Personal Finance?

Personal Finance?

The article in Personal Finance this weekend re the high costs of investments ( really got up my nose. And not for the reasons you might think.

The article did not frustrate me because it “exposed” the truth about investment costs but rather because it is too easy to be negative about these things and it is my opinion that in a country with an already low savings rate, that articles like this do very little to encourage people to save. I have met too many people with cash in the bank because they are “scared” of advisors and/or the costs on products.

As I have written before ( I believe that anyone could do their own financial planning, after all it is not unlike DIY around the house. The reality is that while most of us could fix plenty of the things that go wrong, we either choose not to or could not be bothered and so we call the plumber/electrician/pool guy and we pay their fee to get the job done.

And so it is (or should be with financial planning and advice) – you cant get it for free! You either do the research and homework and go direct (not always cheaper) or you pay a financial planner for advice. There is nothing wrong with this – you pay for any professional service!

Unfortunately in our industry, this service has often been for “free” in the hope that somewhere along the line a product would be sold (and commission earned). This has been the “fault” of the life insurance industry and gave the unit trust industry an incredible opportunity to provide a more transparent and cost efficient product.

Over the years, however, as the UT industry has grown (significantly) and often at the expense of the life industry, asset managers have got greedy (annual fees have steadily crept up). Few people notice fees in a high inflation-high return environment but when the tide turns and returns are muted then suddenly fees become more noticeable. And alternate products again become more popular (in this instance it is the Exchange Traded Funds or ETF’s). If asset managers are not careful they will drive funds away from their funds and into ETF’s – it’s a simple function of supply and demand and value offered.

The other angle on the fees issue is that there has not always been good or even reasonable disclosure about the costs and fees on products. The unit trust industry has gone a long way to changing the bad habits of the life insurance industry but still there are times when investors don’t seem to know what they are paying or why they are paying. Whose fault is that?

I think that the responsibility for this situation rests on the shoulders of the providers, the advisors as well as the consumers. The providers for not being completely open and transparent and for often not writing things in language that the average person can understand (legislation and compliance officers are often responsible for this). The advisors/planners for not respecting themselves enough and for not believing that the fee they are earning is commensurate with the service/expertise offered (and often it is not). And then finally the consumer for playing the victim role and for not taking responsibility for the situation. We all know that there is no such thing as a free lunch and yet we all like to eat and then act surprised when the bill arrives.

To take that analogy one step further – I can remember being taken to dinner many years ago at the Mount Nelson by a girlfriend’s father. We got the menu’s that had no prices on them – so we suspected that it was expensive but had no idea and fortunately we were not paying so it did not matter. But when you are paying make sure that you order from the menu with the prices on it.

So where to from here? If you know what you want then go direct. If you don’t know and you need advice then find a fee-based financial planner and pay for the advice (you pay your doctor/dentist/accountant/lawyer). Find out about all the fees on the products you are looking at and also know why you are paying them and what you will get in return for the fee. Remember, the fees on financial products are usually negotiable – especially when it comes to on-going advice fees. If you are not getting value for your money then discuss it with your financial planner/provider and make sure you do get value/service else change advisor/service provider.

And finally – if you do it yourself it might* be cheaper. But if you cant or don’t want to then you need to pay someone else to do it for you. There is nothing wrong with this!

*see the posts about direct insurance vs using a broker – direct is often significantly more expensive