NOMPU SIZIBA: Financial advice plays an important role in guiding individuals on the best way to save and achieve a broad range of financial goals. But which professional are you likely to get the most value from, who really focuses on your needs and the best products in the marketplace that will be suitable for your plans?
To give us a view on things, especially around the distinction between financial product advisors and financial planners, I’m joined on the line by David Kop, the director of relevance at the Financial Planning Institute of Southern Africa.
Thank you so much, David, for joining us. Why does the term “broker” no longer have relevance in the financial planning industry?
DAVID KOP: We think that “broker” is maybe a bit of an outdated term from the days when financial advice was all about selling products. I think what we’ve seen is that financial planning specifically has transformed from an industry to a profession. There’s been a lot of work to professionalise, in terms of the regulatory space, where the regulations have moved on from the days when just about anyone could be come a financial advisor, with very specific education and experience requirements in place.
And then, in addition to the regulatory requirements, there are many financial advisors out there who go further than what’s required by the regulation, and get a professional designation, such as the CFP Professional, the FSA Professional, or the RFP Professional issued by the Financial Planning Institute in South Africa.
NOMPU SIZIBA: So what do we mean when we talk about “holistic” financial planning, and typically what sort of interrogation should a financial planner be making as they try to ascertain your needs and your goals?
DAVID KOP: I think that the important bit about holistic financial planning is, before a financial planner actually starts talking to you about your money, they find out a little bit more about you. So, in order to provide you ongoing and personalised financial planning advice, it’s very important that the plan actually understands your values, where you come from, and what your goals and dreams are as as a person.
Once they understand that, then you can start getting to the money side of things. I think the first part of a holistic financial plan is understanding your spending habits. So, doing your budget is probably the cornerstone of a holistic financial plan, so you understand what the economic resources are. You also understand exactly what the person’s goals, dreams, and hopes are, and then you can take the two and merge them together. So you can say, well, based on what your goals are, we can then look at what your current financial position is, and how we move you from your current position to your desired future state.
NOMPU SIZIBA: So how should people determine whether they need financial advice or merely a financial product?
DAVID KOP: I think it’s very important that it does become very personal. For instance, if you’ve just gone and got a bond and the person who issued the bond requires you to get a life policy, then you know, okay, well, I’ve got to go get a life policy.
So if you’ve already got your goals that are stated very clear in your head, and you are just looking for somebody to give you advice on what the best product will be to meet them, then you can go and get some product information and product advice.
However, if you’re sitting and thinking, well, I know that I’m supposed to retire somewhere in my life, or I’ve thought about things that I maybe want to achieve, you need help with crystallising those goals and really exploring over and above just if I do die one day, I want to have a life policy in place, but exploring what your goals and dreams actually are. That’s when you need to speak with somebody to get more holistic financial advice to help you identify those goals, and then move forward into working out strategies to implement those goals and reach the point that you want to get to.
NOMPU SIZIBA: A lot of emphasis is placed on the word “independent” in this field. Are people ever truly independent? I mean, how are these professionals paid?
DAVID KOP: I think there are two different conversations. The first one is, is this an “independent” versus “tied” agent. The reality, and specifically what we believe is the FPI, is it’s more important to find out what your financial advisor does – was their objective to help you choose the best financial product for you, was the objective to understand you and to help guide you on a financial journey. And the reality is whether they are working for an independent financial advice firm, which is essentially a firm that is not tied or, or has their own licence, or they are not licensed by a product manufacturer, or if they are working for one of the large insurance companies that manufactures the product and distributes the products – in either case the advisor could be out there to sell you a product, or could be out there to give you advice.
And I think that’s why we are also said, in an article we wrote, that it is more important to find out either what is the ultimate goal of the advisor – are they there to help you choose the best product to meet your goals, or are they there to help you determine exactly what your goals are?
Now, in terms of a financial advisor being paid, the large majority of advisors are still paid either through a commission structure when they sell a financial product, or they take a percentage of your assets under management as an ongoing fee for providing you ongoing advice. What we are seeing from a global stage, however, and we in in South Africa, many advisors are moving to a fee-for-service model, where they either charge you an ongoing monthly fixed fee, or they say, “Well, if you want a plan designed for you, this is what it’s going to cost you to design the plan” – and then you pay for the design of the plan.
So we are seeing a shift from product-related payments to client payments. But it’s very important again, you know, when you have the discussion around how a financial advisor is paid, the conversation you should be having is more about “What you are going to do for me, and what is that service going to cost?” Once you understand that, you as a client can choose what the best way for you to pay that is. And if it is through the commission on the product, at least you understand and it’s totally transparent what that cost is going to be for you.
So we don’t believe there’s any bad method of payment. It’s all about transparency, and the client going in with the full knowledge of the effects of the various payment options that they’re going to choose.
NOMPU SIZIBA: And what type of questions should people ask their advisor before making a decision whether to use their services or not?
DAVID KOP: I think the first one is actually understanding the advisor’s background – things like, what their qualifications are, how much experience they’ve got, what services are they offering? How are they paid for those services and what kind of clients do they like dealing with, so you can see if the clients they deal with are like you. Another important question, in order to give financial advice, but particularly advice that is related to financial products, to find out if they are be licensed by the Financial Sector Conduct Authority, which is the regulator for financial services in South Africa.
So you need to firstly check that they are licensed to actually provide advice. Obviously again, in terms of the qualifications and the experience, also . understand if they are a member of a professional body and hold a professional designation, like the CFP designation.
And then, related to the services that they provide, once you’ve had the initial conversation as to an advisor and clients, what are the obligations on both the client and the advisor after that initial obligation that is related to the ongoing services and advice that can be given. I think that’s where a lot of the unhappiness comes in.
A lot of clients might go into it thinking that they would get ongoing service from their advisors, where sometimes the advisor might think that this is a once-off or an initial consultation. So it’s very important to build and say, “What exactly is the relationship going to look like? Is it a once-off consultation where you’re going to give me a specific piece of advice, or are we getting into a long-term relationship, and what is that long-term relationship going to look like?.
NOMPU SIZIBA: That was David Kop, the director of relevance at the Financial Planning Institute of Southern Africa.