In­vest­ment ad­vice: how un­bi­ased is your ad­viser?

Most fi­nan­cial ad­vis­ers don’t place your in­vest­ments with the en­tire uni­verse of providers, but of­fer a lim­ited range of prod­ucts. But, as Pa­tri­cia Hol­burn and Laura du Preez re­port, this does not mean their ad­vice is with­out value.

Weekend Argus (Saturday Edition) - - GOODPUZZLES -

A strong mes­sage in this year’s Savings Month is the need to ob­tain fi­nan­cial ad­vice and set up a fi­nan­cial plan.

If you are not fa­mil­iar with how fi­nan­cial ad­vis­ers work, you may expect their value to lie in rec­om­mend­ing the best in­vest­ments in the en­tire in­vest­ment uni­verse. But in prac­tice many ad­vis­ers rec­om­mend only a lim­ited range of in­vest­ments. Does this mean you may be steered into cer­tain prod­ucts and pay a fee based on how much you in­vested, rather than the time it took your ad­viser to rec­om­mend a prod­uct?

As they seek to de­fine what con­sti­tutes in­de­pen­dent fi­nan­cial ad­vice, fi­nan­cial plan­ners, leg­is­la­tors and con­sumers are grap­pling with the is­sue of whether the re­la­tion­ships a fi­nan­cial plan­ner has with fi­nan­cial com­pa­nies in­flu­ences the prod­ucts he or she rec­om­mends (see “Dum­mies’ guide to the fi­nan­cial ad­vice mar­ket”, above).

Fi­nan­cial plan­ners at­tend­ing this year’s Fi­nan­cial Plan­ning In­sti­tute (FPI) con­ven­tion heard a pre­sen­ta­tion by Kate Holmes, the founder of Bel­more Fi­nan­cial, a “lo­ca­tion- in­de­pen­dent” fi­nan­cial plan­ning prac­tice op­er­at­ing out of the United States for US clients.

Holmes runs a vir­tual of­fice from wher­ever she finds her­self, which changes as she trav­els the globe. Her clients sched­ule meet­ings on­line and she “meets” them on Skype or phones them at times that suit them, such as af­ter their chil­dren have gone to bed. And she’s read­ily avail­able when they have a ques­tion about their fi­nances.

She doesn’t man­age in­vest­ments or sell prod­ucts. Her only job is to help her clients man­age their fi­nances and cash flow, for which she charges a fee for the first con­sul­ta­tion and an on­go­ing monthly fee.

Her clients trust her and know she has their best in­ter­ests at heart. They will of­ten ask her opin­ion when pur­chas­ing a big-ticket item, like the client who was looking to buy a new truck on a big-sale day in the US and wanted to know if this was a sen­si­ble pur­chase.

Holmes doesn’t sell in­vest­ments or in­sur­ance, although she will rec­om­mend prod­ucts that clients can buy through other chan­nels.

The big ad­van­tage for Holmes is that her busi­ness and ad­vice are free from the con­flicts of interest that can arise from re­la­tion­ships with cer­tain com­pa­nies, or the in­cen­tive to earn more if she sells par­tic­u­lar prod­ucts. Her clients per­ceive her ad­vice to be com­pletely in­de­pen­dent and ob­jec­tive.

In South Africa, the fi­nan­cial ad­vice model that Holmes of­fers is rare. Ad­vis­ers who of­fer this kind of ser­vice are few and far be­tween, David Kop, the head of ad­vo­cacy and con­sumer af­fairs at the FPI, says.

Al­most all South African ad­vis­ers rec­om­mend prod­ucts and some even rec­om­mend in­vest­ments they man­age, or that are man­aged by the group for which they work.

They also typ­i­cally charge a fee, such as R10 000 or R15 000, for an initial fi­nan­cial plan and an on­go­ing fee that is a per­cent­age of your in­vest­ments that are un­der their ad­vice (known as as­sets un­der man­age­ment). Al­ter­na­tively, they earn com­mis­sion on the prod­ucts, such as life cover or re­tire­ment an­nu­ities, they sell you, and some earn com­mis­sion and off­set this against the fee charged.


The value of a fi­nan­cial plan­ner is not lim­ited to de­sign­ing a fi­nan­cial plan, it is also in prod­uct rec­om­men­da­tions in­volved in im­ple­ment­ing the plan, and the on­go­ing en­cour­age­ment to stick with the plan. The more prod­ucts there are, the harder it is to de­cide where to in­vest, and this in­creases the need for an ex­pert to com­pare those prod­ucts and guide our choices.

Holmes’s pre­sen­ta­tion raised two im­por­tant ques­tions:

◆ Is ad­vice in­de­pen­dent only if it is not ac­com­pa­nied by any prod­uct sales?

