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How to avoid being a victim at the hands of your financial advisor

From time to time, the financial services industry is tarnished by fraudulent advisors and aggressive selling of unsuitable financial products to gullible investors.

Two new financial scandals have been reported in the financial press in the last few months. A fund manager persuaded some of his clients to invest in a business run by his wife and was subsequently unable to pay promised dividends and a chief executive was provisionally sequestrated with victims claiming over R700 million. It is therefore a good time to remind investors how to choose an advisor and some red flags you should be alert to.

  • The decision of which financial advice firm or financial advisor to choose cannot be outsourced; it is one of the most important decisions investors make. The average length of an advisor/ investor relationship is purportedly longer than the average marriage in SA! Take the trouble to ensure that your potential new financial advisor is properly registered with and regulated by the Financial Sector Conduct Authority (the new name for the Financial Services Board).
  • As the investor, you should aim to have ‘common sense financial literacy’ and become familiar with current inflation rates, interest rates and different types of assets. You have an obligation to understand the financial risk and likely performance of the products proposed by your new financial advisor. Don’t invest in anything you do not fully understand. Don’t be afraid to ask questions.
  • Your increasing financial knowledge will enable you to detect when an investment offering is simply too good to be true. An offer that falls outside the bounds of common sense and reasonableness should be examined cautiously, conservatively and with a degree of scepticism. In our experience any offer that is too good to be true invariably is.
  • Only work with independent advisors who have the integrity, empathy, skill and aligned objectives to ensure that your best interests come first. Independent intermediaries should be able to demonstrate their independence, freedom of thought and choice to you by virtue of relationships with a wide range of asset management companies and investment products.
  • Transparency is a minimum prerequisite and covers every aspect of your relationship with your advisor. Your advisor should have the administrative back up to document your requirements and execute timeously every time and all the time.
  • Your new advisor has a ‘duty of due care and consideration’ and should at all times produce the best possible solution for your needs. In our experience, advisors are often influenced by what suits them best, as opposed to what might be best for you, the client. In particular, the choice of third party asset managers and administrators proposed by your advisor should be evaluated in terms of their reputational risk and their capacity to meet your goals. Ask questions if you are presented with an ‘off the shelf’ one-shoe-fits-all range of products or the default options of an asset manager. Do not allow your advisor to simply funnel your investments into a high street brand’s suite of products without checking on the fees and performance relative to competitor products over different time periods.
  • There are sometimes small print, costs, charges and other variables that could affect liquidity (the extent to which and speed with which you can withdraw from your investment) and that might have the effect of giving you, the investor, less than what you thought you were entitled to. If this happens, ask questions. Do not hesitate to take your statements to a competitor financial advisor and ask if the extra charges are fair. This second opinion is worth paying for as it could ultimately save a lot of money.
  • In addition to the backdrop outlined above a few practical tips for investors dealing with a financial advisor:
    • Don’t ever pay your funds into a trust account, personal bank account or other bank account suggested by your advisor. Only pay into the bank account of the investment company of your planned investment. In addition, always make sure that you receive independent confirmation from the investment company managing your investment, over and above whatever confirmation your advisor provides.
    • Make sure you receive regular communication from the investment company of your investment and/or online access to your portfolio so that you can monitor the performance of your investment on a quarterly, semi -annual or annual basis.
    • Be alert if normal financial advisor practices are not followed. The law requires that your advisor should discuss your long-term financial objectives, investment risk and any constraints and then present a plan which qualifies and quantifies the details of these requirements. The plan should include details of how it will achieve definable objectives at different future points. The plan should consider all stages of life, including the possible birth of children and your ultimate retirement and death. Your advisor should ask you to sign a ‘record of advice’ which is a summary of the discussions that take place and your advisor’s recommendations.
    • Make sure that you meet with your financial intermediary at least twice a year and ensure that his/her reporting incorporates all your investments, from inception, reflecting all additions and withdrawals, all investments in base currencies as well as a reporting currency and all investment costs and advice fees charged.
    • These reports should also include a range of investment metrics to enable you to get a sense of how your portfolio has fared relative to other products over the short, medium and long term. Your financial advisor should also contextualise the macroeconomic and financial environment and explain how these have impacted your portfolio.

ADVISOR PROFILE

Trevor Lee

Rosebank Wealth Group (Pty) Ltd

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