TRUE VALUE OF A GOOD FINANCIAL PLANNER?
By Richus Nel, Financial Advisor, Brenthurst Wealth

Financial advisors are generally measured one dimensionally by clients, by comparing portfolio returns (exclusively to market returns). In a low return environment (low growth, low interest and low inflation) clients should also consider the following:

– Their market outperformance brought on by their advisor and asset managers during prior market cycles – e.g. an increased foreign exposure strategy since 2012, that benefitted client portfolios hugely from significant RAND depreciation;
– The value of other services offered by financial advisors in respect of cost savings, tax savings and preventing financial mistakes (risk cover, wills, estate planning etc.).

Measuring financial advice solely on investment performance are setting advisors up for failure. Advisors have no control over markets over the short-term and are dependent on investors to understand this during times of low or no return. This will prevent a “race horse” mentality (in selecting asset managers) and urge for forced portfolio alterations, due to low market performances.

As financial pressures increase, the necessity of quality advice increases. I attended the national Investment Forum in Cape Town, Century City, a couple of weeks ago where the leading asset managers (nationally and internationally) provided insight re. economic and political prospects.

One presentation that caught my eye was by Peter Kempen (Coronation) “Thriving in a lower return environment”. Peter used the illustration below (by Carl Richards – Creator of Behaviour GAP) urging advisors and investors to redirect their investment / advice-focus in a low return market environment.

WHAT DO INVESTORS HAVE CONTROL OVER INVESTORS CAN CHOOSE TO SEEK PROFESSIONAL FINANCIAL ADVICE, BUT DOES THIS ACTUALLY “PAY” OR RESULT IN SUPERIOR OUTCOMES?

According to the Internationally studies (Value of Advice Report 2012 – Investment Funds Institute of Canada, Vanguard Advisor’s Alpha June 2016, Dalbar’s 22nd Annual report 2016 – Quantitative Analysis Investment Behaviour) the picture looks as follows:

Adviser utility by investors in Canada is 5 out of every 6, USA 80% of investors with mutual funds make use of financial advice, Germany 80% and Netherland 51%. THE RESULTS FOUND FROM THESE COUNTRIES STUDIED, WERE A SIGNIFICANT INCREASE IN SAVINGS, PERSONAL WEALTH, LESS DEPENDENCY ON THE GOVERNMENT AND BETTER STATE FINANCES. These respective countries were less dependent on any foreign reserves which resulted in a significant interest / cost savings for governments. Good example to tag on by the South African government.

FINANCIAL ADVICE BENEFITS – (ACCORDING TO ABOVE STUDIES)
– Greater wealth accumulation through a committed savings plan;
– More comfortable retirement;
– Selecting tax and cost-effective investment solutions;
– Long-term investment strategy and avoiding emotional investing;
– Guarding against poor financial decisions

STUDIES SHOW ADVISORS FOCUS ON:
1. BEHAVIOURAL COACHING
INVESTORS TYPICALLY “BUY HIGH” AND “SELL LOW”.
The average retention rate of US mutual equity fund is 3.46 years where equities are only suitable for long-term investment horizons (7-10 years). Until the end of December 2015, the S&P500 earned an annual return of 10.35%. In comparison the average mutual fund equity investor only captured 3.66% return. Short-term investors’ focus resulted in a return gap of 6.69% per annum.

In recent years this gap has closed from a +-10% gap in 1998 to +-3.5% in 2015. This can be attributed to better education, understanding investors emotions and managing of those emotions more effectively with the help of financial advisors.

2. REQUIRED RISK ASSESSMENT & ASSET ALLOCATION
Financial advisors ensure that investors take sufficient risk (more than investors would generally be comfortable with on their own). This additional risk (and accompanied return compensation) over the long-term, plays a critical role in superior investment return outcomes for clients.

3. ASSET MANAGER SELECTION
SELECTING ASSET MANAGERS AND ENTRUSTING THEM WITH INVESTOR’S CAPITAL IS AS IMPORTANT AS ASSET ALLOCATION. These managers selected must differentiate themselves as excellent over the long-term (good and bad times).

IFA’S IN RSA HAVE DONE A GREAT JOB IN SELECTING EXCELLENT ASSET MANAGERS:
– 35% of all general equity funds (with a 5-year track record or longer) have beaten the ALSI over 5 years;
– 67% of all the assets placed by IFA in independent general equity funds, have beaten the ALSI over the past 5 years;
– 99% of all assets placed by IFA in the general equity sector, have produced returns above the sector average.

