SIKI MGABADELI: Joining us for this conversation is Frank Magwegwe, who is segment CEO at Momentum Retail. Thanks so much, Frank, for your time today.
FRANK MAGWEGWE: Thank you for having me on your show and good evening to the listeners.
SIKI MGABADELI: Do you know who that quote is from? [If you think the price of advice is high, then you must consider the cost of ignorance.]
FRANK MAGWEGWE: I scratched my head and unfortunately I couldn’t think of who it can be attributed to.
WAYNE McCURRIE: I can’t remember. But it has a lot of validity.
SIKI MGABADELI: Absolutely, because so many people make pedestrian mistakes. We always talk about we are listening to advice on what to buy in the stock market from every Tom, Dick and Harry, and following the herd, whereas if you actually got advice you might do a little bit better. So what is the value of advice then?
FRANK MAGWEGWE: Before you even get there, Siki, let’s just frame the discussion. The term financial planner is used interchangeably with financial adviser and it’s quite difficult to have a good sense of what one is referring to. So if we can just touch very quickly in terms of framing our discussion.
I think you can start by looking at in what sort of instances would you need a financial adviser. This could be when you are buying assets, buying a car, buying a house. If you don’t have expertise or you don’t have time to manage your financial affairs, you are planning for retirement or you are planning to put money aside for education for your child. Those are the sorts of instances when you need a financial adviser.
So let’s move to the other side, let’s talk a little bit about what sort of instances in life would you need a financial adviser. Let’s quickly touch on what a financial adviser does, very broadly.
Very broadly, one, a financial adviser works with you to understand your current financial situation. Secondly, they work to understand your financial goals and objectives. Once they understand that, they work out what we typically call in our industry a financial plan. This is what we can do for you, given an understanding of where you want to go and help you get there.
Fourthly, they implement this financial plan jointly with you as the client. And lastly on an ongoing basis at least twice a year they review this plan with you.
So…. When you might want advice, what do they do? Obviously the outcome of that is the selection. How do I go about selecting a financial adviser? Now some of the questions that you’d need to ask a potential financial adviser are things such as, “What are your qualifications, what is your experience, how do you charge for your services, what do you focus on as far as financial planning is concerned?” because financial planning is a broad field.
You have some financial planners who specialise in investments, you’ve got some financial planners who specialise in what you call risk planning, talking about your funeral policies, talking about your life insurance, for example.
Then lastly and quite importantly, Siki, you also need to ask, “What is your philosophy or how do you deliver financial planning,” because you’ve got financial planners out there who deliver plans that are based on single needs.
I [would] sit with you, you tell me you want to buy a funeral plan. I check affordability, I help you with a budget, I help you buy a funeral plan.
Then you’ve got other financial planners who do what we call in the industry holistic financial planning. So they sit with you, look at your investments, look at your retirement, look at children’s education, look at your medical aid. And once they have a full picture of that they then develop a plan for you. So it is quite important to ask that question – what is your approach to financial planning?
SIKI MGABADELI: Absolutely. So just before we get into some of these questions then around fees, around philosophy, around qualifications, are South Africans typically people who approach financial planners in time or do we react when something goes bad with our finances?
FRANK MAGWEGWE: Generally South Africans do not use or approach financial advisers. How do we know that? We know that because in 2012 the Financial Services Board did research… financial literacy in South Africa. Very interestingly, Siki, what came across all segments of the population. In general, consumers, when they need financial advice, firstly where do they go? Family and friends. That’s what came first.
Secondly it was “I’ll go to somebody I sort of respect, some sort of community leader”. Thirdly “I go to a bank”. And sadly for me as a …financial planner, financial planner came at No 4. A number of reasons can be attributed to that.
SIKI MGABADELI: Why, I was going to say.
FRANK MAGWEGWE: Trust in financial advisers. You typically find in our industry those who use financial advisers trust financial advisers a little bit more than consumers who don’t use financial advisers. Part of the reason is that now and again we do get those bad or rotten apples in our industry that take hard-earned money from consumers, put it in pyramid schemes and you get consumers losing money – and then they tend not to trust financial advisers. That’s one of the reasons.
The second one is the belief that it is expensive to get a financial adviser, or financial advisers are for those with money. “I don’t really have much. Why would I need a financial adviser?” So there are those misconceptions around that. So generally you are looking at a population that in the main goes to family and friends to seek financial advice, instead of to a financial adviser who is qualified.
SIKI MGABADELI: All right. What has the industry done about the rotten apples?
FRANK MAGWEGWE: Quite a number of things. And particularly if you look at what the FSB has done. We have seen over a number of years now that to be a financial adviser or a financial planner in the industry there is this [phrase] “fit and proper” – what does “fit and proper” mean? Fit and proper says you’ve got experience, you’ve got qualifications and you’ve written regulatory exams. That has seen a lot of unqualified financial advisers exiting the industry.
In addition to that I must mention, Siki, that where a consumer has come across an adviser who has given inappropriate advice we now have the FAIS Ombud, FAIS standing for your Financial Adviser Intermediary Service, so a pillar that really governs the world of financial advisory. So you can easily go to the Ombud, and you can lodge a complaint where you feel an adviser hasn’t delivered appropriately. And we’ve seen censure, we’ve seen debarring – in other words, the Ombud actually says to you…you are no longer qualified to give advice in our industry. Sometimes it’s a period of time you are debarred or for the rest we’ve seen advisers being forced by the Ombud to actually pay back money that they have invested on behalf of clients inappropriately. So there is a lot of work that the industry has actually done.
SIKI MGABADELI: OK. So that professional background is very, very important.
