There are so many mixed opinions about financial advisors, some people swear by them and others completely dislike them. These opinions are obviously based on experience, and like all industries, there are good folk and bad folk, sadly. Not everyone needs a financial advisor but some people do, so a sweeping statement such as, "financial advisors aren't worth it" is silly. But let's explore this further in today's post to see what we come up with.
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Firstly, let me tell you about my experience:
I remember sitting at work one day, I worked at a theatre behind the bar, and heard a financial advisor speaking with some of the staff. I remember listening in and hearing about his recommendations around funds and the like. I went home and I sat on Google for hours looking up everything that he was speaking about. My folks didn't have a financial advisor nor did they know much about investing, to be honest, so this was all new to me and it was really interesting. I'm a numbers guy and I've always enjoyed making money so I was intrigued. Not too much came of any of this but the seed had been planted.
Fast-forward a few years and I met with a gentleman who was going to assist me with putting some of my money away and making it grow more. I went through with it, and if I remember correctly, one fund was the Allan Gray Orbis Fund of Funds and the other was something linked to the JSE Top 40 or with Old Mutual but I cannot remember exactly, unfortunately. I contributed monthly to the funds for many years and one day, something clicked inside and I started on my journey to learning how to invest. One of the biggest moments for me was when I figured out the fees he was charging me against the growth and it was really alarming - I basically wasn't making any money. Without any changes over the years, I was going backward at this point. He, sadly, passed away before I could sit down with him to speak about this and I was handed over to another company that held a meeting and that meeting was a lightbulb moment for me, I could see what they were trying to do and I didn't like it at all.
I had this idea, I wanted to meet with a large number of financial advisors to get a feel for the industry, to see if they all recommended the same things, to see what funds were recommended, and to increase my general knowledge. So, that's exactly what I did, I walked in and out of countless meetings, gathering all my research and getting myself to a point where I felt I had enough data to make wise decisions on my side. Unfortunately, I drew the conclusion that the majority of financial advisors were too aligned with specific products, and therefore were biased and the whole purpose of the meeting was to lock me into a fee-based scenario with perpetuity.
You could say that I've done my research and I've engaged as much as I could. For me, a financial advisor wasn't going to be the correct fit for me so over the last decade or so, I taught myself everything I know and I've been in control of my money without the burden of fees. This has worked out very well for me but I'm interested in investing, I'm happy to read long articles or listen to financial podcasts to gain more knowledge but that's not for everyone and that leads us to the point of this article: If you're someone who needs a financial advisor, then let's at least prepare you for finding a good one.
Here are some of the questions I'd ask:
There are a lot of different fee models that financial advisors use. The two that I'm most common with are upfront or commission based. Upfront is when you're charged a fee upfront for guidance and commission based is when you pay a commission based on the investments/insurance you take. The commission is the most lucrative for a financial advisor but it's also what eats into your investments the most. If an advisor charges 2% on an ongoing commission basis, that means you're losing 2% of your investments each year. When taking growth and inflation into account, 2% is a lot. Heck, if you think of losing 2% of your investments over many years, it's a great deal of money. Now, this all depends on what the financial advisor does for you, in some instances 2% might not be a lot of your return is really great. Make sure you understand the fee structure really well and keep asking questions until it makes sense to you so you're able to make an informed decision.
It's important to ask the financial advisor how you're going to communicate. Are you going to have a catch-up meeting once a year, perhaps more frequently, do you communicate with him/her or someone in the team and how will you meet, in person, or online? It's important that you understand this and that it works for you. Once a year might not be enough, if you're uncertain about investing you may need more face time with the financial advisor and if this isn't possible, you'd probably do better finding someone else who can meet as often as you require. It's also important to know how reachable the advisor is, what if something is concerning you, how easily are you able to speak with him/her to get an answer. Perhaps initially you meet quarterly and once you are more familiar, it could change to once a year. Take the time to make sure you understand all of this and that it works for you, or the experience could get frustrating and provoke anxiety.
Financial advisors have to be qualified and accredited. A person is not allowed to recommend financial product recommendations without being accredited. Please ask your financial advisor if they're accredited or make sure to read their website or material to establish this. I cannot stress how important this is, would you go to a doctor who isn't qualified? No. Another question to ask is whether they have indemnity insurance which is a legal requirement by the FAIS Act.
This might seem like a strange question but it's definitely not. There are a lot of products and services that a financial advisor may offer you. These stem from medical aid insurance to dread and disability cover to actual investments in unit trusts, pension funds, ETFs, and the like. If you're just starting out, you'll want to make sure that they offer you a holistic range of products and services. In my experience, I usually get put off by advisors who focus on insurance, insurances are important but shouldn't be the whole focus. I like to see a full plan, from insurance to investments, mapped out for me.
As mentioned in the question above, I like to see a plan of action. I'd want to ask what their investment philosophy is, how they structure a plan for me and what the intentions of the plan are. It's easy to take this question for granted but please don't - I met with all those advisors for a reason, I wanted to understand this and there were a lot of different approaches, some suited me and some definitely didn't. If someone's going to be recommendation how you save for your future, you want to know how they'll approach this.
