Tag Archives: financial advice

Your greatest financial risk is not financial; it is physics!

Over the years as we have chatted to clients about financial planning we have settled down to the “big 5” risks that everyone faces and the resulting financial (and emotional) risks that they present to the person and their family. Simply put, these are (in no order of importance):

  • Dying too soon
  • Living too long
  • Disability
  • Funds for emergencies, and
  • Debt

A lot of the work that we have done with clients has been around identifying these potential risks and then implementing strategies to address them.

However, I have recently become convinced that there is a much greater risk that people face but that is hardly ever spoken about. I also think that this risk is likely to increase as the process of disintermediation increases.

Rightly or wrongly, Albert Einstein is often credited with saying that compound interest is the greatest force in the universe (or the 8th wonder of the world, or some other version thereof). And indeed, compounding is a significant force but I have become convinced that another scientist, Sir Isaac Newton, had much more to add to the debate.

Indeed, the “biggest” force that haunts people is to be found in Newton’s First Law of motion (you should have paid attention during science lessons). Newton One states that “a body will continue in its present state of rest (or motion) unless acted on by an UNBALANCED external force.” This is known as the rule of Inertia…or the tendency to do nothing or remain unchanged.

Simply put, we are all subject to Inertia and will continue to do the same things over and over unless we come into contact with an unbalanced external force. And that’s why people have personal trainers to hold them accountable to exercise and get them fit, that’s why we have seen an increase in the demand for life coaches and it is also the role of the financial planner.

Don’t get me wrong, I have no issue with people doing their own financial planning and/or investing. The problem is that they don’t! How else do you explain the father of 2 young kids who has no will 10 years after they were born, or the divorcee who has not changed beneficiaries on her life policy (or updated her will) or the employee who has not yet started saving, or the entrepreneur who has never submitted a tax return? I could go on…

The cold hard truth is that we are often our own worst enemies when it comes to things financial and it is my strong opinion that we all need an unbalanced external force in our lives to get us out of our inertia. As long as Newton’s First Law of motion holds, there will always be work for financial planners and for that I am very grateful! We have an incredible privilege as we help clients identify and manage their financial risks and then keep them accountable to address them.

 

 

 

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.

 

 

Deceivery Life

I just received an invitation to the Discovery Life financial planning summit…on opening the invitation I noticed a few things:

  1. The invite is for a financial planning summit
  2. The agenda is dominated by sales techniques – sure there are some other topics thrown into the mix but it appears that the main motive is to make better (more proficient) sales people who can sell more products as a result. This is not financial planning. 2 of the agenda items are as follows:

LESSONS FROM THE WORLD’S GREATEST INSURANCE SALESMAN

Peter Rosengard’s extraordinary life story is packed with valuable lessons and insight into how he achieved greatness in the life insurance industry. He shares practical and inspiring advice based on his own success and reveals how you too can consistently prosper.

HOW TO BE THE MOST LIKEABLE FINANCIAL ADVISER IN THE ROOM

All other things being equal, clients choose the financial adviser they like. It’s as simple as that. Learn how to synchronise attitude, body language, and voice tone so that you instantly become someone the other person likes. Nicholas Boothman reveals how to read attitude, pick up on nervousness, the subtle difference between words that open a conversation and words that shut it down, powerful compliments, eye cues, the magic of opposites attracting, and more. Prepare to be liked!

  1. The programme is “endorsed” by the Financial Planning Institute…with Continuous Professional Points (CPD) points for attending. CPD for what – learning how to be a better sales person?

 

What are we getting at – does the FPI, as an institute, stand for financial planning or selling disguised as planning? With events like this where selling is disguised as planning and CPD points can be earned, it is no wonder that the public and regulators are confused about what financial plan is and is not! Come of Discovery and the FPI – let’s call a spade a spade. This is not a financial planning summit!

Fools and their money…

“A fool and his money are soon parted!” There is no need for anyone to be foolish with their money, especially not today. With all the legislation we have in place around financial advice and with the wealth of information available to help you make sound financial decisions there are no more excuses for being foolish! Here are the first 3 of 13 steps to prevent you from being a fool!

  1. Trust no one! Trust is the basis of any relationship – and especially the relationship with your financial advisor. However, a financial advisor must earn his/her trust – it is not a right and should not be your “default” setting when it comes to money matters. Trust is something that is earned over time. People do strange things when there is money involved so be careful and especially wary of anyone who asks “don’t you trust me?” Do your homework before you deal with an advisor – ask for references (and check them).  If you trust blindly you will most probably be ripped off at some stage.
  2. Don’t sign a blank form – ever! Not only is it illegal for any company or advisor to ask you to sign a blank form, it is also an extremely foolish thing to for you to do. Go back to step 1 – trust no one.  Make sure that every form that you sign is fully completed, especially the section with your bank and beneficiary details. If you are happy to sign blank forms, then you dont be surprised if you get ripped-off.
  3. Find out about the fees/costs (in writing – it is your legal right). Investment and insurance products are governed by the Policy Holders Protection Rules (PPR) and the FAIS Act and one of the conditions is that all of the fees/costs must be disclosed in writing so insist on seeing them. There is nothing wrong with paying the fees (everything you buy has a cost) you just need to know if you really are getting good advice or if it is prejudiced by the making of a sale. This same principle should apply to all financial products even those which fall outside of the scope of the PPR/FAIS so ask for the fees and costs in writing. If you don’t, don’t be surprised when you find out that the advice you received was motivated by money.

More to follow…

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