If you make a modest living and you don’t have a lot of disposable income, does it make sense to hire a financial adviser to assist you with your finances?
JustMoney reached out to local financial advisers to find out who can benefit from a financial adviser’s services, and how you will be billed for this.
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How much should you earn before hiring a financial adviser?
According to Reagan Mitchell, managing director of WealthyMe, whether you earn R1,000 or R100,000 per month, having access to financial advice will allow you to make informed decisions for your present and future financial goals.
“The way you access financial advice as a low-income earner won’t be the same as someone who earns R100,000 per month. Similarly, the cost of financial advice will also differ because of the level of complexity,” says Mitchell.
He explains that someone earning R1,000 per month may only need risk protection advice, whereas someone with a more complex portfolio will have a variety of needs.
According to Mike Wood, managing director of Wealth at the Apio Group, independent advisory firms do not choose their clients based on the size of their portfolio.
“They work with a client to ensure that their overall portfolio is always managed in the most cost-effective and tax-efficient manner while working towards an end goal,” says Wood.
How much does a financial adviser cost?
Mitchell says that in South Africa, financial advice has not been productised and as such the cost of advice is usually covered within the financial products in a client’s portfolio.
He emphasises that the commission payable to a financial adviser is recovered from the customer’s premium payments and that the cost of advice is not fixed.
“In other words, the more you spend on financial services rendered by a financial adviser, the more you will pay for the advice. But remember, this is included in your premium already,” says Mitchell.
Ana Scott, executive financial planner at Momentum, confirms that the same applies to the Momentum advisors. However, she explains that in other countries, such as Australia and the UK, financial planners charge a consulting fee.
“In these countries the top qualified financial advisers may charge according to experience, time in the industry, and studies completed, which often results in only the wealthy engaging,” says Scott.
How are financial adviser fees structured?
Mitchell explains that the total cost of making use of a financial adviser consists of:
- Advice fees
- Asset manager fees
- Admin fees
- Insurance company fees.
Advice fees are regulated, Mitchell says, and are charged at the discretion of the adviser, whether at a maximum of 1% plus VAT, or discounted. Clients can negotiate with advisers on this fee.
“Let’s say your portfolio is worth R10 million. At 1% per annum this would equal R100,000 in advice fees. Usually this fee includes an annual review meeting and a couple of reports during the year. Keep advisers accountable if they are not servicing you adequately,” says Mitchell.
He says that in recent years they’ve seen a shift in financial planning practices from commission structures to fee-based earning. However, this model has not been adopted widely.
“The idea of fee-based financial planning is to steer advisers away from being remunerated for product sales, towards the advice they provide. Many stakeholders in the financial services industry are of the opinion that this model will offer better financial outcomes for consumers of financial services,” says Mitchell.
What do you gain from a financial adviser?
According to Scott, financial planners require Continuous Professional Development points to continue to practice. Due to this, they are continually studying products and investment solutions, and are knowledgeable regarding the best solutions for their clients.
With this expertise, Scott points out that they are able to help their clients in the following ways:
- Personal risk planning: The timing of risk events (death, disability, and critical illness) cannot be predicted, therefore it’s crucial to cover these risks. Most clients believe that the chances of these risk events affecting them are low. The financial planner’s role is to guide clients to take out sufficient cover for these risks, despite their beliefs.
- Estate planning: This ensures that clients will have enough capital, should the worst occur, to benefit dependents or heirs in the manner intended, and that there is sufficient liquidity in the estate to guarantee effective distribution. It also creates an understanding of, and where possible minimises, taxes and duties payable.
- Investments: This kind of planning structures client’s funds in a manner that allows their investment goals to be met. Not all clients realise the importance of making their money work for them. Here the planner has an important role to play in assisting clients with the implementation of saving and investment plans.
- Retirement planning: A staggering 94% of South Africans cannot afford to maintain their standard of living once they retire. Those who contribute to a pension fund for 40 years can still see an income drop of 20% at retirement. Comparatively few people these days stay with any one company for an extended period of time, or preserve their pension or provident fund when they move. These issues highlight the important role financial planners play in assisting clients with making sense of their retirement plans.
Scott believes that one of the biggest benefits of having a financial adviser is accountability. She explains that many people allow their emotions to rule their decisions regarding finance. A financial planner holds you accountable to manage your money well.
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