Many South Africans shun financial advice because they believe getting advice means seeing a broker whose aim is to sell you financial products.
Good advisers, however, provide advice, not products. If you buy the advice, it may lead to you taking out some financial products, but the advice should convince you that doing so is in your best interests. You should see that the products are necessary and will help you achieve your financial goals or protect you from the risks that could prevent you from achieving your goals.
The advice that a financial planner provides is a financial plan which can cover every financial aspect of your life, from managing your personal finances, saving for an emergency fund, saving for goals, saving for retirement, saving tax efficiently, your healthcare cover, your insurance, protecting your life from early death and disability, and estate planning. Read more: What should a financial plan include? and How do I set savings and investment goals?
Some advisers or brokers focus only on some aspects of these areas of financial planning – for example, some brokers focus only on short term insurance or medical scheme cover, and some planners specialise in investment and retirement planning, but you need planning in every aspect of your financial life.
Can you do it yourself?
You can manage your financial affairs yourself, or get help on some aspects and not others, but without a full financial plan, you cannot be sure you have covered all the bases and will achieve your financial goals.
A good financial adviser can save you time – managing your finances yourself requires a lot of research and can be daunting when you are making major decisions that can affect your financial situation for many years.
It is also easy to be biased in your thinking, especially when, for example, your investments are making a lot of money or losing money. A good adviser is trained to think more objectively and guard against common biases.
If you do not trust the person who is giving you advice to act in your best interests, then you probably have not found the right adviser.
The cost of advice vs no advice
Many South Africans also shun financial advice because of the cost involved. Advice does cost, because it is a professional service.
What those who focus on the costs often don’t appreciate, however, is that there can be a higher cost of not getting advice.
Over the years, there have been a number of attempts to quantify the cost of not getting advice.
In particular, Morningstar, the US-based investment research house that also provides
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investment management services to the likes of financial advisers, quantified what the annual value of advice in terms of additional returns earned on investments is.
In particular, Morningstar, the US-based investment research house that also provides investment management services to the likes of financial advisers, quantified what the annual value of advice in terms of additional returns earned on investments is.
The returns of a market as a whole are referred to as the Greek alphabet letter beta, and the returns that an asset manager can earn above the market return is referred to as alpha.
Morningstar therefore referred to the additional returns that an adviser can help you achieve as the Greek alphabet letter, gamma.
Morningstar’s David Blanchett and Paul Kaplan in “Alpha, Beta and now... Gamma” estimated that people making use of an adviser could potentially earn more than 1.5% a year more in returns than those who did not. This, Morningstar found, could potentially give you 22% more income in retirement than you would potentially have if you did not take advice.
Focus not on investment performance
Blanchett and Kaplan’s research was not based on any findings about how good advisers are at finding you the best-performing investments, but rather on the difference that advice on the following issues could make to your investments:
More recently, Morningstar turned its research to considering households who used financial planners versus those who used advisers focussed on transactions (a transactional adviser), those who used the internet and those who had no help at all.
It considered the decisions people made in five key areas: the level of risk in their investments, their savings habits, their life insurance coverage, their credit card balance and their emergency savings.
The research found households working with a financial planner made the best overall financial decisions, while those relying on a transactional adviser made the worst financial decisions.
US-based index fund provider Vanguard also researched the potential value an adviser can add, estimating it could be as much as 3% a year, but this is not to suggest that any adviser, charging any fee can add that much, and you should remember that your circumstances also play a role.
Vanguard’s research considered factors not included in the Morningstar research, such as behavioural coaching; advice on rebalancing your investments and the value of implementing investment recommendations cost effectively using low cost funds.
Behavioural coaching and lifestyle planning
Behavioural coaching is the term used when an adviser guides you to seeing how your behaviour is or could prevent you from achieving your goals. For example, a adviser may help you to see why you should stay invested when, for example, markets deliver returns you do not like or buy into a market when there is hype about a sector. This could can help you avoid buying into markets when they are expensive just because there is a lot of positive sentiment, and selling when markets are cheap because many investors have a pessimistic outlook.
Instead, an adviser will coach you on why you need to stick to your chosen investment strategy through different market cycles to ensure you earn the returns you need.
Some financial planners take coaching further. They offer lifestyle financial planning that helps you identify your lifestyle goals and devise a financial plan to enable you to use your money achieve those goals without compromising your financial security.
Peace of mind
Vanguard also notes that for some, the value of advice is just the peace of mind that comes with having a professional guide you.
A professional financial planner will not only guide you on how and where to invest, but also on where to find the most cost-effective insurance and how to navigate any issues you may have with an insurer regarding exclusions or loadings on your cover.
Should you be retrenched, go through a divorce or lose a spouse, a good financial adviser should be at your side helping you to cope financially.
identify your life and financial goals, review your current financial situation relative to your goals and design a plan to help you do what you need to do in order to achieve your goals