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Get advice from the right kind of people

What to ask a financial adviser before you take their advice – Part 2.

CAPE TOWN – If you are going to hire any professional to take care of some aspect of your life, you need to be sure that they are really looking after your best interests. This is as true for a financial adviser as it is for a doctor.

This is sometimes difficult because, if we’re honest, we’re all biased against anyone who earns a substantial fee. This applies to many professions. We resent paying the big surgeons bill, or the estate agent’s fee or forking out for an architect to draw up plans. But since they have knowledge and skill that most of us don’t, we are forced to pay for their expertise.

“The financial services industry is a little different,” acknowledges Robin Gibson, a director at Harvard House Investment Management. “I can submit my own tax, I can buy my own shares, I can structure my own financial plan. The question is though, do I have the time, experience and ability to do so?”

Gibson says that there are definitely those who are able to do that, and they probably can do it better than 90% of the ‘advisers’ in the industry.

“However there is a large set of the population who have neither the time nor the inclination to be their own financial planners,” he says. “So what do those folk do, and how do they prevent themselves from being swept away by a smooth talking adviser with little desire to add value beyond his next commission?”

The best way is to make sure you thoroughly scrutinise your adviser’s qualifications and history before you start.

A few days ago we looked at the first three questions you should ask a financial adviser before you give them your business. Here are some more:

How do you get paid? Do you earn commission or a salary and do you charge me upfront fees?

How advisers are compensated is one of the most contentious issues for many clients. And it is definitely something that you should determine before you start.

“If you adviser earns a salary, then it is more likely that the advice provided will not be affected by the adviser earning more potential commission from more lucrative products,” says Warren Ingram, a financial planner with Galileo Capital. “Up-front commissions or fees are good for advisers but not really for investors.”

Gibson agrees that you should examine the adviser’s fee structure very closely.

“If the adviser charges a time based fee, then establish the basis for its calculation and ask for an expected total,” he says. “If the adviser works on a contingent commission then establish if that figure is negotiable, and how the business model incentivises the adviser to provide an ongoing service.”

Importantly, if the adviser says that they only work on commission, find out if there is any obligation to to pay them if you choose not to proceed with their recommendations. This is an important point as many commission salesman might pressure you into taking what they offer you because they have already put in the work.

Do you utilise a sound financial planning model?

In other words, can the adviser clearly show you how they come up with their recommendations? Are they just suggesting things off the top of their heads, or can they show you the process that gets them to the answer they are offering you? Importantly, can they explain the asset allocation chosen and it offers the best risk-reward balance for your circumstances?

“A sound financial planning model is key to a successful adviser,” says Daryl Coker, an advisory partner at Citadel. “A model that has the ability to run an investment or retirement plan, including current and future asset allocation, as well as a death and disability analysis will go a long way to ensuring that the client is building a financial roadmap which is attainable and easy to follow.”

Coker says that these models should also show projections in real terms. In other words, illustrate what your money will be worth in today’s values, not just its nominal value.

For instance, your adviser might project that an investment is likely to grow to, for example, R3 million in 2030. That might sound good, but how much is R3 million actually going to be worth in 15 year’s time?

Will you consolidate the planning process?

A quality advisor will be able to give a more than just a piece by piece look at your financial planning. They will provide an overall picture of how things fit together.

“So often an advisor is able to give really sound advice in one part of your portfolio, for example death and disability planning, but is limited in their knowledge of investments or fiduciary planning,” says Coker. “This means that while one part of the portfolio is well managed, the rest of the portfolio defaults to a limited or conservative view.”

It’s likely that even a very good adviser may not be able to give you the best advice on everything, but then they should be able to bring in experts in the fields where their limitations lie to ensure that you get the best overall service.

“A really good advisor will be in a position to comment effectively on the overall impact that each pillar of your portfolio would have on any other,” Coker says. “For example, when looking at retirement or investment planning, one needs to ensure that the clients risk cover, tax planning, estate planning and will planning is taken into account to ensure that the advisor mitigates any risks that changes made on any of these parts of the clients portfolio would have.”

And ask yourself: Do I like this adviser?

This is perhaps as important as anything else. A financial adviser has to play an important role in your future and you should enjoy spending time with them.

“As you will enter into an intimate relationship which can last a life time, you should make sure you have no reservations with regards to the adviser,” says Kobus Klein, a financial planner with Liberty. “If you’re not comfortable, there are many qualified advisers out there who would gladly help out and a good start would be to find someone with whom you have commonality.”

Other questions to consider:

  • Do you have a list of clients I could contact to evaluate your level of experience and knowledge (excluding any close personal friends or family)?
  • Are you happy for me to ask them how long you have advised them, how they would rate your level of knowledge, whether they have ever felt pressured to take your recommendations?
  • Can you give me the contact details of a client who was not happy so that I can evaluate how you handled their complaint? Are they still a client?
  • Are you comfortable that I seek another opinion before I proceed with your proposal, and are you comfortable to deal with queries that adviser may raise?

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