Is it time to re­view your fi­nan­cial ad­viser?

The Star Early Edition - - BRICS FOCUS -

MOST suc­cess­ful high net worth in­di­vid­u­als (HNWIs) to­day ap­point a pro­fes­sional fi­nan­cial plan­ner or ad­viser as their pri­vate client wealth man­ager – that’s be­cause this in­di­vid­ual needs to be an economist, lawyer and a priest with­out be­com­ing a ‘jack of all trades’.

Ac­cord­ing to the 2014 South Africa Wealth Re­port pub­lished ear­lier this year by New World Wealth, South Africa has the high­est num­ber of HNWI in Africa.

In fact th­ese more than 48,700 HNWIs ac­count for ap­prox­i­mately 35 per­cent of South Africa’s to­tal in­di­vid­ual wealth. Since ex­change con­trols on in­di­vid­u­als were ef­fec­tively lifted over the past cou­ple of years, a grow­ing num­ber of th­ese HNWIs have been plac­ing an in­creas­ing pro­por­tion of their wealth off­shore.

This need mag­ni­fies the re­quired ca­pa­bil­i­ties of any pri­vate client man­ager. Given this fact, Ron­ald King, head of tech­ni­cal support at PSG Wealth and him­self a Cer­ti­fied Fi­nan­cial Plan­ner (CFP®), be­lieves HNWIs would be do­ing them­selves a favour by re-eval­u­at­ing the ap­pro­pri­ate­ness of their man­ager and set­ting guide­lines on how to go about choos­ing one. King says that from his ex­pe­ri­ence, “clients of­ten fail to dif­fer­en­ti­ate be­tween fi­nan­cial plan­ning and wealth man­age­ment”. “Ad­vice is not sim­ply about se­lect­ing the best per­form­ing in­vest­ment fund, as no­body can re­ally pre­dict that other than by luck. They need to se­lect the most ap­pro­pri­ate fund,” he says, and to as­sist HNWIs he of­fers sev­eral tips as to how to go about se­lect­ing a pri­vate client man­ager.

“He em­pha­sises you need to probe and ques­tion any prospec­tive pri­vate client ad­viser, and un­der the Fi­nan­cial Ad­vi­sory and In­ter­me­di­aries Act (FAIS) they need to pro­vide rel­e­vant in­for­ma­tion.

“You need to know and un­der­stand your fi­nan­cial plan­ner, so re­mem­ber to do your re­search be­fore you hand over your money, not the other way around. The qual­ity of ser­vice de­liv­ery is the sin­gle most im­por­tant is­sue when it comes to choos­ing a man­ager: is he go­ing to walk the road with you or view you as a once-off trans­ac­tion?

Bruce Flem­ing CFP®, Ex­ec­u­tive Head – Con­sol­i­dated Pri­vate Clients (Western Cape) and fi­nal­ist in the FPi, Per­sonal Fi­nance Fi­nan­cial Plan­ner of the Year 2014, ex­plains that the FPi (the gov­ern­ing body for CFPs®) has de­vel­oped a rig­or­ous sixstep fi­nan­cial plan­ning process that all mem­bers are re­quired to com­ply with. “So clients fully un­der­stand it’s a process not a prod­uct-sell.

“As an in­di­vid­ual’s cir­cum­stances change through­out his or her life so there needs to be an on­go­ing re­la­tion­ship with the fi­nan­cial plan­ner who will ad­just their fi­nan­cial plan tak­ing the changes in per­sonal and fi­nan­cial cir­cum­stances into ac­count. It has been an un­due em­pha­sis on sell­ing prod­ucts that has given this in­dus­try a bad rep­u­ta­tion.”

He notes that a Re­tail Dis­tri­bu­tion Re­view (RDR) dis­cus­sion pa­per by the Fi­nan­cial Ser­vices Board (FSB) is out for com­ment and once ap­proved, as seems likely says Flem­ing, among other is­sues this will see South Africa follow the ex­am­ple of the UK, Aus­tralia and US in out­law­ing com­mis­sion-based pay­ment for in­vest­ment prod­ucts in favour of “fee based pay­ment for ad­vice agreed for up­front with the client”.

“How pay­ment is for­mu­lated will vary as agreed within the client-ad­viser re­la­tion­ship, but two op­tions ex­ist in pure in­voic­ing for time or pay­ment as a per­cent­age of cap­i­tal man­aged. At Con­sol­i­dated we have been do­ing this for 14 years and it works bet­ter for the client,” says Flem­ing.

