Money Basics with Martin Hesse

THERE ARE ADVISERS AND PROFESSIONAL PLANNERS – KNOW THE DIFFERENCE

NOT that long ago, “financial advice” was essentially a euphemism for the aggressive selling of financial products by life insurers. You went to an adviser or broker if you wanted to invest or take out an insurance policy. The adviser chose a product from the limited range available, convinced you that it was right for you, and you signed on the dotted line.

The dotted line, in the case of investment products, was a contract that bound you to contribute a specified amount over a specified term.

This business model enabled the life company to offer the adviser, who had some product training, but needed very little in the way of financial qualifications, a lucrative commission based on the whole amount contributed over that period, which was a huge incentive for the adviser to sell as many products as possible.

And if you broke the contract by stopping your contributions or wanting to withdraw your savings early, that pre-paid commission would be clawed back from you, in the way of a penalty.

It was a recipe for disaster: advisers mis-sold financial products on a massive scale because they were operating in their best interests, not yours.

Many things have changed. Investing has become democratised through, among other things, the emergence of the asset management industry, which offers a mind-boggling choice of non-contractual collective investments. And it has become easier to invest directly in the stock market, through low-cost, accessible online platforms.

Importantly, the regulators clamped down on advice and the sale of financial products, through the Financial Advisory and Intermediary Services Act of 2002 and, more recently, the Treating Customers Fairly regime. This has made it harder for an adviser to sell you a product without first properly assessing your circumstances and financial situation.

However, the scenario I described at the outset persists. There are still far too many advisers who have minimal qualifications and are, to put it bluntly, little more than salespeople.

Fortunately for you, the consumer, a new breed of adviser has taken financial advice to the level of a profession – where it should have been in the first place. The financial planner (and I’ll use this term to distinguish such a person from a regular adviser) has a postgraduate qualification, offers a level of service similar to what you would expect from a family doctor or lawyer, and is bound by a professional code. This is someone with whom you can establish a long-term relationship and who acts in your best interests to help you achieve your financial goals.

LISTEN TO PODCAST

Listen to the full interview with the FPI’s David Kop about the benefits of financial planning on the IOL Personal Finance webpage here.

The top echelon of financial planners in South Africa have the internationally recognised Certified Financial Planner (CFP) designation and are members of the Financial Planning Institute of Southern Africa (FPI). (Read more about the FPI on page 18)

David Kop, executive director: relevance at the FPI, says a major tell-tale sign an adviser is not working in your best interests is that the adviser’s focus is on the product, not you.

“One must be aware that financial planning is not about the product. The product is a tool that a planner will use to help you meet your goals. So if you find that the adviser’s conversation with you is all about the product, and not about you, that is probably the first tell-tale sign that somebody is just there to sell you a product.

“Financial products are vitally important and are needed in our ecosystem, but from an advice and planning viewpoint, the first step is to understand more about you – what you want to achieve, what your goals and dreams are. Then the planner will apply his or her skills in order to achieve your goals. If that is the approach your planner is taking, you know you’re on a financial planning journey. But if the approach is just trying to get you to buy into a product and worry about the advice second, then you’re in a product-sell environment.”

Another indication you may be being persuaded to invest in a product that is unsuitable for you is if the adviser pressurises you into signing immediately, without giving you time to mull things over. Always ask if you can have a day or two to examine the terms and conditions of the product more closely, in the comfort of your home. If there is still pressure to sign, walk away.