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LAST Thursday, the day after the midweek holiday, I went into my bank to pick up a new chequebook.
I decided to draw money over the counter to see how it works, since we all only seem to use ATMs these days.
Inside the bank, the queues were long and mostly filled with people over 50. In fact, some of them were over 70.
While standing in a slow-moving queue I had the opportunity to overhear most of the conversation that took place between a bank official and an elderly woman who was investing R700 000.
So today I’d like us to analyse this meeting and make sense of how a good advice process should be. He (the adviser) was a trusted bank official and the client of 70 was basically told to do as he advised.
When told that investing in a portfolio of bonds was better than investing in the money market, the lady said she was satisfied that she could double her returns by doing so.
Her daughter, who accompanied the lady, interjected to determine whether the investment was safe.
“Yes, conservative and safe, yes,” the adviser answered.
And another advantage, he added, was that the investment was easily redeemable should she need the cash.
The customer also rattled off the other investments she has; these are all in safe money market and balanced funds with top-name investment management companies.
The adviser agreed that this was good and wise.
Let us look at the mistakes that were made by this bank adviser as well as by his investor:
l The place for giving advice of this type (a queue in the bank) was wrong. Private matters should be discussed in a private area or office.
l The amount to be invested was big enough to take better care of a worthy client.
l The client never asked why bonds were a better investment option. This is especially relevant at a time when most investment advisers and fund managers are hesitant to buy only bonds or go “overweight on bonds”, as so many backers of bonds are failing.
l The client was not willing to pay for proper advice and was satisfied with free advice, even if this was not in her best interest.
l Never once was the matter of the costs involved asked about, neither was that information volunteered.
There will be three costs that need to be investigated: commission on investing (higher in this instance than with most money market investments); management fees applied by the chosen investment house; and cost of redemption.
The client mentioned her other investments and the adviser should have offered to do a full and proper needs analysis.
The fortunate thing for our investor is that there is no need for her to ensure proper conduct.
The investment adviser, on the other hand is obligated, in terms of the Financial Advisory and Intermediaries Act, to suggest a needs analysis.
Yet it is wise for an investor to test the adviser with some questions and not rely on “the right to sue” when the investment fails on underperforms, as the losses that may be sustained may never be fully recovered when doing so.
Let us look at some guidelines to apply when dealing with an adviser:
l Always ask why a particular investment is suggested. Do not always buy into the fact that equity investment is bad.
There are four investment classes and a balanced portfolio should have representation in all four classes. Never over-expose in any one investment type or class; create a fair mix.
l Do not argue which is best, add a bit of everything to the mix.
l Have your entire portfolio reviewed every few years. Obtain a second opinion.
l Be willing to pay professional fees. Don’t go for the no-commission or no-fee option. An investment manager colleague, who has outperformed peers by between 3 percent and 6 percent, applies a fee of 1 percent which would have gained his clients an extra 2 percent to 5 percent return and the opportunity to double their money four years sooner.
l Don’t be too concerned over upfront or commission costs. Also check subsequent costs. Some managers will attract investors with nil upfront costs yet may charge a 5 percent annual trail, which is often hidden.
l Remember that the ombudsman does not regulate investment returns and you are on your own when it comes to recovering losses.
n Deon Hattingh is a certified financial planner and trainer on financial literacy, budget and debt management, and wealth creation. For more information, please visit www.makingsense, or e-mail deon@makingsense.co.za.
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