Are financial gurus worth their salt?

Written by Steven Bacher
Tuesday, 05 July 2011 15:09

They say that the problem with advice is that supply is generally greater than demand. One industry that’s not short of gurus ready to dispense with advice is the financial industry. South Africa has a highly developed financial sector that is recognised globally as being world class. For most South Africans the interaction with the financial sector is often through their financial advisor.


It’s estimated that there are more than 10 000 financial advisors in South Africa, which leads us to ask: what is their role in the financial sector? What value can they add to the person on the street? What does one look for in an advisor?


What is required of a financial planner?


A good financial planner guides the client in terms of how to manage their personal financial position. This requires an understanding of multi-disciplinary fields. The advisor is expected to have a grasp of legal matters (Wills Act, Matrimonial Property Act, Estate Duty, FICA, Pension Funds Act etc), tax matters (income tax, capital gains tax, corporate tax), investment matters (portfolio construction, investment theory, risk management, offshore investments etc), medical aid, retirement planning matters, fiduciary matters (estate planning, wills, trusts etc).


Personal financial planning has become very complex in the past years and with that has necessitated increased skill levels on the part of financial advisors. The industry has witnessed the professionalisation of the financial planning industry over the past decade, starting with the introduction of the Financial Advisors and Intermediary Services (FAIS) Act of 2004. The industry watchdog – the Financial Services Board – has become a lot more stringent in licensing advisors.


All financial advisors are now required to write regulatory exams that test their understanding of the FAIS Act in particular. Advisors that do not pass this exam will not be allowed to continue working as a financial advisor. The industry qualification – CFP or certified financial planner – has become increasingly difficult to attain, with pass rates below 60%. Advisors with the CFP designation are now in demand worldwide.


The skilled advisor will have mathematical, analytical and interpersonal skills. They will also need to be administratively adept and ensure that they comply with the relevant Acts at all times.


The role of the advisor


The advisor plays an intermediary role in the financial sector in South Africa. Their job is to understand the different products offered by the numerous companies and to recommend the relevant products to their clients. Before any products can be sold, the advisor is required to conduct a full analysis on the client’s financial position and prioritise the actions that will see the client’s position improving. The primary value proposition of today’s financial advisor is advice. In the past, advisors were taught to sell. Today, they need to analyse and strategise.


What value can they add to the man in the street?


The value of advice is a debate that has raged for many years. Clients tend to haggle about the price or cost of advice but often lose sight of the value of advice. The price of advice is the commission earned or consulting fee charged. The value is the extent to which a client is better off as a result of the advice.


Says Craig Gradidge, co-founder of Gradidge-Mahura Investments, “In one hour I immediately saved a client more than R200 000 in tax by restructuring their salary. I restructured the retirement portfolio of the client I saw after that, but he’ll only see the benefits in 20 years’ time, when he retires. I estimate the value of the restructuring to be worth about R6 million. But we’ll only see that when he retires.”


Both clients paid a similar cost for advice, but the value they received differed based on their personal circumstances and requirements.


What does one look for in an advisor?


A good advisor is less focused on sales and generally conducts a significant amount of analysis in order to fully understand the client. The quality of advice is influenced by two important factors: experience and education. What qualifications does your advisor have? How much relevant experience do they have? Can they show evidence of structure and process within their business? Do they have a clear investment philosophy? How often are they in contact with you? Are there regular reviews – preferably annually – of your financial position?