How to find the best financial adviser for you
02 August 2016
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Welcome to the latest edition of Old Mutual Live Business, my name is Chris Gibbons. How often have you heard it said during a financial show on TV or radio or seen in print the words ‘before making an investment, make sure you consult your financial adviser.’ Fair enough, it is wise advice and these days that financial adviserhas to have a formal, professional qualification. Unlike in bygone years when any Tom, Dick or Harry could hang up a sign and start dispensing words, if not real wisdom, all, of course, at a fee.
Even so, financial advisers come in many different shapes and sizes, some are attached to big companies like Old Mutual, others are strictly one-man band independents and quite a few fall somewhere in between. How do you decide who is best for you and equally importantly, do you understand how much they’re going to charge you and what impact those charges are going to have on your investments?
We say hello now to Gregg Sneddon whose Cape Town based company is called The Financial Coach. Gregg, welcome to Old Mutual Live Business. How would I go about making this kind of decision, where would I start?
How to source out a financial adviser
Gregg Sneddon: Greetings Chris, I think it’s like trying to find or start any new relationship. If you went to see a doctor, you would probably start with asking some friends and some colleagues for some referrals, or some family members.
Then you’d go and make an appointment to see the person and then get there and start a conversation with them. I think the most important thing is, it’s about relationship, there has to be a good fit. You could meet the most qualified surgeon who has the best qualifications in the world, but if there’s not a fit there, if the bedside manner, and you don’t click, it’s not going to be a happy relationship, so there has to be a good fit.
CG: Like anything else, it’s a case of shopping around, but you’re stressing the importance of that good, personal relationship, the chemistry does matter.
GS: Absolutely, I think it’s the most important thing. In any business thing it’s about relationship, if there’s not a good relationship, it’s not going to be a happy one, so it has to work for both parties. Both the adviser, the planner as well as the client.
It’s all about feeling comfortable
If you’re not happy, if there’s not a good fit, then shop around. I certainly wouldn’t, coming to everything at the first meeting, take the advice with a pinch of salt and maybe get a second or a third opinion and find somebody that you’re comfortable with.
I think qualifications are important and there has to be trust, but trust is something that’s earned over time, you don’t trust the person implicitly at the first meeting, they must earn your trust over time. Qualification is certainly important, but these days, more and more planners are becoming properly qualified.
I think it’s important to deal with somebody who is a certified financial planner, but having said that, we also need to recognise that there are a great number of, particularly older advisers who have been in the industry for 30-40 years and who probably are not going to sit and study a CFP at this stage. That doesn’t make them bad advisers or people not to deal with.
Some of them know what they’ve been doing and are better than many CFP’s, they just don’t have that formal qualification, it wasn’t a requirement when they set out. So don’t discount the years and years of wisdom that have been earned over time. If you’re dealing with somebody who is new to the industry or younger, certainly I would be looking to deal with a certified financial planner for financial planning.
CG: Let me be absolutely clear about that. I was under the, perhaps mis-apprehension that I was not allowed to dispense financial advice unless I had passed a particular exam.
GS: Yes, you do have to, but CFP’s, a certified financial planner is underpinned by a post grad diploma in financial planning. It’s an NQF 8 qualification, if I’m not mistaken and I think you need an NQF 5, which is a matric equivalent. So, yes, certainly you don’t have to, it’s not yet regulated that you have to be a certified financial planner. Maybe it’ll come in time.
CG: Many of the big financial services companies have people who appear to work for them but are in fact independent brokers, how does that all work?
How do independents work with big firms?
GS: That’s a very good question, if you can get an answer, let me know! It’s not as clear as it should be. I don’t know how you can work for a big insurance company and then claim to be independent, to me that’s just a conflict of interests.
If you’re independent, you represent anybody. You might have chosen to represent four or five different companies, but you’re not restricted in approaching company number five or company number six. To say you work for a big insurance company or a big corporate and then call yourself an independent, no, I don’t think that’s possible, but maybe I’m wrong. To me an independent financial planner is somebody who is unrestricted and can offer you any companies products or services. If you’re restricted in any way, I don’t know that you can call yourself independent.
The client always pays
CG: If I pick one of these independent brokers, who pays them?
GS: You do, of course, you’re always paying them. You just might not be aware of it because it might be paid via a product or out of your funds, but ultimately the client is the one that’s always paying and because of that, you need to not be naïve. Nothing is for free, just sit in front of any professional, it’s going to cost you money and you need to find out exactly what it is you’re paying and why you’re paying it.
