The importance of finding the right financial adviser

You don’t have to have a lot of money to invest in order to work with a financial planner.

financial-adviser-1With changes to the way financial advisers are remunerated, some industry commentators believed that it would negatively affect younger investors who do not have large amounts of money to invest.

The provisions of the Retail Distribution Review (RDR) are changing the upfront commission structures for investment products, and advisers will only charge an ongoing advice fee.

Without these upfront commissions, it is estimated that a financial planner will take around nine years to build a financially viable practice, leading to the belief that advisers would focus primarily on higher net worth individuals where an annual advice fee would reap higher monetary value.

Bruce Fleming, financial planner at Citadel, and named this year’s Financial Planner of the Year by the Financial Planning Institute (FPI), disagrees and argues that the professionalisation of the industry has resulted in an increase of young financial planners entering the industry who will build their practices over time through engaging with young investors.

It is a fallacy that financial planners are not interested in younger clients who are just starting their financial journey.

According to Sherma Malan, Head of Membership and Corporate Relations at the FPI, there is a shift in younger people studying towards a postgraduate qualification in financial planning which will reduce the average age of financial planners from the current age of 47. “From the young professionals that we engage with, we have found that this pool of individuals want to create a new legacy of financial planning – they understand that a career in financial planning is one that is intrinsically and extrinsically rewarding,” says Malan.

Building a long-term relationship

Fleming says when he started as an independent financial planner 16 years ago, most of his clients were young professionals just starting out. “Yet today 95% of those clients are still clients of mine. There is a huge amount of loyalty between myself and my clients – they helped me get my practice going and I have been part of their financial journey.” Fleming adds that for young financial planners starting their careers, it is those young clients who may only have R500 a month to invest at the moment who will be their big clients in 15 years’ time.

Phillip Kassel, executive financial planner for Liberty says when he started his practice 24 years ago he was more comfortable dealing with clients closer to his own age. “It is also very daunting when you enter the industry, it is very challenging and competitive so you are prepared to see anyone who is willing to meet you,” adds Kassel.

Gregg Sneddon, financial planner at Personal Wealth Managers says his financial practice is always prepared to take on young clients who may not necessarily have any assets yet, as a financial practice can cross-subsidise new entrants in order to develop its client base. “You need to take a longer-term view, even if the client is not initially profitable.”

So don’t believe that just because you are starting on your financial journey that you won’t be able to afford good advice. You can start to form a long-term relationship with a financial professional, just as you would with your GP.

Most financial planners will meet with you for an initial, no-fee and no-obligation meeting, as finding the right client/professional relationship is just as important to them as it is to you.

Kassel believes that any good financial planner welcomes all the questions you have, but that we are often too polite to ask the tough questions. “We never ask these questions upfront, resorting either to lapsing the contracts – and thus ending the relationship – or merely venting on social media or via the ombuds,” says Kassel. He adds that we need to be more vigorous in asking the right questions to ensure we have the right planner and the right products for our needs.

Six questions to ask when selecting a financial professional

1. Are you and your products registered with the FSB?

A basic starting point is to ensure that the adviser or planner is registered with the Financial Services Board. Never deal with an adviser who is not registered or who offers products that are not FSB registered. This is where so many people become the victims of scams. The adviser must provide you with their registration number which you can verify on the FSB website – under the ‘Departments’ Tab select ‘FAIS’ and then choose ‘Searches’ from the menu on the left-hand side.

2. Are you a financial planner or adviser?

It is important to understand the difference between a financial adviser and a qualified financial planner. A financial adviser or broker would advise you on an immediate need usually based on a specific product. A financial planner looks to structure and arrange your financial resources to meet your life goals and build their practices around a long-term relationship. These are individuals who have studied and qualified as a Certified Financial Planner (CFP).

As a young professional your first engagement with a financial professional would most likely be around a specific need such as risk cover or taking out your first investment. You could meet with a financial adviser just to meet this requirement, but it is worth using this opportunity to start a longer-term relationship with a financial planner. As your investments grow and your life changes ‒ you get married, change jobs, have children ‒ so your financial planning needs will change and you are more likely to increase your engagement with financial products and services. It is then that your relationship with a financial planner will become very important and you would have already built up a relationship and trust.

