If your financial adviser does not follow the proper procedures, you may end up receiving poor or inappropriate advice, Wouter Fourie, a certified financial planner who heads the Pretoria-based advice company, Ascor, and the Personal Finance/Financial Planning Institute Financial Planner of the Year, warns.
The Financial Advisory and Intermediary Services (FAIS) Act sets down the procedures an adviser should follow to ensure that you are properly advised.
Advice should take into account your needs and circumstances and result in a range of recommendations or product choices. You can receive once-off advice about a particular financial issue, but you need to agree in writing that this is all you require.
The dangers of asking for and receiving advice without the FAIS procedures being followed were highlighted recently, when a retiring Transnet employee, Mr DS, asked a Pretoria-based Old Mutual representative, Johan Janse van Rensburg, about how a lump-sum withdrawal from his retirement savings would be taxed.
Janse van Rensburg provided the advice verbally, and, in what Old Mutual called a “sample quote”, also provided advice on the structure of an investment-linked living annuity.
The 11-page “sample quote” did not contain any warnings that the information was being provided without the proper procedures being followed, such as the adviser undertaking an assessment of Mr DS’s financial position.
To make matters worse, the information on how his lump sum would be taxed was incorrect. Janse van Rensburg calculated that the Transnet employee would have to pay R180 000 in tax.
Fourie says Mr DS’s lump-sum withdrawal is below the threshold for members of statutory retirement funds, such as the Transnet pension fund; therefore, Mr DS would pay no tax on the amount.
In the sample quote to Mr DS, the advice on a living annuity could, if followed, have had serious consequences. The pension structure included an effective initial annual drawdown rate of 12 percent on R2.5 million – what remained after Mr DS took one-third of his savings as a lump sum.
Calculations based on the Association for Savings & Investment SA’s Standard on Living Annuities, which gives recommended drawdown rates, indicate that Mr DS’s income would have started to decline within six years of retirement.
Fourie says “sample” quotes that contain advice are unacceptable. “It is not in the best interest of anyone to request, receive or give sample advice, particularly when it comes to retirement planning, where it is very difficult to rectify mistakes when you can no longer generate an income,” he says.
OLD MUTUAL RESPONDS
Lee Nakan, the executive general manager at Old Mutual’s Broker Division, says Mr DS asked Janse van Rensburg for an example of the tax consequences on his lump-sum withdrawal at retirement and was aware that the advice he received on both the taxation of the lump sum and on a pension bought with the balance of his retirement money was a “sample quote”.
He says Old Mutual’s advice processes are designed to comply with the FAIS Act and the regulatory regime of Treating Customers Fairly.
“Old Mutual does not tolerate non-compliance with regulation by our advisers, or any other staff, and does not approve of behaviour that is not in line with our customers’ best interests.
“To the extent that Mr Janse van Rensburg did not follow Old Mutual’s processes in his interactions with Mr DS, we have addressed this with the adviser and will use this as a case study for other advisers going forward to ensure that they follow the correct process.”
Caroline da Silva, the Financial Services Board’s deputy executive in charge of financial advice, says: “The FAIS General Code of Conduct sets out the requirements for a financial services provider from the point of contacting the client, through providing information about the financial service, to what is required from a provider before they provide a client with advice.
“The FAIS codes do not contain any reference to the term ‘sample advice’.”
Nakan says if any business based on the “sample quote” had been submitted, Old Mutual’s internal processes would have blocked the transaction from going through. “This is because Old Mutual introduced measures to ensure clients are presented with appropriate options and easy-to-understand indicators of the outcome of their choices.
“We are committed to ensuring that clients are appropriately advised and fully aware of the implications of their annuitisation (pension) decisions.”
Nakan says Old Mutual has put the following additional measures in place:
* Advisers are required to present “all clients with a guaranteed annuity quote, alongside any living annuity quote. As part of the required documentation for a new-business living annuity submission, we require that clients formally sign to indicate they have been presented with the guaranteed annuity option and have declined [it].”
* Advisers are required to complete an assessment that explains in simple terms the possible outcomes of the different annuity choices and the risks. This would take into consideration the annual drawdown rate, along with the client’s details such as age, invested amount and portfolio choice.
ESSENTIALS FOR SOUND ADVICE
Wouter Fourie, a Certified Financial Planner from Ascor, and the Personal Finance/Financial Planning Institute Financial Planner of the Year, says a key requirement of the Financial Advisory and Intermediary Services Act is that an adviser must first ascertain all the relevant facts about your financial situation. This is called a financial needs analysis.
“There must be a proper analysis of your financial affairs, needs and wants, to ensure you receive the most appropriate advice,” Fourie says.
He says advice should be based on the Financial Planning Institute’s six-step process. Your adviser must:
1. Establish and define his or her relationship with you, including what services will be provided, both parties’ responsibilities, and how your planner will be paid and by whom.
2. Gather your personal data and establish your goals.
3. Analyse and evaluate your financial status, determining what you must do to meet your goals.
4. Develop and present financial planning recommendations and/or alternatives. Your planner should then ensure you understand the recommendations so that you can make informed decisions.
5. Implement the recommendations. Your planner may carry out the recommendations or serve as your “coach”, co-ordinating the process with you and other parties.
6. Monitor the process. If your planner is in charge of the process, Fourie says, he or she should meet you periodically to review your situation and adjust the recommendations if necessary.