CG: Okay, I have personally done just that in years gone by and after we’ve discussed my investment needs, the person concerned, the broker, tells me that all of this can be achieved for a very small sum, a half a percent here, a half a percent there. It all sounds very reasonable indeed, but this is an area in which an investor surely needs to exercise great caution, because all those tiny sums add up, don’t they?
GS: Of course they do Chris on a half percent, while it can sound very reasonable, on a large amount, a half a percent may be way too much and on the smaller amount, it may be way too little. So, percentages, I’m very wary of percentages. To say oh, we charge a half a percent here or a half a percent there, I don’t think that’s transparent enough. In fact, by law, we’re supposed to disclose the rand amount of transactions so that investors can understand that.
As I said, it depends on what service you’re contracting the adviser or the planner to do for you. It depends how often they’re going to be involved, what they’re going to do, how much work you’re going to do yourself and of course the quantum of the investments or the quantum of the portfolio that’s being involved.
As I said, there might be a time where a half a percent is way too much money and the industry norm seems to have crept up to 1%. One percent on a hundred million rand portfolio, that’s a bucket full of money and in that instance it might be appropriate to take 0.1%. What I think is important is that financial advice fees are negotiable.
Are financial adviser’s fees negotiable?
CG: That was my next question. They are negotiable, is that right?
GS: They’re always negotiable. You’re paying for a service and you know, the old adage that you get what you pay for might not necessarily be true. But certainly be aware what it is you’re paying for. If you’re investing a lump sum these days, it’s very unusual for advisers to take upfront fees anymore. There are some people who do that, there are some corporates that insist on taking upfront fees, but it’s very uncommon in my experience for investors still to be paying upfront fees on investments.
CG: All right, now if I have a financial adviser who winds up placing my investment with a company like Old Mutual, wouldn’t it be better approaching the company directly in the first place?
Could I go directly to the financial institution?
GS: It’s unlikely because they’re going to charge you a fee regardless of whether an adviser is involved. You’re not going to get a discount, it’s unlikely you’re going to get a discount for placing business direct with them. So then you’ve paid the full fee and you’ve got no advice. My advice to clients is, look, if you can go direct and you can cut out and you’re going to save, and you know what you’re doing, then go for it.
Reality is that very few people actually know what they’re doing and you’re not going to get any advice from the company concerned because usually they’re not licensed in terms of the financial advisory intermediary services that can give advice and they’ll tell you that. If you know what you want, go for it. If you don’t, find a trustworthy financial planner.
CG: There is another model altogether, one which you practice at The Financial Coach whereby the investor pays the adviser by the hour, no half a percent here or a half a percent there, a straight forward professional rate payable when the consultation is complete, as you would pay a doctor, as you would pay a lawyer, why would that be of benefit?
Is an hourly rate the way to go?
GS: Chris, we do offer that model, but it has problems as well. What is the hourly rate and how do you calculate that rate? So the investor or the client comes in, look, I’m just getting an hour of your time. No, you’re not getting an hour of my time, you’re sitting in front of me for an hour, but there’s a whole lot that goes into that hour that you’re not really seeing.
The rate has to be calculated and the reality is that that rate for most investors is probably going to be unaffordable. You’re probably not going to come away with anything less than R1000-R1500 per hour and the client says, wow, that’s too much. Well, you’re paying your doctor much more than that, the problem is, you just see them for 15 minutes.
So in order to do a proper financial planning consultation, you’re probably going to need 3-5 hours and that might be way too steep for many clients. There’s the first thing, is the quantum of the fee might not suit the client, to go and fork out that kind of money upfront.
I’m finding a much bigger problem in the hourly fee model and that is there’s a lot of admin in kind of going after the fee because clients say they’ll pay but then you’ve got to chase them and then I’ll become a debt collector.
Then there’s resentment from all sorts of sides because the clients feel they’ve got to fork out this money and the advisors think, I’ve got to go chase the clients. Then an even bigger issue we’ve come across recently is, who takes responsibility for the portfolio?
It’s all very well for the investor to say, look, I’m going to take responsibility, but when things go wrong and something goes wrong with the fund and I know something has gone wrong with the fund, I’m not going to contact the client.
Most clients are not aware that something has gone wrong with the funds until it’s too late. I’m re-examining this pure hourly fee model. We will offer it for clients who want to just pay a consultation or want a second opinion.
But I think when you’re entering into a financial planning relationship, the ongoing advice fee makes a lot more sense. It’ll end up being the same quantum of fee, but instead of it being a cash payment, you view it as a credit card payment. So the company concerned is going to pay it from your funds to the advisor on a monthly basis.
CG: There I’ve got to leave it, we’ve been talking to Gregg Sneddon of the Cape Town based company, The Financial Coach, Gregg, thank you for being with me on Old Mutual Live Business.