There is this strange phenomenon in SA called Regulation 28 that is applied to retirement funds. It stipulates that retirement fund members may not have more than 75% of their funds in equities and no more than 25% of the fund invested offshore Continue reading A case for higher offshore weighting within a living annuity?
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.