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Do you really need a financial advisor?

Advised vs non-advised: How the numbers stack up.
It pays to do your research and to interview a few different advisors before choosing your advisor, the writers recommend. Picture: Shutterstock

There is much scepticism about the value of advice and financial service providers in general. Some bad brokers have earned the financial planning industry a bad reputation by not always acting in the best interest of their clients and charging ridiculous upfront fees. With the rise in direct online advice through robo-advisors, one needs to ask: “How much value can a financial advisor provide?”

Do you get value for financial advice?

A research report from the International Longevity Centre (ILC) in the UK titled The value of financial advice was released recently. The research shows that there is real value created for investors when they obtain financial advice. 

The report considered two main categories of investors: those with limited assets and affluent investors. Affluent investors who made use of advisors entered retirement with 17% more money in liquid financial assets and 16% more money in retirement funds than the wealthy group who were not advised. The non-affluent but advised group, accumulated 39% more capital in liquid financial assets and 21% more in retirement funds than the not advised group. By any measure this is a resounding endorsement of the value generated for investors by quality advisors. It is worth remembering that the capital these investors have accumulated is after all fees.

Vanguard, the company that invented index investing, has also done a study on the benefits of having a financial advisor. According to their study, a good advisor adds about 3% per year in net returns for investors. To illustrate the impact of this difference, consider two investors who each have R10 million and decide to invest their money for ten years. One investor makes use of an advisor and the other manages his investments on his own. After ten years, the advised investor will have R8.9 million more.

A good advisor helps you save more

The ILC study also found that investors saved more and were more willing to invest in growth assets (like shares). The group who were wealthy and advised, were 6.7% more likely to save and 9.7% more likely to invest in equities compared to the wealthy group who are not advised. The non-affluent group who were advised, saved 9.7% more and were 10.8% more likely to invest in equities than the non-advised group.  

Not all financial advice is the same

While a good advisor can make a positive impact on your finances, a bad advisor can be very destructive to your wealth. It certainly pays you to do your research and to interview a few different advisors before choosing your advisor. Most importantly, you want someone who will not be focused on selling you products. Find out if the advisor earns a commission on what they recommend for you. If they do, ensure that the products recommended are suitable for your needs and not just advised so that they can earn an income. It is also very important to look for advisors that have the CERTIFIED FINANCIAL PLANNER® accreditation as this tells you that the advisor has the required education, experience and ethical standards to provide advice.

One size does not fit all

These studies certainly make the argument for using an advisor however, that does not mean that all investors should use an advisor for all of their investments. Some people are very capable of managing their investments on their own. There are some instances where advice might be beneficial even to those who are knowledgeable about finances and have the time to do their own research. Good examples would relate to tax compliance, estate planning and overall investment strategy. We find there are three broad categories of investors:

  • People who have the knowledge, confidence and time to manage their own investments;
  • Those who have the knowledge and only require limited advice on specific issues;
  • Those who prefer their investments to be managed by a professional.

We have certainly noticed an increase in requests for ad-hoc discussions from experienced investors who want a second opinion on their investment strategy. It is always worth finding out what services financial planners can offer. Many will offer you the option of an hourly consultation where you can obtain a second opinion without worrying about being sold a product you don’t need. If you have more complex issues, you can request a detailed financial plan that is developed for you to implement on your own. Or, if you prefer to have someone manage your investments on your behalf, the studies show that this could be very beneficial to you, provided you choose the right advisor.


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Pity one has to use the British model for the South African scenario – really out of context

Not out of context at all, completely relevant.

Great article Warren, especially the part on how to choose an adviser.

Hi Dirkg, are you an adviser?

Hi tomorrow, yes I am.

Warren Buffett said “never ask a barber if you need a haircut”, which translates into “never ask an adviser if you need advice”.

Very grown up “tomorrow”

When you ask a financial advisor whether people need financial advice you don’t need to speculate about the answer.

Hi, how to buy
ARC Investments share?

I have watched for over 20 years how certain financial advisors (SALESMEN)sell “their” products based on commission and poor returns for the client. NOW they want to do away with the FSB and create “new” greatness? Me thinks not, BUT HOPE

Good article to highlight the importance of having a financial advisor for the majority. I fall into category 1 the DIY investor. The problem is that it is difficult find a good financial planner based on ethics doing ie. doing the right thing for their client; remaining independent and not peddling some product based on commissions. Perhaps in this age of big data and transparency all Financial Advisors should have their performance monitored (it is just a matter of time if the Financial Planner is to survive the RoboAdvisor age – since the criteria below can be easily monitored for RoboAdvisors) based on:
1. Products sold to client
2. Commission earned by advisor
3. Return achieved per year (at a minimum) vs Market Return per investment product for the year/period
4. Financial planning hours spent on client
5. Fees paid by client
6. Actual Fees to Return % (Annual and Cummulative per client) – This ensures that there is nowhere to hide.
7. Incidents / Complaints against the Financial Advisor if any

If the above is measured for each Financial Planner on average the playing field is levelled.

CFP – my foot! Tried it with my wife’s R1m provident fund payout after she resigned. Long story short- undercover Sanlam sales agent (and a large sponsor of the local golfing fraternity) that tried to flog 5 unit trusts to us, together with an exorbitant management fee.

“Save yourself poor” came to mind when I looked at his pathetic CERTIFIED FINANCIAL PLANNER® accredited proposal.

End of comments.



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