LAURA DU PREEZ
Your adviser may supply products from just one institution and there may be perverse incentives behind the choices they make.
When you sit down with a financial adviser, you should have a clear idea who you are dealing with and what their relationship is with any supplier of financial products, be they life or short-term insurance policies or investments. This information enables you to assess whether the advice you will get have any limitations to it before you act on it.
That is what the Financial Sector Conduct Authority (FSCA) said at the outset of its review of financial advice and the way in which we are sold financial products.
It is more than five years since the regulator started its retail distribution review and though some consumer protection measures have been put in place, many proposals are still in draft form and up for further discussion in documents published late last year.
One contentious issue concerns the right name for advisers who act as agents of financial institutions, selling almost exclusively that company’s products relative to advisers who operate from their own advisory practices. The debate extends to who should be able to call themselves an “independent” financial adviser without misleading you.
In the meantime, you need to question your adviser closely about the service you will enjoy, their relationship with any financial product providers and the cost implications.
Later this week, the SA Independent Financial Advisers Association (Saifaa) will post a list of 21 “vital” questions you should ask your adviser, its founder Derek Smorenburg, says. Here are a few questions from the list, the issues raised in the retail distribution review papers and some insider insights:
Whose financial products do you sell?
You must ask an adviser whether they represent a wide range of assurance companies’ products and a variety of investment houses and which ones and why, Smorenburg says.
Saifaa suggests you ask your adviser who is their employer — a financial institution such as a life company or an advisory practice. If the adviser is employed by an advisory practice with its own licence, you still need to check whether the practice is owned by a product house. This information will help you work out whether you are getting advice from a tied or product supplier agent, who only recommends products from one institution.
If your adviser is employed by a practice licensed as a separate financial services provider but the practice is owned by a product house, you need to ask about incentives offered to your adviser.
Brian Foster, the founder of Financial Caddie, a coaching and mentorship business for financial planners, says the retail distribution review discussion has moved beyond expecting independent advisers to offer you every single product in the market. Some may be expensive, and some may be dangerous, he says, but if advisers who claim to be independent limit their range, they should be able to justify their choices.
How do you get paid when I invest?
The retail distribution review process identified upfront commission payments as a big contributor to products being mis-sold and a cause of many grossly unfair penalties imposed on investors who stop or reduce payments on investment policies before an agreed term. Commission is calculated as a percentage of the amount you pay and the term for which you invest, and paid upfront to advisers by way of “loans” which are repaid when you pay your monthly premiums. But if you fail to keep up with the payments, the unrepaid loan is recouped as a penalty against your savings.
Upfront commissions have been limited to 50%, and maximum penalties have been set and must reduce to zero over five years. The FSCA has proposed banning commissions on investments and that advisers only be allowed to charge agreed fees as and when you contribute to an investment.
There is debate about retaining commissions on low-cost products to ensure advisers service low earners. In the meantime, Saifaa recommends you ask your adviser if they earn statutory commission, a fee charged as percentage of your investment, or a time-related service fee.
What incentives are you offered?
Foster suggests you ask about the incentives which could affect your adviser’s recommendations. He says some advisers earn a higher reward for recommending the internal, more expensive fund of the institution that employs them or owns the practice that employs them.
Alternatively, advisers in their own practices set up their own investments and mostly recommend these to you. In addition to their advice fees, they charge you for making decisions on the investments in a fund of unit trust funds or what is known as a model portfolio created for you and other clients.
The FSCA has put a stop to taking fees for the same service twice or double-dipping, but Foster says it could be argued that advice and investment management are two different services.
John Eckstein, MD at Analytics Consulting and Ci Collective Investments, says an adviser who does a thorough due diligence on the underlying investments for their own range of funds may well be providing you with a better service than one who enjoys a large manager’s presentation and switches your investments for more whimsical reasons.
Janet Hugo, director of Stirling Wealth and former winner of the Financial Planning Institute’s financial planner of the year award, says she recommends to her clients unit trusts which she co-manages with another independent adviser, Wouter Fourie and with Analytics Consulting. Engaging managers through consultants enables her to secure favourable bulk asset management fees and the costs, at 0.2%, only cover the running of the fund.
Both Saifaa and Foster suggest asking your adviser about their views on investments, asset allocation, investment philosophy and investment benchmarks. This should reveal any links and also their views on index-tracking and active management.
What arrangements do you have with the investment platform?
Some tied advisers are employed or franchised to a financial institution that runs its own investment platform. Some advisers who operate from an independent practice are able to offer you lower fees on unit trust funds on certain investment platforms because they place many clients’ investments on those platforms.
If a financial institution has an investment platform and offers its own funds, you may enjoy a discounted rate. Eckstein says this “vertical integration” can be good or bad for you — if the advice, fund and platform fee charged for financial services within a group add up to 3.5% or more, vertical integration is not benefiting you.
Saifaa suggests you ask for the all-in costs of products and services recommended, including and excluding advisory and guidance fees, Smorenburg says.
(This article originally appeared on BusinessDay)