Tag Archives: fees

The value of advice?

Much has been written about the value of financial advice. There are many people who believe that financial planners offer little value for the fees charged while there are others who believe that the value financial planners add is very significant.
Research by Morningstar has revealed that the value of advice (they call it “gamma”) can be as much as 3% (of the client’s portfolio) per annum. This is, among other things, a result of managing investor behaviour and greater tax efficiency for the advised client.
We have more than a few clients who prefer to manage their own funds with no on-going advice fees and who will then consult with us from time to time when they think it necessary. And while this may seem to save them an “annual advice fee”, in my experience, it has almost always cost them significantly more than the fee that they would have paid as an “advised” client. Consider the following example from our practice.
The client retired a few years back and transferred his funds to a living annuity – he met with us around the income draw, asset allocation and resulting fund selection and has been looking after it on his own since then. He has been drawing the minimum income (as a result of some consulting that he was doing) until the anniversary earlier this year when the consulting stopped and he needed to increase the annuity. Which he did – without consulting us and without any thought to the tax consequences.
He did not consider that he had a discretionary pot of money from which he could effectively draw (close to) tax-free income. The result is that he is now paying at least R100k in tax that he need not be paying. This is R100k that we would have saved him if he had been an advised client (or if he had at very least sought advice before making the change). The R100k is certainly many times the quantum of the annual fee that we would have been paying. And he is currently staring at an estate duty problem because of the choice to increase the annuity income draw and leave the discretionary assets in his estate.
Add to this the fact that he recently switched funds – “the funds had done nothing for the past few years” and so he made the change. The move was at exactly the wrong time and his asset allocation is now also out of kilter (way too much offshore exposure for a living annuity with a 5% draw). The annual fund fees that he is paying is also way too high – he had “no idea that was an issue”.
Clearly in this case, the value of advice would have been way less than the cost to his portfolio. But then, perhaps we have ourselves to blame. If all clients think we do is choose funds then why would you pay (a significant) ongoing fee for that?
We need to make sure that clients fully understand that asset allocation is but one part of the value-add from a professional financial planning service. There is so much more to the financial planning service, but they wont know that if we don’t tell them and more importantly, if we don’t demonstrate it.

 

 

To pay a penalty or not?

A client of mine presented a potential dilemma to me. He has a living annuity through Liberty Life but also has the bulk of his living annuity funds on a LISP platform. He was wanting to move the Liberty one to the LISP and consolidate his investments on one platform*.
Under normal circumstances there should be no penalty when transferring living annuities. However, in the fine print, Liberty had noted that there would be an exit penalty if the annuity was transferred anywhere else within the first 5 years of the investment. As such he was advised that he was going to pay a penalty of 1.2% (±R6500) to move his annuity and he balked at the prospect.
We told him to find out from Liberty what the total annual fee on his annuity is and it turns out that they are charging him a total of 2.15% pa (admin and fund fee, no advice fee included – the advisor took that maximum upfront fee).
By comparison his living annuity on the LISP has a total annual fee of 1.1% (fund and admin fee, no advice fee). Do the maths – the 1.2% penalty will be covered in the next 12 months and thereafter he will be better off because of the lower annual fee (less than half of the current annual fee and there would still be a penalty to move for the next 24 months).
The real question I have for him is why anyone would ever invest in a product where there is any kind of exit penalty? There is no need to ever pay penalties when it comes to investing – there are far better (and cheaper) products out there than those offered by the life insurance companies. Stay away from them unless it is insurance you need!

*Note: he pays us directly for advice and there are no on-going advice fees on his investments so the advice we give to him is not affected by the desire to grow assets on which we earn fees.

Personal Finance?

The article in Personal Finance this weekend re the high costs of investments (http://www.iol.co.za/business/personal-finance/financial-planning/investments/costs-are-wiping-out-real-returns-1.1036412) 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 (https://www.thefinancialcoach.co.za/2010/08/18/diy-by-all-means-but/) 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

A total rant!

I need to get this off my chest (again)…been fighting with 3 of the bigger insurance companies re the level of disclosure on their products with respect to fees and more specifically the performance on their portfolios…

Suffice to say it is a futile exercise – it appears that even in this highly regulated environment that they can get away with complete nonsense when it comes to answering questions put to them .

There is such a huge discrepancy between the published returns on their portfolios and the actual returns experienced by investors that one can only deduce that this must be the costs of the products – and it is not a pretty deduction.

