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Financial advisors – Should you get one?

18 July 2016, 20:17

Everyone would like to feel financially secure and financially free. There are many ways to reach this goal, amongst these wise investing, committed saving and remaining out of bad debt. However if your portfolio management seems a bit overwhelming, the temptation to over spend never too far away, or you still aren’t seeing the expected results of your own financial planning, it may be time to call in the professionals.

Hiring a financial advisor could be a solution to create a strategy that effectively prepares you for your financial future. Financial advisors’ can help their clients analyse their personal circumstances, recommend products for them to invest in and compile a financial plan to achieve their goals. However just like any financial investment, hiring an advisor is a decision that should not be taken lightly.

Should you get a financial advisor?

The first question you should ask yourself is whether you are up for the task of managing your investments on your own. This requires, in most cases, many hours of research, and constantly updating yourself on global economies and companies’ stocks and shares movements. Financial planners can also help you remain disciplined with your financial strategies and they will keep track of your finances, allowing them to make the right moves for you or to help you make the right moves yourself. Financial advisors also regularly review their client’s portfolio, taking into account changing market conditions, changing legislation, taxation etc. so that they ensure the fund is still correctly invested. Not only this but a financial advisor will often be able to also give advice on matters such as taxation, drawing up of wills, trusts, insurance and even emigration, to name just a few.

What type of financial advisor should you look for?

According to a recent survey by the Financial Planning Institute (FPI) of Southern Africa, the reasons why consumers are wary to pursue financial planning are 70% because of lack of trust, 62% of affordability and 55% because they do not know where to start.

When hiring an advisor, look for one who is affiliated with a financial institution that is established and respected. A company such as Brenthurst Wealth researches and tracks the performance of all the funds used in the creation of the various risk-adjusted investment portfolios. It also does research on other funds and products in the market place, often advising clients not to invest in them and is able to give cash-flow forecasts for clients approaching or even already retired.

In order to get the correct advice and to make sure that your money is in hands that you trust you should make sure that the planner you intend to work with is a Certified Financial Planner, which means the rigorous standards set by the FPI and have the experience to help clients. You are also able to check your advisors qualifications to make sure they meet the standards set by the Financial Advisory and Intermediary Services Act (FAIS), and they should be objective when handling your finances.

When looking for the correct fit for you, be aware of what it is you want, what you are looking for and what your aims are for this partnership. Your financial advisor is, in most cases, a long term financial partner, so choosing someone who will add value to your portfolio, someone you trust and someone that helps you understand and navigate finances easily is essential. Remember this is someone who is also a dedicated relationship manager who forms a personal and in-depth relationship with a client and his/her family to fully understand the client’s needs and objectives.

How can a financial planner benefit you?

In March 2014, Vanguard, one of the world’s leading investment companies, released a report entitled ‘Putting a Value on Your Value’ which concluded that “working with an advisor can add ‘about 3%’ in net returns when following a disciplined framework for wealth management, thereby adding “alpha” or additional returns to clients’ portfolios.

According to Forbes, the financial term ‘alpha’ refers to the how “an investment advisor can combine securities into a portfolio that provides excess returns to investors above the appropriate related benchmark index for those investments on a risk-adjusted basis”.

So how exactly does using an independent firm of advisors such as Brenthurst Wealth’s disciplined framework allow financial advisors to return more on your investments? They additional performance or alpha of 3% can be reached by suggesting certain calculating moves:

  • 0.45% can be saved by moving your investments to low-cost funds, which means financial advisors need to research funds which are measured by the asset-weighted expense ratios.
  • Up to 0.35% can be saved with rebalancing a 60% stock 40% bond portfolio annually instead of not rebalancing the same portfolio.
  • 1-2% can be attributed to the behaviour of the client; the financial advisor usually provides the client with guidance and discipline which helps them to make good investments and not be deviated from their original investments.
  • Up to 0.75% is dependent on the asset allocation of the investor and the breakdown of their assets between the taxable and tax-advantaged accounts. The benefits occur when the tax-advantaged and taxable accounts are about the same size; the allocation of the target is in a balanced portfolio, and the client is in a high tax bracket.
  • Also up to 0.70% is dependent on the ‘bucket’ size of the investor, which is the breakdown of the assets between tax-advantaged and taxable accounts, and the marginal tax bracket. Just like with the asset allocation, the benefits occur when the taxable and tax-advantaged accounts are about the same in size and the investor is in a high marginal tax bracket.

Having someone guide and keep you disciplined with regards to personal finance is a resource that you can use of and benefit from for the rest of your life, especially as you deal with big financial responsibilities such as your child’s university education or your retirement.

What are the draw backs?

A concern for some people may be that there is a cost to engaging a financial advisor. Fees vary from one company to the next and the platforms advisors use also have varying fees. It often depends on the size of the investment or the complexity of the financial structuring that is required. In view of the better returns typically achieved, as highlighted in Vanguard’s report, looking purely at fees should not be main consideration for making the decision whether or not to use an advisor. Some advisors charge an upfront structuring or consulting fee, while others do the initial set-up of investments free of charge and thereafter charge transactional, advisory or performance fees. Legislation requires that all fees be disclosed so once a plan is proposed an investor will be comprehensively advised on what the fees will be. Another concern is that investors think they will be locked into a particular investment and will not be able to change it, or ‘resign’ from their advisor, irrespective of returns achieved. This is not the case at all. One of the key benefits of using an advisor is the on-going management of investment and adapting the investor’s plan as his/ her situation changes. For instance in the case of the death of a spouse, birth of children or a divorce. And investments can be moved to another company at any time.

Signing with a financial advisor doesn’t mean you will be trapped into a long term contract that you are not happy with. A client who does not receive ongoing advice and service can terminate the agreement and appoint another advisor with immediate effect.

Now that sounds like sound investing!

Brenthurst Wealth Management has a team of highly-qualified advisors who provide clients with sound and impartial investment advice. They provide advice on an individual basis and tailor investment strategies for each client separately based on their specific circumstances. Brenthurst Wealth is registered at the FPI as an accredited professional business practice and was recently voted on of the top four boutique wealth management firms in South Africa. Find out more about their services

- Fin24


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