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Robots versus financial advisors

A qualified, trusted advisor is able to spot potentially poor financial decisions and gently advise against this course of action.
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This year marks my 20th year as a Citadel wealth manager. It is a perfect time to reflect on the value of my and my colleagues’ decades of work. It is also a sincere attempt to understand whether the fees our clients pay for financial advice are, in fact, money well spent.

With the advent of robo-advisors, where advice is provided at low- or no cost over the internet, questions are being raised as to the future of qualified financial advisors. Is my job becoming obsolete?

I hope, for my own benefit as well as that of my clients, that the answer is no. An advisor is the middleman between the investor and the investment. Using our qualifications, experience and skill, we strive to help our clients achieve an optimal balance between risk appetite and return objectives.

All investors look for fantastic returns with minimal risk, but this is not always feasible. But by determining an appropriate asset-class mix between cash, bonds, hedge funds, onshore, offshore, equity, property and currency, the advisor helps construct a diversified portfolio of investments that best achieves each investor’s personal objectives and expectations. Citadel provides clear guidelines to advisors, based on in-depth asset class modelling.

The value of objectivity

The true value of a qualified financial advisor, however, is the objectivity that comes with being an intermediary. Although there are many people who can fathom the markets independently, I have yet to meet an individual who can truly be objective when it comes to their money and investments.

When political or global events turn market sentiment negative, the natural inclination is to be overly cautious. Likewise, after a period of calm and when the waters look smooth, investors typically take on more risk than they normally would. An experienced advisor has the tools and experience to assess their inherent risk profile and investment goals from a far more objective point of view.

The role of financial planners becomes even more critical once the planning and structuring phase is complete. I have personally experienced many instances where investors, my clients, have been tempted to make very emotional decisions about their finances: buying a coffee shop, helping their children purchase a property, or just setting them up with a large lump sum. I have even seen clients seriously consider making incredibly high-risk investments, bordering on pyramid schemes or completely overcapitalising on property.

A qualified and trusted advisor is able to spot potentially poor financial decisions and gently advise against this course of action. A robo-advisor could never be such a friend in need.

It is also important to note that investing, like life, is a process. Starting out with a diet, an exercise regime or a study programme is one thing. Keeping it on track and adjusting it to suit your new circumstances over the long term require a whole new set of skills. At regular intervals a financial plan needs to be reviewed and the portfolio rebalanced to continuously create the ideal asset mix to suit a client’s ever-changing financial needs. Planning and updating is often the easy bit, moving between asset classes, however, often requires an extensive administration process.

Although Citadel wealth managers offer their clients seamless portfolio changes, there is, in fact, a great deal of behind-the-scenes admin, like giving extensive notice on an existing investment or needing to open a new product for the new asset class. The extensive back-office function is rarely considered.

A deep understanding

When you consider why you are partnering with Citadel, I believe there are a few excellent reasons. Firstly, Citadel and its advisors are committed to good financial planning principles. Secondly, our advisors evaluate each investor individually and holistically.

By deeply understanding all aspects of their lives, both financial and personal, bespoke advice is given to that individual. A time-appropriate example of this – given South Africa’s fragile economy – is that if the majority of an individual’s investments are presently in South Africa, the advice may be to only provide offshore investments to diversify and balance a client’s local exposure. The third area where Citadel excels is backed up by research which shows that investment returns are up to 29% higher over a typical 30-year retirement term, when a client is provided with consistent financial advice. The average tenure of a Citadel advisor is 15 years, with many, myself included, having served even longer.

My last and perhaps most important point, where I believe robo-advisors will never be a substitute for a passionate financial advisor, is that there is something deeply gratifying in knowing that an experienced professional has listened to you, has understood your circumstances, goals, aspirations and dreams. Somebody on your side, to assist you in your journey to reaching those dreams.

Deon Bester is a Citadel advisory partner.

This article was originally posted in The Citadel Investor 2017, and was republished with permission.

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Dear Dion,

Your industry is ripe for disruption just as estate agencies are, both over charge for their services. Fund management fees are often critiqued with a fee of 1% costing 30% of investment returns. But when a financial advisor charges this in addition to active management fees this climbs to 2% or 3% and returns are diminished at the same proportion.

Let say that real returns( ex inflation) if on average 5% in SA over 30 year life span – then on average with advisor fees plus investment fees running at 2.5 % then 50% of real returns are lost.