Anyone who puts money into any investment product with any insurance company needs their head read! You are being very foolish indeed – there is a better way with lower costs and no contractual obligation and no subsequent penalties for breaking that contract. Invest in unit trusts and/or exchange traded funds – low/no fees, complete transparency and no penalties – EVER!

Commission free life cover…

thumbnailCA5TPCTEAs a follow up to the post on cutting out the middle man, I thought I would write about another case of “half-truths” from insurance companies.

About 6 years ago, I was at a financial planning conference where the issue of fees and commissions was being discussed by a panel. One of the panel members was representing the LOA (Life Offices Association, now ASISA) and he stated that about 35% of the cost of new business for life insurance companies was the cost of commission that they paid to advisors. This means for every R100 of premium, R35 was (according to the official industry association) a direct result of the commission that was paid to advisors.

Being the trusting type, I therefore assumed that if you remove the commission from the quote, there should be a reduction of ±35% in the cost of the cover. So for about 6 years now, we have been providing life cover for our clients without any commission on the policies*.

The problem is that in whole time that we have been providing commission free life insurance policies (yes it can be done), we have not yet seen a reduction even close to the supposed 35% that the LOA was touting, nor have we found anyone in the industry that has been willing or able to explain the reasons for the discrepancy.

For the record and in our experience, if we remove the commission from the life cover then there is a reduction of between 12 and 27% in the cost of the cover (depending on the insurer) this is clearly far short of the supposed 35% and some insurers are obviously creaming more for themselves than others.

In practise this means that if the cost of the cover (with full commission) would have been R1000 per month, by removing the commission from the policy, the premium could be reduced to ±R750 per month). Over a 10 year period that is a saving of at least R30000 in additional premiums. Makes you think, doesn’t it?

That’s all for now!

The Financial Coach™

*we do this by charging an hourly rate for work done in providing the cover – typically this is anything from 2-4 hours depending on the type of cover involved.

Sometimes cutting out the middleman just leaves a gaping hole!

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I recently received a marketing offer from 1lifedirect to take out some life cover directly through them, thereby cutting out the paperwork, expensive medicals, the broker and therefore the commission. All of this, they promised, would save me up to 22% on the premiums.

Having seen their rather funny TV adverts and being the curious sort I decided to give them a call to see if things were as good as they promised. After all, their flyer offered me R500000 life cover for only R140 per month (subject to certain terms and conditions of course).

On the face it of their offer sounds quite attractive – but on further investigation it is anything but so. Some comparative quotes to see what I could get elsewhere revealed that I could get R896000 life cover for R128 per month (with full commission on the policy). The same cover without any commission on the policy would cost just R100 per month – now that is a saving of 28% on the full commission quote and is over 50% less than the 1lifedirect quote. So there really is no saving of anything and in fact, sometimes cutting out the middleman could turn out to be quite a bit more expensive.

The 1lifedirect offer is not nearly as good as it initially seemed and far from it being a quick and convenient process they could not give me a quote over the phone because of the fact that I do the occasional scuba dive. The quote needed to be done by their actuaries…7 working days later and still no quote from them despite 2 follow up phone calls from me. By this stage, the average insurance broker would have had the case finalized and issued and I don’t even have a quote. Sometimes going direct is certainly not a quicker or more convenient process.

1lifedirect also say that they cut out the need for expensive medicals – for the record, most medicals are paid for by the insurance company concerned. This is certainly the case where the insurance company is the one that calls for the medicals. Sometimes going direct can mean that you stay ignorant of the facts.

1lifedirect also claim that they cut out the need for paperwork. Far from this being a pro it could turn out to be a real negative the next time you apply for insurance cover; no paper work means that you have no record of what you answered on the medical questions and no record of answers significantly increases the risk of accidental non-disclosure. As a consequence this significantly increases the risk of a claim being repudiated by the insurance company (because of the accidental non-disclosure).

So, far from being “life insurance that is quick and convenient, and that – by cutting out the broker – saves you money!” in my case, the offer by 1lifedirect turns out to be significantly more expensive, not so quick and also potentially increases the risks when applying for future insurance.

For the record, I have no problem with people going direct. To me it is much like fixing the toilet at home – I can do it but it will take time and effort and I might not have the necessary tools. Either I invest the time and energy or I pay a plumber to do it for me.

In the same way, if a broker can’t add value to the client and he/she knows what they want and has the time to do it then there is no reason that they should not go direct.  They just need to be aware that it may not always be the best option and that while in some cases it may appear to be cheaper it could turn out to be a very costly exercise.

Sometimes cutting out the middle man just leaves a gaping hole.

That’s all for now.