Hi Greg C. I have nothing against you personally and you may well be a great financial adviser. The issue I have is that the way the system is built there is a fundamental conflict of interest, especially when it comes to long term savings products. Its not your fault that it is this way but you probably benefit from it. My issue with the current system is the ongoing fee's that are given by the investment companies to the financial advisers. RA's and unit trusts already have very high fees and then on top of that the financial adviser who advised you what to buy in a 1 hour meeting gets a portion of your money for as long as you put money into the product. For an RA that you signed up for when you where 25 that could be 30 years. The other issue is that the fee is variable, and that is where the conflict of interest arises. The objective of the saver is to build up reserves for retirement. Realistically you should be happy to be earning between CPI+2 and CPI+4 as a long term average. That is not a huge margin. Add to the mix the ongoing fee of the financial adviser and your growth is heavily cut. The adviser should only be caring about your growth so he should be minimizing costs and maximizing growth yet at the same time he has to put food on the table so the adviser has a vested interest in maximizing that ongoing fee and hence reducing your growth. Its a fundamental conflict of interest, and that is my issue with the current setup.
The system that is already in place in the UK and other more advanced economies reduces this conflict of interest by cutting away all ongoing fees to financial advisers. Instead you pay them for advice on an hourly basis, similar to the way you would pay a lawyer of doctor. This system leaves no conflict of interest. The adviser absolutely wants your investment to grow the maximum possible as then you will be happy and refer more of your friends to him. Its just fundamentally better all round. The good advisers will get a lot of ongoing business and even have people put them on retainer with monthly income to give up to date advice.
As I clearly said in my post I know some very good and honest financial advisers. My wife worked for some of them for a while as a matter of fact. At the same time she told me horror stories of all the abused clients they used to get coming from other advisers who would knowingly shaft a client just to get something for themselves. High ongoing and up front fees where common and what was worse was all the cases of advisers selling people 5 copies of the exact same RA essentially multiplying the fixed fees by a factor of 5 for zero gain to the client. Why did they do this one may ask? Simple, the insurance companies where offering rewards to the financial advisers for number of policies sold. So they advisers told people with a R1000 savings plan to buy 5 identical R200 RA's so that teh adviser could win a ski trip to the Alps. That is the kind of thing that infuriates me.
So yes, there are very good people in the financial advisory business who earnestly want to help people with finances, but at the end of the day their will be fees involved. Even the honest bunch of guys my wife worked for despite their low fee structure did not impress me much. They had their own unit trust funds. There where 3 in total, CPI+2, +4, and +6. I have kept track of their fund performance and they have consistently been in the top 15 or so unit trusts in their risk brackets. Funny thing is I still get far better returns just investing my money myself into low cost EFT's like SatrixDivi or Betta Beta. Last time I checked to compare 5 year growth and their best fund had only returned 20% or so over 5 years where my return had been about 60% for the same period.
SA has very low math and financial literacy and I think the insurance and investment companies take great advantage of that. Unit trusts with their high costs are pretty much dying or dead all over the world yet SA still has a huge unit trust industry. People in first world countries are learning to invest for themselves with advice from advisers and low cost diversified ETF's make that easy. I really look forward to this being rolled out in SA as well. We have some good ETF's but their costs are still double that of the world leaders like Vanguard.
Anyways, I just want to re-iterate, my beef with financial advisers is purely in the long term savings space. Life cover works differently and very well. If you sign up for life cover the insurance companies pay the adviser up front. Provided the cover is not canceled within a short period (in which case the fee is returned to the life insurer) the adviser keeps the money. So feel free to speak to professional advisers about getting your will in order and making sure you have enough life/disability cover to care for your family and kids in the event of you dying or being incapacitated. On the other hand if you are thinking about investing for retirement just make sure your pension is in an appropriate risk bracket for your age and that you are getting your 15% tax from the pensionable allowances SARS gives and invest anything else yourself directly into ETF's or something.
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