4. COSTS / TAXES
Generally advisors are cost and tax cognisant and will advise cost effective investment solutions to their clients. These savings enhance investor returns significantly over the long-term. Advisor firms are able to negotiate lower fees with platforms and asset managers to the significant benefit of investors over the long-term. Tax planning is receiving an increased focus (due to rising taxes) and demand priority to individualised, tax efficient investment solutions.

5. FINANCIAL PLANNING
Financial planning specifically refers to investment and retirement planning illustrating investors’ financial wellness. It includes any financial consideration, plan, discussion or guidance that improves an investor’s financial well-being.

6. MANAGING DOWNSIDE RISK
Managing risk is a key focus in personal finance for advisors. Financial risk is any unforeseen event that could derail a client’s financial plan. This includes personal liability, short-term damages (theft / accident), death, loss of income, medical emergency and even debt or business debtors not paying. Currency / cash flow / liquidity risks are managed. Risk planning even includes timely management of death bequests and guardian nominations for fostered children, preventing huge unnecessary costs / losses through court settlement.

7. DRAWDOWN RATES / WITHDRAWAL
Financial instruments dropping in value always come as a shock to investors, even if investors are aware of the volatile nature of markets.
DRAWDOWN CONSIDERATIONS MANAGED BY ADVISORS:
– managing drawing percentages and escalations
– source of drawing (considering tax efficiency)
– portfolio construction to safely fund that drawing

8. EDUCATION
Financial advisors are providing a vital educational function within the South African context. This guidance is “principle based”, focussing on risk and personal finance matters. This empowerment leaves investors in a much improved financial position. The more educated an investor, the better their financial position and the more sustainable business relationship with them. Succession remains a key focus for advisors. Successful succession ensures that information passed onto clients, are also passed down to their future generations by these clients themselves.

CONCLUSION:
THE INTERNATIONAL STUDIES (REFERRED TO ABOVE), CONCLUDE THAT THE RETURN BENEFITS FROM USING A FINANCIAL ADVISOR COULD BE AS MUCH AS 1.5%-3% PER YEAR.

Behavioural coaching is found to be as high as 1.5% per annum on its own. Advisors holding clients’ hands taking on the right level of risk (considering return expectation), plays an undeniable role in achieving superior returns. The difference in e.g. long-term equity returns compared to bonds / cash returns are enormous. Avoiding general investment mistakes, also add up quickly to a superior financial position.

Over a lifetime these added services by financial advisors result in a significant higher level of investible assets and financial position by retirement. Over 15 years it is suggested that the improved result from financial advice, could be as high as 2.73 times, compared to unadvised assets. (Value of Advice Report 2012 – Investment Funds Institute of Canada).

IN SOUTH AFRICA THE IMPROVEMENT IN PERSONAL WEALTH, ATTRIBUTED TO FINANCIAL PLANNERS ARE SUGGESTED TO BE AS HIGH AS 2%-4% PER ANNUM.

This begs the question: What is the true value of your financial advisor and what is a fair price for that advice? Top tip of the day: Do not chase yesterday’s winners.

SPEAK TO ANY OF OUR OFFICES COUNTRYWIDE TO ASSIST WITH YOUR INVESTMENT STRATEGY.

BRENTHURST RANKED TOP BOUTIQUE WEALTH MANAGER IN SOUTH AFRICA, 2017

Brenthurst Wealth was ranked as the BEST BOUTIQUE WEALTH MANAGER IN SOUTH AFRICA AT THE 2017 Intellidex Wealth Manager and Private Banks Award. Brenthurst is also ranked at number five overall and scored well in the client survey. “This is a great achievement for our team as wealth management is a highly competitive industry. Considering the challenging investment environment we believe our strong focus on building long term relationships with our clients and our philosophy of searching for the best investment options contributed to Brenthurst receiving this accolade. A big thank you to the clients that are at the heart of our business and to the team for their dedication,” says Brian Butchart,
Managing Director. Read more: https://www.businesslive.co.za/investing/investors-monthly/2017-06-28-when-only-the-best-will-do-what-our-private-banking-and-wealth-management-survey-says/