Is it really a good idea to cut out the middle man?

South Africans’ reluctance to pay for professional financial advice has a price

Many investors approach financial service providers directly because they believe they can get a better deal by cutting out the ‘middle man’, the financial adviser. Getting appropriate financial advice is however essential to your financial wellbeing – it mobilises you to take action when needed and helps you manage risks. Why are so many investors hesitant to get professional advice? This disconnect can largely be attributed to a focus on the costliness of financial advice, instead of the actual value of the advice.

Financial advice plays a key role in retirement planning, which is very relevant to South Africa

One of the most critical benefits of sound advice is preparing for a comfortable retirement. South Africans generally save far too little to generate adequate retirement income. Hamilton van Breda, Head of Retail Sales at Prudential confirms this problem: “This unfortunate situation is fuelled by the knowledge gap between consumers and the complex financial issues that affect them. Financial advisers can play a critical role in helping people save enough money for retirement.”

Financial planning gives you more control over the risks inherent to investing

There are many risks involved in not providing for retirement, including an unexpected reduction in income due to poor market returns, inflation decreasing the real purchasing power of money, and exposure to failing financial institutions and fraudulent schemes. “Because most of these risk factors are beyond our control, investors should embrace appropriate financial planning as the one risk-reducing measure that they can control,” explains Van Breda.

Over the long term, quality financial advice is worth more than its cost

People who use a financial adviser benefit by having peace of mind, greater control over their finances, avoiding bad investments, sticking to a budget, finding it easier to save and improving their retirement prospects. Van Breda says the hefty debates and criticisms of the cost of financial advice in South Africa has kept many people from approaching a financial adviser. “There has been a strong regulatory and consumer media-driven focus on reducing the cost of advice and improving the quality of financial advice. However, there is seldom any reference to the value of the advice,” he explains.

Van Breda believes that investors will have a better financial outcome if they seek quality financial advice. Advisers can make recommendations on a diverse range of products and services such as life insurance, employee benefits, tax planning, estate planning, risk management, investment and retirement planning. The value they add in all these aspects can far outweigh the costs.

Financial advisers have guidelines to help ensure their advice is in their clients’ best interests

The Financial Advisory and Intermediary Services (FAIS) Act gives financial advisers very specific guidelines to follow. When it comes to giving advice, the Act stipulates that advisers must:

· take reasonable steps to get information about their client’s financial situation, financial product experience and objectives,

· conduct an analysis based on this information, and

· identify the financial product or products that will be appropriate to the client’s risk profile and financial needs.

Financial advice helps you protect your money in challenging times

Financial advisers should be able provide tangible benefits to their clients, such as wealth creation and protection. They should help investors make an informed decision in a relatively complex and bewildering environment. This is now more relevant than ever. Investors are nervous, but if they seek advice from a financial adviser, the adviser can provide them with strategies to safeguard investments and assets. Advisers can help curb irrational investor behaviour.

The debate about adviser remuneration has impacted people’s perception of advice negatively

“The debate over whether financial advisers should receive explicit fees linked to advice given or commission received is always a heated one. However, it becomes a real problem when any fees or ‘additional’ charges discourage people from investing,” says Van Breda.

Quality financial advice is worth the cost in the benefits of sound financial planning

According to van Breda potential investors need to understand the role and value of financial advice. Financial advisers offer a valuable service and they deserve to be reimbursed in a transparent and open way. Van Breda believes a focus on value, not cost, will enable investors to reap the benefits of professional advice. “When the benefits of financial advice outweigh the expected costs of the advice, investors will be more willing to engage the services of a financial adviser. At the same time, financial advisers should be properly qualified and ethical in their treatment of their clients’ important life decisions,” he says.