When it’s worthwhile paying for a financial advisor
The majority of South Africans still pay a financial advisor primarily to help them choose a fund or fund manager – a broker commission that’s not always well spent according to Steven Nathan, CEO of 10X Investments.
According to Nathan by taking a more DIY approach, investors are able to achieve superior long-term returns by paying less in fees.
“Compared to a low-fee option (1% pa or less), paying fees of 3% per annum could cost customers up to 40% of their final investment. By saving on active management and advisory fees, customers are bagging more of the return, and re-investing more towards their retirement.”
Why so many people are looking for advice
According to Nathan, local investors can currently choose from over 1,500 unit trust funds and dozens of fund managers offering multiple alternatives and substitutes with different objectives, strategies and styles.
He noted that because of this industry model, consumers are often left with little choice and are often confused and intimidated into turning to advisors for help.
“While 1% may seem like a tiny amount, the compound impact over thirty or forty years can lower the final retirement pot by 20% or more.”
“Of course, it would still be worth it if the advisor picked a fund that delivered an above-average return. While this is possible, it’s very unlikely as their recommendations are not based on any kind of science or prescience. Instead, they are usually based on past performance.”
What is advice worth paying for?
Nathan believes that investors should only pay for advice that will likely improve your savings outcome.
“Such advice relates to the disciplines and essential elements of investing. and ideally, you will pay for this advice directly, based on the level of service, not by an annual (seemingly small but ultimately significant) deduction off your savings.”
He provided the following examples that an advisor should be able to help you with:
- drawing up a retirement plan that has a high chance of meeting your investment goal;
- sticking to the plan, even if others appear to be working better from time to time;
- identifying the most suitable and/or tax-efficient products for your goal(s);
- setting your level of market risk (allocation to the share market) that is appropriate for your time horizon;
- ensuring your portfolio is properly diversified;
- avoiding unrewarded risks, such as active management or fund manager selection risk; and
- selecting low cost products, to minimise the detrimental long-term impact of compounding costs.
Read: South Africa’s richest face three new wealth taxes: report
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