Who would stand for it? It’s absurd to charge so much for so little, despite the benefits of good health. But that’s exactly what most people pay for financial advice. Yet few of us bat an eyelid.
You see your financial advisor. Initially he may do some assessment of your needs, he’ll give you some advice and make some recommendations about where to invest your money. Then off you go, thinking you’ve got a great deal. Even better, the guy doesn’t even give you an invoice.
He doesn’t have to, of course. He gets paid a commission by whoever he recommended you invest your money with. And he usually gets paid that commission in advance and you pay it off via fees and interest charged against your account, year in year out.
Now if you saw your advisor every single year, and he spent time re-assessing your needs, making sure you stayed the course, that you didn’t give in to your emotions when the markets moved against you, or stop contributing when cash was tight, that might be (almost) justifiable. But most people don’t see their advisor more than once.
The sales commission is typically around 3-5% of the value of your contributions. So if you are saving, say, R7,500 monthly (15% of an R600,000 annual income), more than R1,000 rand of that would go toward the commission and the interest on the debt you unwittingly assumed.
And it gets worse. You are not just giving up some of your contributions, but also the return those contributions would have earned you. Over a 40-year savings life the full cost of your broker’s commission could end up costing you between R700,000 and a R1 million. That’s in today’s money, stripping out inflationary gains. You’ll likely be short more than 10% of your final investment value.
Imagine giving up 10% of your life’s saving for a few hours of financial planning advice.
Unlike doctors, advisors can’t honestly tell you: “This won’t hurt at all.” You probably won’t feel the pain until you retire, by which time it’ll be too late to do anything about it.
This is not to say advisors add no value, only that their remuneration serves them very well and often punishes clients very badly.
If that doctor you saw at the beginning of this story was able, in one consultation, to keep you healthy for the rest of your life, you probably wouldn’t have any qualms about paying a yearly fee in exchange. It would be worth it. But the doctor can’t do that for you. So she must keep earning her fees. So should your advisor.
Legislation in the UK has forced advisors to change the way they charge. They can no longer earn commissions. Instead, they are obliged to charge a fee. In the US, 70% of advisors now charge a fee rather than earning commissions. The Financial Services Board in South Africa has proposed ending commissions here, too, but that has yet to be enforced.
That shouldn’t stop you from asking your advisor to forgo his commission in favour of a negotiable fee. This would be annually renewable at your discretion. Which means that if you don’t get good service, or value for money from your advisor, you simply instruct the investment manager to cancel the future payments. This discretion makes the process fair and transparent.
It also means your advisor is going to be more objective and impartial about which investments he recommends, since he has no motive to choose one fund or asset manager over another. He is driven by what is best for you, not which provider will pay him the bigger commission.
If your advisor really has your best interests at heart, he should have no objection to charging this way. If he does, perhaps it’s time to re-examine the relationship.