FRANK MAGWEGWE: Absolutely critical.
SIKI MGABADELI: So how do you check that the person is…
FRANK MAGWEGWE: Very simply. And again that’s one of the things that consumers do not know. An opportunity like this really helps them to understand; it is really very simple. You go to the Financial Services Board with either the name of the organisation, even better if you’ve got the name of the company that the adviser is representing, and what is called an FSB number, the financial services provider’s number. That’s one of the things that you can ask from an adviser. Or simply by asking them about their accreditation, you are able to go and check that accreditation on the FSB website.
SIKI MGABADELI: Does it matter if they’ve been a financial adviser for a long time?
FRANK MAGWEGWE: Yes, it does matter because you find that typically what happens in our industry, a new-to-industry financial adviser – say, Siki, you have graduated from the university with a B.Com in financial planning, or you’ve studied courses such as to become a certified financial planner, for the first few years you really are still finding your feet. And typically in our industry you find that as you enter the industry most new financial advisers, generally speaking, advise on what we call risk products, or they do risk planning. They help you with your life insurance, then they help you with products such as funeral policies. Then you find that over time they then add your savings and your investments. So it’s quite important to understand from the adviser how long he or she has been in the industry, and what he or she is accredited to give advice on.
SIKI MGABADELI: Some do I suppose specialise just specifically in products, so we need to ask.
FRANK MAGWEGWE: You tend to find some financial advisers out of choice do only investment planning. They help you with how to select unit trusts, how to select asset managers, how to take money offshore. All that has to do with investment. And you also do find some advisers who specialise in health planning, help you with medical aids, for example. Then you find others who are like your general practitioner, if you think of a doctor – they do investment planning, they do risk planning and they do a little bit of even health planning.
SIKI MGABADELI: All right. Let’s talk about fees then. Are they regulated? How do you know if you are paying too much?
FRANK MAGWEGWE: Fees are regulated. Before I touch on the amount relating to fees, it is important to point out, Siki, to listeners out there, that in general in South Africa the majority of financial advisers earn their fees by selling the products of an insurance company they may work for or represent, and they get what is called a commission in the industry. So in many instances consumers do not pay directly a fee to the financial adviser. The advisers do you a financial plan, they make a recommendation. Should you the take the product, in other words, implement the recommendation, they then get paid a commission. For the majority of them, Siki, that’s how they earn their income.
Then you’ve got a few who have gone to work as lawyers would work. In other words, they charge a fee per hour for a consultation. You come, I discuss your financial affairs with you, I charge you a fee.
Then the third group, investment specialists, tend to charge a percentage of the assets under advice. So, for example, if they are giving you advice on investing a lump sum of money, such as R100 000, they may charge anything between 1% to 1.5% of that as a fee.
So those are the three types – the ones who charge as doctors or lawyers would do, who charge a consultation, and those, special investment guys, who charge a percentage of the amount of money they are advising you to invest.
SIKI MGABADELI: Is there a cap on that percentage?
FRANK MAGWEGWE: Yes, there is quite a bit of pressure on fees generally coming down in the industry, and we have found that most advisers have come down from about 1% of assets under advice – those who specialise in investments – to probably between 0.5 and 0.7%. We are seeing that it’s coming down quite aggressively.
SIKI MGABADELI: Is that to attract more…
FRANK MAGWEGWE: That’s to attract. The Financial Services Board has done a lot of work around how much is an appropriate fee for appropriate advice. And that has seen that advice on investments coming down.
And then just to answer an earlier question, Siki, when you talk of products such as life insurance products, funeral policies, definitely for those the commission that you pay on those products is legislated by government. You can only pay a certain amount of commission on certain categories of products.
SIKI MGABADELI: All right. So when it comes to then discussing what you want to put your money into and basically just dealing with how your money is going to be managed, how much detail does you financial planner need to go into?
FRANK MAGWEGWE: That talks to also the amount of detail that the consumer wants. So as a financial planner I come across on a daily basis some clients who say to me: ”You know what, I know you want to do a full financial needs analysis, to really look at my full portfolio, to ask me if I budget, to talk about risk planning, to talk about investment planning. But you know what, I don’t have the time. Thank you very much. What I am interested in is a specific product – can you tell me what I can invest in specifically?” So they don’t want you to spend a lot of time.
Then you find clients who’ve got time and really you can spend an hour to two hours really discussing to understand their objectives, their needs, their aspirations. You go away having understood all that and really you come back with a detailed financial plan. It can easily be six to eight pages – that really talks to understand your needs, and I’m going to walk with you this journey to help you with your finances. So it really differs from client to client how much depth of a financial plan you can put together for them.
SIKI MGABADELI: And how early should one start?
FRANK MAGWEGWE: As early as possible. If I can quickly tell you my story, when I started working, I’d just finished with a BSc Honours in …Finance. Off I go, I am working at a bank and I don’t budget. I decide I want to buy a car at that point in time. I bought this car that I really didn’t afford. When I took into account the maintenance of the car, took into account things such as insurance on the car, I suddenly realised that I really couldn’t afford it. So many people make that mistake early in their careers.
So as soon as you can it is important to get the help of a financial adviser, even if it’s just to help you budget. Understand your income, understand your expenses and have that discipline on a an ongoing basis. Generally live within your means. As soon as you start working it’s advisable to get a financial adviser and in many instances you do not even have to pay for it. Just call and establish a financial services company or a bank – they will be very glad to send out a financial adviser to you.
SIKI MGABADELI: That story sounded very familiar. Thanks, Frank.
• Subscribe to a daily email of transcripts from Moneyweb Radio – click here