The ongoing charge of 1% annually for advice is simply exorbitant. Financial advisor are exactly that – they can’t pick stocks or assemble portfolios – mostly they research a ‘ set of house portfolio’s with different risk return characteristics and then resell this to multiple clients using various life stage models. In other word they simply resell a risk profile over and over again.

They hide this by assembling a huge amount of information – which then present a plan using jargon and bill 1% – its mugs game

If some needs advice about the coffee shop – then see an accountant – they charge fee and thats the end of it.

I like to by my financial advice a fee at time and would not seek to spend much more than .25% a year max.

Financial planners need to adjust there business models. and it will change as the market find better ways of servicing people.

Citadel is particularly expensive

Thanks

Agree 100%, Mike. Advisors “research” what fund managers research!!!
They are also not keen on passive funds or a blend with active. I got an advisor down to a 0.1% fee pa, and I saw where they invested a pals portfolio. Yep, u guessed it…very similar to my active portfolio. They never got my business! Fee for services is the best option , or, do your own thing ….read, read, read and learn.

Agreed. I may add, the term “financial advisor/planner” is regularly used by the industry. But when 100% of such income is earned from sales commission…it is what it is: a (financial) sales-person!!

A fee needs to be asked like an attorney, doctor or accountant would. That would be more professional.

(and within large assurance houses, the “advisors” are subject to sales targets. Annually, during glitzy year-end events, their best “advisors” are awarded….based on….wait for it….on “sales” achieved. Hence the “top” achievers are the best “sales” people. They brought in the most business to the company & is thus awarded accordingly.

In fairness to the industry, many of the sales people are those that gave consistent best advice to their clients over the years, in order to reach the sales where they’re now. But real quality advice is very loosely correlated to sales output & difficult to quantity.

A Financial Planner should not be picking stocks, clearly you do not understand what a real Financial Planner does for his/her clients. Read up on what the best Planners in the world are doing and then you can comment.

No one commenting here knows what a real Financial Planner does. I agree that many “advisers” in the industry add little or no value and simply sell products, the real blame for this lies at the door of the Life offices.

There is a new breed of Financial Planner out there who does not pick funds but advices clients on making the correct lifestyle decisions to avoid mistakes which will cost them in the long run. These planners build a close relationship with their clients and get to know and understand them and their personal situations intimately in order to coach them. These planners would not have over 150 clients/relationships. this is completely different to a lawyer or an accountant.

Do some research and find who these planners are and trust me they will add huge value to the clients they work with.

I agree with what you say about the relationship a real Planner would have with a client, the only problem I have is that Citadel have done exactly the opposite to this when they recently bought a business. It must be difficult working for bosses who don’t have your clients interests at heart.

As long as financial advisors insist on the current fee arrangement, they will be perceived as salesmen. With the current fee arrangement there is a conflict between the client’s best interest (maximise returns) and the advisor’s interest (maximise fees).

How about acting as professionals? I pay my lawyer by the hour, why can’t I do the same for a financial advisor?

These questions are of course rhetorical, the answer is that the current system is financially better for them. They can spend an hour with you, never speak to you again, and continue to take a percentage of your total invested capital in perpetuity. And then there are all the background fees, for example sign-on fees for investing in certain products. I’m sure that a Citadel financial advisor would always recommend a Citadel fund even if there is an alternative fund that is better suited for the client.

The knowledge that the advisors have is valuable, but the cost when considering the full lifetime of the investment is exorbitant. So robo-advisors it is.

The “article” says Robots versus financial advisors, yet there is no versus, no comparison between the pros and cons of each system. Rather it is an advertisement for Citadel.a versus article should be a comparison between two things, which this is definitely not.

I do agree with some of the points he makes, but there are pros to robots as well, particularly for smaller (younger) investors who do not have complex portfolios and other fiduciary needs, where the cost saving in fees compounded annually, can make a material difference to their ultimate returns.

Imho the future will become a hybrid of the two, especially looking at where R&D into AI technology is going.

Very good comments. Nobody is willing to pay unjustified fees that can be reduced by technology. We are ripe for disruption.

Have a look at https://www.fundco.com/dashboard We compare all funds based on performance and cost, we will soon be adding additional metrics that do not rely on the rearview mirror, and eventually investing in one convenient place.

Robo Advisors are the way forward.

They are non-biased, can even do stock selection far better than a human being. I will actually prefer stock section to be done based on analytical analyses rather than a person’s perception or personal like/dislikes.

End of comments.

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