report from Momentum states that 9% of South Africans use a financial adviser. A more interesting statistic might be the percentage of South Africans who have an established relationship with their adviser, as someone would have with a family doctor, for example. I would estimate that to be below one percent.
The best advisers are professionals with the Certified Financial Planner (CFP) designation, who adhere to high ethical standards and belong to the Financial Planning Institute of South Africa (FPI).
Unfortunately, the majority of advisers in South Africa are not in this league. Many are so-called “tied agents” in the employ of large product providers whose primary motivation is the commission they receive on selling you a product from that provider. There are also independent financial advisers (IFAs), who may offer a range of products from select providers but are also commission-based. There is often enormous pressure on these commission-driven agents and advisers to achieve sales targets, exacerbating what is, essentially, a conflict of interest with their clients.
While the advisory industry is becoming more professional and employing increasing numbers of CFPs, it faces a major challenge: with the rise of online insurance and investment platforms, many people, especially from younger generations, are going the DIY route when it comes to their finances.
Sonja Steyn, strategic head of wealth management, financial planning and advice at Momentum Advice, says Momentum is seeing less uptake among younger South Africans. “That is not just about cost or access; it is a mindset. Advice is not yet something people aspire to or see as part of their financial journey from the start. We know advice works,” says Steyn, “so why is it not the obvious choice?”
I agree with Steyn when she says that most South Africans still have the wrong idea about the role of an adviser, turning to one only when they need a quick-fix financial solution. And I believe there persists a wariness towards advisers that is partly justified, considering their chequered past.
“People do not know where to go, who to trust, or what expert advice even looks like,” Steyn says.
So what does expert advice look like? Here are a few pointers:
• Qualifications. The top professional advisers typically have a Bachelor’s degree in commerce or accounting, a Postgraduate Diploma in Financial Planning, and have passed the FPI’s exam for the internationally recognised CFP accreditation, which also requires a certain level of work experience. Note that all advisory practices must be registered with the Financial Sector Conduct Authority and have a Financial Services Provider (FSP) licence. This tells you that the adviser is legally authorised to advise on and sell products of a certain type (there are a number of FSP licence categories), but does not confer any standards on the adviser apart from having to comply with the regulations under the Financial Advice and Intermediary Services (FAIS) Act.
• Motivation. The best advisers I’ve met have a passion for helping people with their money, which is almost as intense as medical professionals’ passion for healing people. Many have moved into this field from other finance– or business-related fields and have found it to be far more rewarding.
• Approach. A good adviser’s approach will not be product-focused; it will be to get to know you thoroughly (warts and all) and, with your input, work out a plan to achieve your financial goals. Only once a plan has been formulated will the adviser consider specific products or bring in other professionals, such as a tax or trust expert, to help implement it. The relationship will require effort from your side to succeed; you can’t expect the adviser to do all the work. Just as a physiotherapist may require you to do exercises at home to get your muscles functioning properly, your adviser may ask you, for example, to trim or reprioritise your spending. Importantly, the adviser will be there for you in times of stress, personal or market-related, cautioning you against doing anything rash and keeping you on track.
• Remuneration. I rate advisers on three levels according to their remuneration model. On the lowest rung are commission-based advisers. These are most likely to be focused on selling you a product and, once done, least interested in how that product serves your goals. In the middle are AUM-based advisers, who take a percentage of “assets under management”. These advisers are more aligned with your interests in that if your investments do well, they do well. However, they may have little regard for clients who have yet to accumulate a sizable asset base. On the top rung are fee-based advisers who charge you directly – either per hour or per action, or in the form of a monthly retainer or subscription. Here, there is complete alignment – the adviser is incentivised to retain you as a paying client, so they will act fully in your interests.
PERSONAL FINANCE