King lists another im­por­tant tip when con­sid­er­ing a new fi­nan­cial ad­viser: “Ask that ad­viser for re­fer­rals from ex­ist­ing clients, and en­sure those re­fer­rals are for clients at the same level of cap­i­tal as yours,” says King.

Flem­ing con­curs that most ad­vis­ers would have a pre-ar­ranged panel of re­fer­rals. “But I wouldn’t give out client de­tails willy-nilly as it in­volves con­fi­den­tial in­forma- tion, so it must be un­der­stood this is a con­trolled process.”

The qual­i­fi­ca­tions held by a fi­nan­cial plan­ner must be checked, says King. “To­day’s fi­nan­cial plan­ner es­sen­tially needs to com­bine the dis­ci­plines of be­ing an economist, a lawyer and a psy­chol­o­gist. He needs to un­der­stand the eco­nomics of the global arena, he needs to un­der­stand the tax laws of each ju­ris­dic­tion and he needs to un­der­stand you and your fam­ily’s cir­cum­stances.

“I be­lieve the CFP® qual­i­fi­ca­tion is the only one that brings to­gether all th­ese at­tributes, as well as en­sur­ing your fi­nan­cial plan­ner abides by a code of con­duct. It is for this rea­son that the FSB is look­ing at fi­nan­cial plan­ning as a sep­a­rate des­ig­na­tion.”

Another is­sue to bring up with your ad­viser is the support struc­ture of the man­ager you ul­ti­mately ap­point. King rec­om­mends you visit his of­fices and en­sure he’s not a one man business op­er­at­ing from a car and a mo­bile phone. “You need to sat­isfy your­self it’s a le­git­i­mate op­er­a­tion with proper of­fices, ad­e­quate pub­lic li­a­bil­ity in­surance and team support. Im­por­tantly, spend some time as­sess­ing how he fil­ters in­vest­ment prod­ucts, his man­ner of due dili­gence for each and his re­search ca­pa­bil­ity.”

Flem­ing also ad­vises that with cur­rent com­pli­ance re­quire­ments the days of the one man ‘ jack of all trades’ will in any case soon be over. “You need to use an ad­viser who has ad­min support, an ac­counts depart­ment and reg­u­lar client re­port­ing sys­tems that are held at least on an an­nual ba­sis, or as of­ten as re­quired. How­ever, I would not ad­vise re­port­ing on too short a time span as this in­di­rectly re­in­forces short-ter­mism in in­vest­ment per­for­mance.”

King adds: “Fi­nally, in­de­pen­dence is an im­por­tant is­sue, though there are two sides to the is­sue of in­de­pen­dence. You cer­tainly need to ver­ify there are no vested in­ter­ests in the ad­vice you re­ceive, but in­de­pen­dence can come with lim­i­ta­tions, for in­stance re­lated to prod­uct knowl­edge. An in­de­pen­dent fi­nan­cial plan­ner will sel­dom have as much in-depth prod­uct knowl­edge as a tied agent.”

Flem­ing adds that while tied agents have their place their in-depth knowl­edge tends to be limited to their range of prod­ucts. “The point of in­de­pen­dence is to of­fer clients broader ad­vice, and also recog­nises the fact that in­vest­ment ad­vice is only one part of the process. An in­de­pen­dent ad­viser has in­ti­mate knowl­edge of more than one plat­form.”

Even once you’ve made your se­lec­tion, King ad­vises that you re­tain per­sonal re­spon­si­bil­ity for your de­ci­sions and for your fi­nan­cial plan. “Most suc­cess­ful peo­ple in the world all ap­point a pro­fes­sional fi­nan­cial plan­ner, but re­main aware that the ul­ti­mate re­spon­si­bil­ity for their fi­nan­cial af­fairs re­mains with them and no-one else.

“This is dou­bly the case with women. I have seen many cases where women have left fi­nan­cial de­ci­sions to their hus­bands only to dis­cover on their hus­band’s death that they are not looked after. So make sure you take re­spon­si­bil­ity,” says King.

An ad­di­tional tip might there­fore be for pri­vate clients to bring up with your cur­rent ad­viser sooner rather than later the is­sue of their style of re­mu­ner­a­tion and the business con­ti­nu­ity of your ad­viser given the po­ten­tial con­se­quences of RDR.

Ron­ald King, Head of Tech­ni­cal Support at PSG Wealth.

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