Theo Voster talks to the media on a regular basis, especially NETWORK 24, with focus on investments. The article below received a great deal of attention, which we would like to share with you.
The questions you should ask yourself is:
- How much do I pay?
- Do I know what the total cost is, all levels included?
Please inform us if you are unsure about your cost structure. Enjoy the read.
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Shocking costs may eat away at your investment
The Business and Sauvignon-workshops at the “Vryfees” in Bloemfontein were special events – Media 24 has a winner with their Festival Café concept, where all the newspapers, TV channels (kykNET and Via) and magazines are under one roof!
The conversations had with people about the costs they pay for investments and investment advice left a somewhat bitter aftertaste.
I almost find it criminal when an elderly lady and man tell me that an advisor quoted them a starting fee between 3% and 5% on their investments – on a nest egg of R5 million it comes down to a fee of between R150000 and R250000 which goes to the nest egg of the advisor (and that be it from a well-known institution) instead of the investment!!!
There is more than sufficient proof that people who make use of financial advisors are significantly better off than people who don’t.
The question is: If financial advice plays such a major role towards one’s financial wealth, what is a fair price to pay for the service?
Before we get to the cost of advice, the latest study (July 2017) about the value of financial advice comes from the International Longevity Centre in Britain (ILC-UK). What gives this study so much value is that the ILC-UK is independent and is not connected to any financial institution, and focus their attention on research regarding the implications of longevity.
In this study, they looked at actual data of more than 90000 households in England. The conclusion was that the people who made use of financial advisors are better off than those who do not, irrespective of how prosperous they are.
“Poorer” people, in other words, people who must survive on a strict budget, were actually better off, in actual fact they were 21% better off. The more prosperous group of people were 16% better off. This is compared to people who did not make use of financial advice.
This study was performed over a period of 10 to 15 years. As expected, the benefit of advice increased over time and age.
The question is now:
If financial advice adds so much value to your life and financial well-being, what would be a reasonable cost structure for good advice?
To answer the question properly it is important to keep the different costs apart, since apples are not always compared with apples.
The points below are the basis on which the financial advisor eventually will be responsible for financial analysis, planning and implementation together with ongoing management and monitoring of the portfolio:
- Money that is deducted from your investment prior to the money being invested (it is normally called structuring-, implementation- or planning fees): There is normally a lot of work to be done prior to presenting a complete plan, for example, things like an analysis, long term financial models and investment recommendations. The starting point is that the cost should be linked to time and ability. As a guideline, it should be somewhere between R7500 and R25000 (if really complicated) if the investor eventually places the investment with the advisor. In the R5 million case above, the planning cost should not be more than R7500!
- The fee for the management of the underlying investment portfolio: As a starting point, the total ongoing fee should not exceed 3% of the value of the assets per annum. Depending on the structure of the asset (active vs passive or domestic vs foreign) the 3% per annum could be heavily reduced. To understand the ongoing fees, three elements need to be separated and should be understood separately – although these are eventually added together to calculate the ongoing fee:
- Advisory fee – approximately 1% of the assets under management; it can be reduced if the investment amount is relatively high and/or the client does not expect too much ongoing input from the advisor. It is also advisable to negotiate a maximum fee per month if it is a large investment.
- Platform and administration fee – levels between 0.5% and 0.75% for assets under management is a reasonable standard in the unit trust and investment industry.
- Underlying fund management fee – This fee can vary between from 0.5% to 2% of the assets under management depending on the specific mandate and fund manager.
You need to be cautious of performance fees, “fund-of-fund” fees, transactional costs and wrapper fees, which in some cases can be added!
There are alternatives to the above fee structure, especially where the investor only requests a specific service or transaction. I specifically refer to estate planning, asset allocation and/or portfolio modelling services. In this case the advisor will levy a fee for the specific service and will not be responsible (or earn money) for the long-term performance of the portfolio.
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