There are tens of thousands of financial advisors in South Africa, but there is considerable variability in the quality of advice they offer. Many will focus on investments and other financial products you may need, but a good advisor’s role is a more demanding one.
How do you recognise balanced financial advice that is in your best interests?
The right qualifications
One gauge of an advisor’s suitability is his or her professional qualifications. The top echelon of financial advisors in South Africa have a postgraduate qualification such as the Postgraduate Diploma in Financial Planning, hold the internationally recognised Certified Financial Planner (CFP) accreditation and adhere to a professional code of conduct.
Are your incentives aligned?
A second important consideration is the advisor’s compensation model. How does the advisor earn a living: is it through commissions on product sales, a percentage of assets under management (AUM), or is the model a fee-based one, where you are charged directly for the service provided?
As explained in Subscription-Based Financial Advice Gains Traction Among Next Generation Clients, ideally you want an advisor that is focused on providing objective advice, rather than selling financial products.
A structured process to improving financial wellness
Financial planning at its best is a structured process, involving a series of steps. For an optimal outcome, each step needs to be given its full weight. Only a couple of these steps specifically involve products.
1. Discovery: getting acquainted
The first step involves you and your advisor getting to know each other and setting goals. It may involve some awkward questions from both sides. You will need to know, among other things, how your advisor is remunerated and whether there are any conflicts of interest. Your advisor will need to delve into your personal affairs. It’s at this point you should be able to ascertain whether you can build mutual trust and whether the relationship can develop.
2. Fundamentals: the financial basics
The financial fundamentals must be right before there can be any discussion on products or planning. Do you have an emergency fund in place? How much debt do you have and how can that be managed? Do you stick to a household budget? Do you hold any preconceived assumptions about money that may negatively impact outcomes?
3. Planning: your goals on paper
Here you and your advisor draw up a plan to achieve the long-term financial goals you’ve set yourself, such as saving for retirement, but also taking shorter-term goals into account. These may include buying a property, planning a big overseas trip, or funding a child’s education. This step will necessarily involve recommendations on specific products, including investments and insurance policies.
4. Execution: action on both sides
While your advisor may take care of the technicalities, such as allocating assets, opening accounts and monitoring investment performance, this step also involves work from your side, such as changing your spending behaviour or sticking to a budget. Well-known financial planner Warren Ingram notes that a great planner can do nothing for you if you’re not doing your part. “If you’re not doing your homework, even the best advisor in the world will not be able to deliver good outcomes for you. The relationship breaks down when the client puts all the responsibility for their future on their advisor,” Ingram says.
5. Review: revisiting your plan regularly
A financial plan must be flexible enough to adapt to both changes in your life, such as a career change or starting a family, and changes to the world around you, such as an economic recession. For this reason, your financial plan should be regularly reviewed, and your relationship with your advisor should ideally be a long-term one.
Consider subscription-based financial advice
Product-driven advisors will tend to focus on step 4, while neglecting the other steps. The subscription model, whereby you pay a monthly subscription for the ongoing services of a fee-based financial advisor, offers the best guarantee for well-structured, holistic advice and the promise of a long-term relationship centred on your financial wellness.