You can find a list of Certified Financial Planners on the Financial Planning Institute website – select ‘Your Financial Planning’ from the menu at the top.

3. What does your practice offer?

Partnering with a young financial planner means that you will have someone to work with over the longer term, but you need to know that they are backed by a strong team. Financial planning has many elements which you will need over the course of your lifetime including investments, wills, risk cover, medical cover and short-term insurance. Can the practice or planner provide these services or at least outsource to qualified professionals in order to provide a holistic solution?

Financial planner Gerald Mwandiambira and author of My Money, a financial planning guide for ordinary people, says that while a financial planner has overall sight of your finances and can guide and advise you, you do still need to engage other professionals when required. “CFP® professionals work with many other competently qualified and certified professionals who may offer specialised support around your finances. These include accountants, attorneys, estate agents, tax practitioners, brokers, medical doctors, psychologists, stockbrokers, bankers and investment specialists.”

Mwandiambira says one should also ask about the number of clients the planner works with. “Many successful planners rarely have more than 100 clients in their portfolio. This is because planners walk the journey of life with clients. It is very important to identify with clients. When I meet potential clients that do not fit, I do not accept them, as money and finances are a very intimate part of our lives and both parties must be comfortable.”

4. How will you charge me?

There are many different fee models available. Sneddon built his practice on a fee basis. A client can either pay an invoice for time spent or as an annual fee. This allows the client to decide the level of service. “I had a 24-year-old client recently who I just dealt with by email for a once-off fee,” says Sneddon who says the amount charged per hour depends on the experience of the adviser, the type of advice and the client’s financial situation. It can range from R500 to R1 500 per hour.

Mwandiambira says a detailed and well prepared financial plan may take hours or days to prepare. “In Australia for example, a Certified Financial Planning Professional may charge as much as the equivalent of R12 000 for the plan alone. A fair professional rate may start at R500 an hour, however fees are negotiated between the client and their financial planner.”

Fleming’s practice was also based on a fee model. “We made it quite clear that we see you as a client for life, not just for a product sale. Clients appreciated this as they were used to the commission model where once the claw-back period is past you never hear from the adviser again.”

Tied agents ‒ in other words financial advisers or planners who work directly for a product company ‒ can still earn a commission from the company but that has to be fully disclosed. Good advice is worth paying for when you are working with a professional – you need to understand how much you are paying and whether you believe it provides value.

Fleming believes that the real value of advice is felt at retirement when the right decisions made prior to retirement result in a comfortable retirement and advice during retirement is critical. “We spend about 80% of our time with retired clients who call us for advice on what they can afford and how their spending affects their retirement value.”

5. Are you independent?

Theoretically, an independent adviser can give you a range of investment options and is not beholden to one institution. Realistically, it is impossible for a planner to intimately understand and provide proper advice on every product in the market, so many financial planners are multi-tied, meaning they deal with a select number of insurance and investment companies. However, the bulk of advisers remain fully tied – meaning they work specifically for a financial product house. This does not necessarily mean they cannot be good planners. Fleming says as a Certified Financial Planner, a certain code of ethics and conduct has to be met and the philosophy of the planner and the transparency of fees and services is more important than the product offering.

Many tied agents, like Kassel for example, are Certified Financial Planners but have the backing of a large institution. Kassel is also National Chairman of the Financial Advisors’ Forum, representing some 2 600 tied advisors and argues that in his experience, whether the planner is ‘independent’ or tied is immaterial as far as the client is concerned. “They perceive value in the relationship, and not the nuances of each and every product on the market. The analogy is the fact that a patient keeps on going back to a particular doctor, dentist or specialist based on the relationship – and the trust – that they have in that practitioner. The same can be said in the area of financial advice.”

6. Do you follow your own advice?

Sneddon believes that a financial planner should have their own finances in order before they are qualified to give advice. If they are building up a practice, do they have a proper business plan themselves? Are they managing their own finances to make sure the business is viable? Do they have a succession plan if something happens to them? “Also ask them about their personal financial plan. Do they have a retirement annuity, life cover and a will in place?” says Sneddon.