Some important questions for your financial advisor
By Vaughan Harries
Choosing a financial adviser is an important decision which will help guide you on your path to financial well-being. Selecting a suitable, certified adviser will reduce your financial stress and give you confidence that you are creating security for yourself and your family today and in the future. Here are some of the questions you could ask to ensure your chosen adviser is the right one for you:
1. How do you charge for your services?
Financial planners work mostly on commission based on the advice and service fees charged. These fees can be broken up into two types: initial advice fees and ongoing advice fees. The advice fees applicable to your investment will depend on your investment product. Usually the actual advice fees charged are based on a percentage of the value of the investment and are funded out of the total investment value but this will be illustrated in the fee disclosure.
Independent financial planners who work for themselves tend to receive 100% of the fees charged, whereas financial planners who are employed by a service provider will usually share in the advice fees.
2. What are my all-in costs?
The all-in costs will be disclosed to you in your financial plan. The applicable costs will vary depending on the product but may include administration fees, advices fees and portfolio management fees (also known as the Total Investment Cost).
The best way to compare and understand your all-in costs is to review the effective annual cost table, which is a cost measure standard set out by the Association for Savings and Investment South Africa. This table will form part of your financial plan with your adviser and was introduced to allow you to compare the charges you incur and their impact on investment returns when you invest in different financial products. It is expressed as an annualised percentage which helps you make better informed decisions and allows for each cost to be fully transparent.
3. What are your qualifications?
There are various institutions you can attend and qualifications you can acquire to become a financial planner. Certified Financial Planners (CFP) are a designation given by the Financial Planning Institute (FPI) of Southern Africa. The FPI is a professional association recognised by the South African Qualifications Authority for financial planners in South Africa.
In order to become a CFP, I studied a Bachelor of Commerce in Accounting as an undergraduate degree and then studied a Postgraduate Diploma in Financial Planning. I then wrote the professional competency examination through the FPI. Succeeding in this board exam then qualified me to use the CFP certification and become a Commissioner of Oaths at the same time.
There are also Financial Services Board regulatory exams that must be completed in order for a financial planner to provide advice to clients on behalf of a service provider.
4. How will our relationship work?
Relationships with your financial planner should be on-going. Have regular meetings to set up and service your investment as well as discuss your holistic financial plan. At these meetings, your financial planner should report back on returns and review your circumstances as well as your holistic financial plan to ensure that your life assurance, will and other aspects of your life are catered for.
Over time, market environments change and so too does legislation so the relationship will be an interactive one where your adviser must keep you informed on information that may affect your investment. Where necessary, your financial planner will re-assess your risk profile, ensure your objectives are still aligned with your structure and make any necessary changes to bring your asset allocation back in line with your strategy.
5. What’s your investment approach?
The investment approach should be tailored for each individual client but may include a combination of long term and/or short term views depending what strategy is appropriate for the client.
The multi-manager does not manage assets, but rather researches the asset managers in the industry, identifying their core competencies and combining them in multi-managed portfolios.
The blending of complementary single asset managers into a multi-manager portfolio helps to spread risk in an investment portfolio. In this way, investment returns are achieved that are consistent, above the benchmark, competitive to peers and at lower risk.
6. What investment types do you use?
There is no one-size-fits-all for the asset allocation of your investment. A good financial adviser should first discuss and understand your investment objectives and appetite for risk. Once your investment goals, investment horizon, risk tolerance and personal circumstances have been established, your risk profile can be aligned with an asset allocation that is most suitable to achieve the objectives which you have set out.
7. How do you measure investment performance?
The asset manager of a fund will choose a benchmark that corresponds to the risk of the underlying assets for that particular fund. Typically, inflation, market indices, and composite benchmarks are the most common measures to understand how an investment portfolio is performing.
Like asset allocations, a benchmark will be discussed in your initial financial plan and used as a way to analyse the risk and return of your portfolio to understand how it is performing against certain market segments as well as against its competitors.
Choosing the right benchmark is important as it is a constant yard stick which allows you to track the trajectory of your investment to ensure your objectives will be met.
8. What tax will I pay if I invest with you?
The tax you will pay will depend on a wide variety of things ranging from the type of product and assets you are invested in, to your age, to how you may be married. SARS has set out how each asset class is treated from a tax perspective. Therefore, the tax applicable to you may depend largely on the investment product as well as your asset allocation.
During the financial plan, the tax applicable to your particular product, structure and personal situation will be explained to you so that you are fully aware of what tax you may be liable to pay now and in the future. Where possible, your adviser should always advise on more tax-efficient products and strategies to lower your overall tax outcome.
Every year before the tax submission window opens, the product provider will issue you with your tax certificate for the previous tax year, which will list any taxable amounts that would need to be included in your tax return.
Vaughan Harries is a certified financial planner at Alexander Forbes