There are a few crucial questions that you can ask your potential financial advisor. This can be a pressure test on them to see if they are a perfect fit and if you can place your trust in them with your finances.
- How are financial advisors remunerated?
In the South African market, the most common structures include a fee-based model and a commission-based model.Commission-based advisors are remunerated by the company with which the product was placed, and this is normally done as an upfront payment. The issue with having a purely commission-based structure is that it may lead to the advisor being faced with providing the most appropriate advice and generating commission from a product sale.
Fee-based advisors are remunerated by charging a fee for the advice and services they render. The structure of this fee may vary depending on the type of planning that is done. An upfront fee is normally charged for a formal plan and the advisor can charge a percentage of the assets they manage, with the emphasis being on comprehensive wealth management. - What are the services offered?
Some advisors specialise in one specific area of financial planning, for instance, investment planning or estate planning. Depending on your specific needs, be sure to ask the advisor where their focus is. An advisor might be a great estate planner but renders poor advice on investment planning and vice versa. Ideally, partner with someone offering holistic and comprehensive advice. There are financial advisors with associates and experts in all financial disciplines to ensure that the full spectrum of advice can be provided. Ask questions pertaining to their experience, client testimonials and the size of their practice. - Are they independent or are they tied?
An independent advisor is not directly affiliated with any insurance company, investment firm or product house, nor are they incentivised in any way to recommend any specific products or investment. A tied advisor is directly affiliated with a specific company or product house and will be incentivised by recommending their products only. Your advisor must disclose whether they are independent or tied, and it is normally disclosed in their introductory letter. The benefit of an independent advisor is that they may recommend a broad range of products and offer various options for you to choose from. It demonstrates that they are independently working for you and that their advice will not be affected by any industry associations. - What is their professional background?
A financial advisors practice must be registered with the Financial Sector Conduct Authority (FSCA) and this should be reflected on all official marketing information. The financial advisor has to be a member of the Financial Planning Institute (FPI) which is the recognised professional association for all financial planners in South Africa.It’s good practice to follow advice from a Certified Financial Planner who has completed their board exams. The CFP designation is the internationally recognised standard for financial planning professionals. Find out if they focus on a specific market and if they would be willing to share some client testimonials. It is advisable to employ the services of a company that has a proven track record and a wealth of industry experience. - Are they part of a team?
Don’t buy the advisor – buy the team! It’s important to ensure that the advisor has the infrastructure and professional support to maintain your financial plan. Having a plan is one thing but committing to service level agreements requires support and sustenance.
We suggest that you frequently meet with your advisor in order to reflect on your plans so that you can react to your plans.