Asset allocation and investment diversification are really important but a fair bit more complicated to understand, especially if you're new to this. Your money may be invested in property, bonds, cash, ETFs, unit trusts, insurance products and so the list goes on. You need to understand how the advisor will create a certain level of diversification for you. Do you want all your money in property? Probably not, imagine something happens to the property market. What about all in equities (shares)? This depends on your risk tolerance. There are countless scenarios when it comes to investment diversification so you need to get this explained to you to ensure that your investments have a certain level of diversification. Read my article on investment diversification here to understand this further.
You get financial advisors and independent financial advisors, to my knowledge at least. A tied financial advisor is someone who is linked to a specific brokerage. For example, you may meet a financial advisor who's linked to Vanguard or Liberty and therefore the products they recommend will all come from the brokerage they're linked to. I don't like this, it feels biased and limited; I much prefer a financial advisor who isn't tied and can work with any products or services they want, and are therefore not biased in any regard. Personally, I would never work with someone who's linked to a single brokerage.
When I was meeting with financial advisors, some advisors only deal with people who have a specific net worth. Investing large amounts of money versus smaller amounts of money require different skills. To the same point, your needs might be different from someone else's and I'd want to get some kind of idea around what sort of clients the person works with generally. I wouldn't settle for a, "I work with everyone", I want some insight into the types of clients to determine whether they're similar to me.
Another question to ask that helps with figuring out trust is to ask the financial advisor if you'd be able to speak with some of his/her active clients. Just like you'd do if you wanted to hire someone or get a job, you'd have references and the same needs to be applied here. Sure, it's a hassle but this is your money and you need to do due diligence. Get the numbers of a couple of active clients, reach out to them politely and see if they can spare you 5 minutes, it'll be worth it.
A question I feel definitely doesn't get asked enough is how will success be measured. If you're new to investing, this is really important for you to understand - you're going to put money away every month for many years, how are you going to know if it's a success or not? This is so incredibly important, you won't necessarily understand whether it's working or not, receiving a report that says your money has gone up simply isn't enough, it might have gone up but is it up against the benchmark? Push on your advisor to understand this, please. It should be an easy question for them to answer - get them to draw some numbers on paper whilst you're sitting with them and take that home with you.
Financial advisors who earn on a commission basis would obviously do best recommending the products with the greatest commission for them. Obviously, not everyone just sells what makes them most but many do and this is important to understand. Of the products they are going to offer, what fees are associated with each of them? Take the time to understand the product options and their fees so you're able to determine whether there might be bias involved.
Gosh, tax, a topic I really dislike because of the complexities. Whenever you invest, you earn from that and when you sell, you generate an income that is subject to something called Capital Gains Tax. There are exemptions and all sorts of tax laws and rules around this, the best you can do is raise the question around tax and see what the financial advisor explains. Sorry, I'm not one to go into detail about tax as I'm not qualified and it's a minefield but it needs to be raised and discussed. The last thing you want is a massive, unexpected, tax bill down the road.
Earlier I mentioned independent vs tied, and we spoke about fees around funds but what we haven't raised is how an independent advisor would go about choosing an investment option. If the advisor recommends a certain fund to invest in, it's useful to know how they went about choosing that fund as an option. A financial advisor should be able to talk about the analysis program they use with ease. If they don't, then you have to wonder whether they even do an analysis or purely just sell.
Here are a few others you might be interested in:
I appreciate that this is a lot but this is your money. If you're going to invest your money every single month for several decades in order to retire comfortably, there is NO reason to have to rush or feel awkward asking lots of questions. A good financial advisor will understand this and will take the time to answer your questions and make you feel comfortable. If anything, if the advisor is annoyed with all of the questions, then you've done your job and you'll know not to go with them. Perhaps you need two meetings to get through all of this, again, a good financial advisor will make the time for you.
With all that being said, what I'm picking up on recently is this movement away from financial advisors to financial coaches (money coaches). There is a big push in the United States around this and it's been very interesting to see this change starting to take place. Financial advisors are able to offer product recommendations specifically which is something financial coaches can't do but I think what's most important is having someone who has your financial interests at heart and whose job is to guide you, teach you how to budget, help you to pay off debt and give you tools to assist you with investing. Personally, I think that's more important than product recommendations. A financial coach can help you with the foundation and give you the tools to use to put yourself in a better financial position. From there, you might still choose to work with a financial advisor but you might find that it's not necessary.
I've been at it myself for many years and have done really well. I recently engaged with a financial advisor (I couldn't find a money coach) who has been a great sounding board. I get the feeling that it took a few meetings for him to realise that I probably wouldn't act on much of what he recommended, certainly not the products, but rather needing a sounding board. He charged me a fixed rate up front for X number of sessions and we've used those sessions to bounce ideas and through that, I've gained knowledge. Ultimately, it was more of a consulting engagement than anything which is exactly what I wanted.
We're all different and we all have different needs, the last thing I want to suggest is to stay away from financial advisors because that's most definitely not what I'm saying. What I am saying is that you need to do your research, you need to ask questions and you need to make sure that the person you're, effectively, employing is going to deliver his/her service in a way that makes you feel comfortable - If you fail to get that right, you might find yourself feeling trapped in a relationship and because it's your money, that's a scary position to be in.
Did I miss any questions?