Financial advice: Moving from products to solutions

Where the real value lies.

The way that financial advice is given in South Africa is changing. This is not just because of regulation like RDR, but because both clients and advisers are thinking differently about where the real value of advice lies.

Speaking at the Glacier i3 Summit in Stellenbosch last week, the president of Wells Fargo Asset Management, Nicolaas Marais, pointed out that this change is happening in many parts of the world. It is a move from recommending products, to discussing and designing outcomes and solutions that meet specific needs.

“In the US, 71% of advisers are moving towards delivering outcomes,” said Marais. “They are thinking about liabilities and cash flow needs and working out solutions.”

This, he pointed out, has been the case in the institutional space for years, where consultants start by looking at a pension fund’s liabilities and then design a portfolio that will match those. This thinking is now starting to take hold in the way advisers interact with individual clients as well.

In other words, advisers need to think less about the importance of identifying and recommending different asset managers based on relative performance and more about how to construct portfolios that deliver an individualised outcome.

“We’re not investment managers,” said Brian Foster, a financial planner and the co-founder of Beyond RDR. “We have to let go of picking funds and telling clients that’s where our value is because I think that’s going to get us into trouble. Some of the best asset managers in the world struggle to add value, so if you’re a small independent advice firm what chance do you have really? That isn’t where we are adding our value.”


An important part of this process is a discussion between the adviser and the client about risk.

“In the financial services world we tend to talk about risk in terms of volatility, but what about the risk of not achieving the thing that matters to you most?” Foster noted. “As advisers we must have the right conversations and define together with the client what they are really worried about. Generally they don’t care about volatility. What they care about is losing money. They are not risk averse, they are loss averse.”

He added that risk profiling of clients is generally inadequate. This makes it potentially one of the biggest problems advisers face.

“One of the things I see financial advisers doing poorly is risk profiling,” Foster argued. “We try to have a step by step process, but what we are missing is the conversation that needs to take place.”

He noted that there are four elements to a risk profile, and these can’t all be determined by checking boxes on a questionnaire.

“The first is what is the risk needed to achieve a certain return, and that is a financial construct that has nothing do to with attitude to risk,” Foster pointed out. “There is risk capacity, which is about the clients’ capacity to withstand the risk given their position. Again, that is not a psychological construct. It is a financial one.”

Where the client’s attitudes become important are in their perception of risk and their risk tolerance. However, these alone can’t determine what kind of portfolio they need.

This can only be achieved by melding all of these factors together. Filling in an attitude to risk questionnaire that on its own leads to an asset allocation model does not take into account the realities of the client’s financial situation or market realities.

A key part of this is also managing client’s expectations. Client’s need to understand the relationship between risk and reward, but also what is realistically achievable.

This requires advisers to not only make sure that their clients understand upfront what their portfolio is designed to achieve, but also that the adviser communicates regularly about its progress.

“The less interaction you have with your client, the less there is an honest discussion about what is actually achievable, the more you are at risk disappointing them,” said Marais.

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the link between risk and reward is long gone in SA
just look at the returns being achieved!!! 1/2% p/a over the last year!!! maybe 5% p/a over the last 3 years if you’re lucky!!!
cash has beaten equities over the last 3 years and will continue to do so into the future!!!

I would disagree strongly. Over time equity will always beat cash. What needs to change is how we educate our clients about risk/return and the conversations we have with them about what they want in their lives.

Cash has beaten equities over the past 3 years yes.

However, I have done my own investments in offshore indices and I have also been making excellent returns.

South African advisors just can’t compete. There is no justification for the fees that they charge when the market is flat.

If your only job is to make my money grow, and I give you R100 000 and you charge me fees for taking my money and fees for holding my money, and 3 years later I come to get my money from you and you give me R90000 back, then you have failed.

That is the equivalent of taking your car in for an oil change and it comes back and it wont start. Or of taking your computer in to get MS Office installed and when it comes back it doesn’t have Windows on it anymore.

Why would you want that sort of service?

A true Financial Planners job is not to just make money grow. that is ultimately the job of the asset manager. A real Financial Planner helps clients build long term plans which uncover their ideal lifestyles and puts a strategy in place to achieve these goals.

Real Financial Planners help their clients make smart financial and lifestyle decisions and stop them doing things which will be to their long term detriment.

How a Planner is paid is a discussion between Planner and his/her client. As long as this is disclosed, explained and agreed on an ongoing basis it will be a mutually beneficial relationship.

Dirkg, it sounds like you have been well trained in the art of financial planning BS.

The financial planner/advisor is the person that is promoted to be contacted for investments. What goes on behind the scenes shouldn’t matter to the investor and it really isn’t their problem.

If you are selling me something be it advice or a product in financial services, there isn’t a scenario where I do not want maximum returns.

If I do not get the return that was initially presented by the financial planner/advisor, why should he get a cent of my money?

I know they come with all the BS about “returns cannot be guaranteed” and “history can’t be used to anticipate future performance” but if I meet with a financial planner/advisor, I am always presented with the graphs of the past performance of an investment and it is always talked about as though those are good investments going into the future.

Sounds like snakeoil sales to me.

Financial Planners whether employed or independent are sales people whether they like or not!!!
No financial planner, no matter what their qualifications, can plan for 40/50 years!!!!
which of them saw what SA is going through now??? 2/3/5/10 years ago??????

Wow quite a sweeping statement!?

I guess we will have to agree to disagree. There are real Financial Planners out there who care about their clients and are not sales people. It seems clear to me that you have not experienced this as yet.

Perhaps approach the FPI to put you in contact with a reputable and qualified Planner.

Paolo, multiple financial planners have positioned clients with the bulk of their wealth offshore, been happening since the relaxation of exchange control in 2009.

The reality is you probably can’t afford to sit down in front of these type’s of planners, hence your interactions have been limited to salesmen who call themselves financial planners after a 4 week intense training course from one of the life companies.

Financial planners don’t have and frankly don’t need to plan for 40/50 years into the future – as it is an ongoing relationship, hence you any plan is review and tweaked based on conditions and changing lifestyle goals.

You will see, once RDR is implemented you are going to pay an even higher premium for quality independent advice, which is probably counter intuitive to what RDR is trying to achieve.

agree with P.G. – FP’s are sales people!! also, cheap labour that take all the risk!!! LOL

A question? How can a financial planner give the best products to suit his client if he is unable to select them from the entire market? Previous and current rules by different product supplying companies pushing targets for them achieve,and higher incentives are the very reasons why people are now very wary(I’m being kind) of their companies and their financial advisors.
The companies ‘peddling their products’this way will continue to lose business unless they learn to have the best interests of clients at heart,, and not heir own! Also these now ‘great’ companies in terms of size, have not made their money honestly and believe they can push uninformed people and hide behind the markets failing etc.,,The other thing they should do, apart from learning to care for ‘their’ clients,is learn to communicate better. In 34 years I received one call from the advisor who sold me the RA and not one that I can recall from the company who was taking my money every month. Result is after that period my ‘return’ was not even double the amount I had paid in over that period! Who is to blame? I can’t get back my 34 years,,,

End of comments.



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