A strong message in this year’s Savings Month is the need to obtain financial advice and set up a financial plan.

If you are not familiar with how financial advisers work, you may expect their value to lie in recommending the best investments in the entire investment universe. But in practice many advisers recommend only a limited range of investments. Does this mean you may be steered into certain products and pay a fee based on how much you invested, rather than the time it took your adviser to recommend a product?

As they seek to define what constitutes independent financial advice, financial planners, legislators and consumers are grappling with the issue of whether the relationships a financial planner has with financial companies influences the products he or she recommends.

Financial planners attending this year’s Financial Planning Institute (FPI) convention heard a presentation by Kate Holmes, the founder of Belmore Financial, a “location-independent” financial planning practice operating out of the United States for US clients.

Holmes runs a virtual office from wherever she finds herself, which changes as she travels the globe. Her clients schedule meetings online and she “meets” them on Skype or phones them at times that suit them, such as after their children have gone to bed. And she’s readily available when they have a question about their finances.

She doesn’t manage investments or sell products. Her only job is to help her clients manage their finances and cash flow, for which she charges a fee for the first consultation and an ongoing monthly fee.

Her clients trust her and know she has their best interests at heart. They will often ask her opinion when purchasing a big-ticket item, like the client who was looking to buy a new truck on a big-sale day in the US and wanted to know if this was a sensible purchase.

Holmes doesn’t sell investments or insurance, although she will recommend products that clients can buy through other channels.

The big advantage for Holmes is that her business and advice are free from the conflicts of interest that can arise from relationships with certain companies, or the incentive to earn more if she sells particular products. Her clients perceive her advice to be completely independent and objective.

In South Africa, the financial advice model that Holmes offers is rare. Advisers who offer this kind of service are few and far between, David Kop, the head of advocacy and consumer affairs at the FPI, says.

Almost all South African advisers recommend products and some even recommend investments they manage, or that are managed by the group for which they work.

They also typically charge a fee, such as R10 000 or R15 000, for an initial financial plan and an ongoing fee that is a percentage of your investments that are under their advice (known as assets under management). Alternatively, they earn commission on the products, such as life cover or retirement annuities, they sell you, and some earn commission and offset this against the fee charged.

Financial planning advice

The value of a financial planner is not limited to designing a financial plan, it is also in product recommendations involved in implementing the plan, and the ongoing encouragement to stick with the plan. The more products there are, the harder it is to decide where to invest, and this increases the need for an expert to compare those products and guide our choices.

Holmes’s presentation raised two important questions:

* Is advice independent only if it is not accompanied by any product sales?

* Does selling financial products expose you to biased or subjective financial decisions?

Financial planning advice is not product advice. It covers every financial decision, including budgeting, insuring your capacity to earn an income, getting into and out of debt, buying a house, planning a wedding, getting divorced, saving for an income in retirement, drawing an income in retirement and looking after your dependants after your death. It includes looking at how you finance your lifestyle – your financial plan.

In implementing that financial plan, you need to decide where to invest or which insurance policy to buy. These products need to match your needs. The product decisions also need to be taken in an environment of competing needs, such as “Should I start saving for retirement now, or rather use surplus finds to pay down my debt?”. This is where the true value of financial planning advice lies, Kop says.

If you are not familiar with financial products, you will need advice to determine which ones best meet your needs. Many of us have neither the time nor the skills to do this research.

The fact that financial planners advise on a limited range of products doesn’t affect the value of their advice. What matters is how they choose the products they sell, the due diligence they perform, and whether they choose the best pro-ducts or their decision is influenced by some other factor, Kop says.

Independent advice will recommend the product best suited to your needs. An adviser can be influenced by how much commission the adviser will earn, resulting in you being sold a product that may not be best suited to your needs.

It may also be influenced by the relationships and contracts your adviser has with product providers.

Rob MacDonald, who heads the Fundhouse Adviser Practice Management Programme, told the FPI conference that small advisory practices are being bought up by larger ones that also offer products, developing models that these business call “vertically integrated”.

What that means is that you may be offered only the products the company has to offer. This could exclude products that would better meet your needs, that you have identified, or that have lower costs. You may even be advised to move your investments if your independent adviser’s business is bought out by an advisory firm integrated with a product house.

The value of advice

In a paper written in response to National Treasury discussion documents in 2013, 12 former winners of the Financial Planner of the Year Award, say rather than not having a financial plan or product, it is better for you to see an adviser who can identify your financial needs and provide for them, even if you are advised to invest in products that could objectively have been obtained cheaper or better elsewhere.

The 12 advisers were Barry O’Mahony, Natasja Hart, Debbie Netto, Ian Beere, John Campbell, Lionel Karp, Craig Kiggen, Alec Riddle, Gerrit Viljoen, Jan-Carel Botha, Bouwer Nel and Dilip Garach.

They list the benefits of financial planning as:

* Advised clients are more disciplined investors. Research shows that the average South African changes his or her unit trust portfolio every 14 months, but this is far lower with advised clients.

* Contributions levels are regularly reassessed and changed. Contribution rates for non-advised clients tend to stagnate.

* Advised clients generally contribute more to tax-efficient retirement funds, whereas non-advised clients contribute more to discretionary products.

* Advised clients are encouraged to reduce debt and credit card usage and to rein in spending.

* Advised clients will reduce or increase their risk cover as their requirements change and invest any surplus. Non-advised clients tend to keep their cover level unchanged or accept automatic increases in cover, regardless of actual need.

* Local and international studies show that advised clients tend to earn better returns.


When you invest on the advice of an adviser, the adviser has to earn something for advising you.

The adviser may earn commission that is paid by the product provider. This is typically the case with policies that have penalties if you break the contract by stopping or reducing your contributions before the term is up.

The adviser can charge a professional fee per hour or a monthly retainer.

Most advisers, however, charge a initial fee for a financial plan and an ongoing fee based on how much you invest on their recommendation (known as a fee based on assets under management).

If you invest in a policy with underlying investments, or on an investment platform, you need to consider the total cost of all the fees, including:

* The adviser’s fee. Remember that investing through an adviser could reduce the fee you pay to an investment platform.

* The platform fee, which is typically on a sliding scale, depending on how much you invest.

* The asset management fee on each underlying fund. This could be either an ongoing fee or a performance fee.

You should also be aware that:

* Some unit trust companies pay rebates to the platform provider that may or may not be passed on to you in the form of a lower platform fee or a lower asset management fee.

* Some investment platforms offer what is known as “all in” fees that include the fund or asset management fee, the advice fee and the platform fee.

An often-quoted statistic is that, at a total fee of 2.5 percent, you will forfeit 40 percent of your investment return over 40 years.