Financial planning is for everyone, not just the rich
NOT that long ago, “financial advice” was essentially a euphemism for the aggressive selling of financial products by life insurers. You went to an adviser or broker if you wanted to invest or take out an insurance policy. The adviser chose a product out of the limited range available, convinced you that it was right for you, and you signed on the dotted line. The dotted line, in the case of investment products, was a contract that bound you to contribute a specified amount over a specified term.
This business model enabled the life company to offer the adviser, who had some product training, but needed very little in the way of financial qualifications, a lucrative commission based on the whole amount contributed over that period, which was a huge incentive for the adviser to sell as many products as possible.
It was a recipe for disaster: advisers mis-sold financial products on a massive scale because they were operating in their best interests, not yours.
Many things have changed. Investing has become democratised through, among other things, the emergence of the asset management industry, which offers a mind-boggling choice of non-contractual collective investments. And it has become easier to invest directly in the stock market, through low-cost, accessible online platforms.
Importantly, the regulators clamped down on advice and the sale of financial products, through the Financial Advisory and Intermediary Services Act of 2002 and, more recently, the Treating Customers Fairly regime. This has made it harder for an adviser to sell you a product without first properly assessing your circumstances and financial situation.
However, the scenario I described at the outset persists. There are still far too many advisers who have minimal qualifications and are, to put it bluntly, little more than salesmen.
Fortunately for you, the consumer, a new breed of adviser has taken financial advice to the level of a profession – where it should have been in the first place. The financial planner (and I’ll use this term to distinguish such a person from a regular adviser) has a postgraduate qualification, offers a level of service similar to what you would expect from a family doctor or lawyer, and is bound by a professional code. This is someone with whom you can establish a long-term relationship and who acts in your best interests to help you achieve your financial goals.
The top echelon of financial planners in South Africa have the internationally recognised Certified Financial Planner (CFP) designation and are members of the Financial Planning Institute of Southern Africa (FPI).
I asked David Kop, executive director: relevance at the FPI, whether the seemingly widespread perception that financial planners were just for the wealthy was a valid one.
Says Kop: “Our vision simply states ‘professional planning and advice for all’. One of the myths is that financial planning is only for the wealthy, and you should only start engaging in financial planning when you’ve got money. But the reality is that everyone can engage with a financial planner.
There are various ways financial planners get paid – it could be by charging a fee or by earning a commission on a product. So the first point is understanding how your financial planner gets paid and whether it is something you are comfortable with. With about 4 700 CFP professionals in South Africa, you will find someone who meets your needs.”
Kop says financial planning involves drawing up a financial plan that is specific to you and designed to help you reach long-term financial goals, but that is flexible enough to adapt to short-term changes in circumstances.
“Your financial plan is a working document and is something that should be regularly reviewed and updated as you go through life – you might have a new baby, you might change your goals. Covid hits, and all of a sudden your travel plans go out of the window, and now you’ve got this pot of money saved, so what else can you use it for?
“A lot of people think financial
planning is all about retirement planning and yes, retirement planning is one aspect of your financial plan. But during your journey, there are other things that will come up.
“Your children may one day want to go to university, or you may want to take your partner on a romantic trip to Paris, for example. So there are definitely milestones that your financial plan will need to accommodate,” Kop says. While a planner should consider all your financial needs, he or she may be likened to a medical general practitioner, who can refer you to a specialist when necessary.
Says Kop: “The area of financial planning is so broad, to be an expert in everything is nigh impossible. So quite often the role a financial planner takes is to be your coach and guide and to help develop your plan, and then work with other professionals to help you implement that plan.
“However, the planner should have enough financial knowledge so that, if he or she refers you to an attorney to help draft your will, for example, the planner would be able to say how the will you’ve drafted fits into your overall plan.”
So what are the telltale signs that an adviser is not working in one’s best interests?
“One must be aware that financial planning is not about the product. The product is a tool that a planner will use to help you meet your goals. So if you find that the adviser’s conversation with you is all about the product, and not about you, that is probably the first telltale sign that somebody is just there to sell you a product.
“Financial products are vitally important and are needed in our ecosystem, but from an advice and planning viewpoint, the first step is to understand more about you – what you want to achieve, what your goals and dreams are.
“Then the planner will apply his or her skills in order to achieve your goals. If that is the approach your planner is taking, you know you’re on a financial planning journey. But if the approach is just trying to get you to buy into a product and worry about the advice second, then you’re in a product-sell environment,” Kop says.