Is it time to review your financial adviser?
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.