◆ Does sell­ing fi­nan­cial prod­ucts ex­pose you to bi­ased or sub­jec­tive fi­nan­cial de­ci­sions?

Fi­nan­cial plan­ning ad­vice is not prod­uct ad­vice. It cov­ers ev­ery fi­nan­cial de­ci­sion, in­clud­ing bud­get­ing, in­sur­ing your ca­pac­ity to earn an in­come, get­ting into and out of debt, buy­ing a house, plan­ning a wed­ding, get­ting di­vorced, sav­ing for an in­come in re­tire­ment, draw­ing an in­come in re­tire­ment and looking af­ter your de­pen­dants af­ter your death. It in­cludes looking at how you fi­nance your life­style – your fi­nan­cial plan.

In im­ple­ment­ing that fi­nan­cial plan, you need to de­cide where to in­vest or which in­sur­ance pol­icy to buy. Th­ese prod­ucts need to match your needs. The prod­uct de­ci­sions also need to be taken in an en­vi­ron­ment of com­pet­ing needs, such as “Should I start sav­ing for re­tire­ment now, or rather use sur­plus finds to pay down my debt?”. This is where the true value of fi­nan­cial plan­ning ad­vice lies, Kop says.

If you are not fa­mil­iar with fi­nan­cial prod­ucts, you will need ad­vice to de­ter­mine which ones best meet your needs. Many of us have nei­ther the time nor the skills to do this re­search.

The fact that fi­nan­cial plan­ners ad­vise on a lim­ited range of prod­ucts doesn’t af­fect the value of their ad­vice. What mat­ters is how they choose the prod­ucts they sell, the due dili­gence they per­form, and whether they choose the best prod­ucts or their de­ci­sion is in­flu­enced by some other fac­tor, Kop says.

In­de­pen­dent ad­vice will rec­om­mend the prod­uct best suited to your needs. An ad­viser can be in­flu­enced by how much com­mis­sion the ad­viser will earn, re­sult­ing in you be­ing sold a prod­uct that may not be best suited to your needs.

It may also be in­flu­enced by the re­la­tion­ships and con­tracts your ad­viser has with prod­uct providers.

Rob Mac­Don­ald, who heads the Fund­house Ad­viser Prac­tice Man­age­ment Pro­gramme, told the FPI con­fer­ence that small ad­vi­sory prac­tices are be­ing bought up by larger ones that also of­fer prod­ucts, de­vel­op­ing mod­els that th­ese busi­ness call “ver­ti­cally in­te­grated”.

What that means is that you may be of­fered only the prod­ucts the com­pany has to of­fer. This could ex­clude prod­ucts that would bet­ter meet your needs, that you have iden­ti­fied, or that have lower costs. You may even be ad­vised to move your in­vest­ments if your in­de­pen­dent ad­viser’s busi­ness is bought out by an ad­vi­sory firm in­te­grated with a prod­uct house.


In a pa­per writ­ten in re­sponse to Na­tional Trea­sury dis­cus­sion doc­u­ments in 2013, 12 for­mer win­ners of the Fi­nan­cial Plan­ner of the Year Award, say rather than not hav­ing a fi­nan­cial plan or prod­uct, it is bet­ter for you to see an ad­viser who can iden­tify your fi­nan­cial needs and pro­vide for them, even if you are ad­vised to in­vest in prod­ucts that could ob­jec­tively have been ob­tained cheaper or bet­ter else­where.

The 12 ad­vis­ers were Barry O’Ma­hony, Natasja Hart, Deb­bie Netto, Ian Beere, John Camp­bell, Lionel Karp, Craig Kiggen, Alec Rid­dle, Ger­rit Viljoen, Jan-Carel Botha, Bouwer Nel and Dilip Garach.

They list the ben­e­fits of fi­nan­cial plan­ning as:

◆ Ad­vised clients are more dis­ci­plined in­vestors. Re­search shows that the average South African changes his or her unit trust port­fo­lio ev­ery 14 months, but this is far lower with ad­vised clients.

◆ Con­tri­bu­tions lev­els are reg­u­larly re­assessed and changed. Con­tri­bu­tion rates for non- ad­vised clients tend to stag­nate.

◆ Ad­vised clients gen­er­ally con­trib­ute more to tax-ef­fi­cient re­tire­ment funds, whereas non-ad­vised clients con­trib­ute more to dis­cre­tionary prod­ucts.

◆ Ad­vised clients are en­cour­aged to re­duce debt and credit card us­age and to rein in spend­ing.

◆ Ad­vised clients will re­duce or in­crease their risk cover as their re­quire­ments change and in­vest any sur­plus. Non-ad­vised clients tend to keep their cover level un­changed or ac­cept au­to­matic in­creases in cover, re­gard­less of ac­tual need.

◆ Lo­cal and in­ter­na­tional stud­ies show that ad­vised clients tend to earn bet­ter re­turns.

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