File Image: IOL
File Image: IOL
Picture: Supplied
Picture: Supplied
File Image: IOL
File Image: IOL

This article was first published in the second quarter 2017 edition of Personal Finance magazine.

If you use your financial adviser as little more than a sounding board, instead of someone to whom you defer, you could be a “validator”, a growing class of investors who seek validation for their own investment decisions, as opposed to accepting advice on how to invest.

Robo-advisers that help you to choose a mix of asset classes appropriate for your risk appetite and investment needs are expected to contribute to the growing number of investors who want a computer program to help them validate their decisions.

A study by global market research company JD Power into the investment advisory industry in the United States has segmented the market into three categories according to how investors make decisions in consultation with a financial adviser.

It found that the percentage of “validators” has increased steadily since 2013, and that they now account for 36 percent of all investors, according to an article by BenefitsPro, a US-based magazine for advisers. The trend is even more pronounced among Millennials (those born between 1982 and 1994), with 64 percent falling within the validator segment this year, BenefitsPro reports.

The other two types of client are “collaborators” and “delegators”, the study found. Collaborators depend on their advisers for guidance and advice, while delegators want their advisers to make decisions on their behalf.

BenefitsPro reports that the percentage of collaborators has fallen steadily during the same period (to 51 percent in 2016 from 59 percent in 2013), while the number of delegators has remained flat.

Peter Hewett, the managing director of Hewett Wealth and a former Financial Planner of the Year, says he is seeing a shift in the South African market, with consumers generally becoming more astute and making an effort to understand financial markets. 

South African consumers have moved from being delegators to collaborators, he says. “It’s encouraging. If your client is involved and fully understands what you’re doing and why you’re doing it, he tends to be tolerant when the markets take a negative turn and you end up with a long-term relationship.” 

Hewett reckons that most South African consumers are collaborators and delegators.

“We have fewer validators than the US. There you see a definite shift to mutual fund (unit trust fund) investors; they’re ahead of us when it comes to robo-advice; and there’s more awareness in that market about the impact of costs over the long term. 

“I’m seeing it locally. The local ETF [exchange traded fund] market is growing at quite a rate, although it’s still much smaller than the actively managed market. I think people do realise that active asset management has value over time, if you have a good manager.” 

Mike Foy, the director of wealth management practice at JD Power, says the rise of validators is likely to be accelerated by the further development of new technologies, such as robo-advisers.

Full-service financial advice firms will have to adapt to these changes by providing investors with more value and transparency, making a clear case for the value they provide versus lower-cost alternatives, such as robo-advisers, Foy adds.

Hewett says research by Charles Schwab indicates that consumers with less complex needs are attracted to robo advisers, but, as their affairs become more complex – and the need for tax advice or estate planning arises – they seek advice. 

Findings by this year’s Global Consumer Survey apparently support Hewett’s view that South Africa has a small percentage of validators. The survey found that only 27 percent of South Africans believe they are knowledgeable about finance and financial matters.