The difference between a clear path to wealth and a foggy road to ruin
No matter what our respective levels of financial sophistication are, we can’t master every area of financial planning. The key is choosing a planner that’s right for our individual circumstances.
Failure to adequately plan for that future or falling prey to an unscrupulous advisor could affect both your quality of life in your retirement years and the legacy you leave your family. Remember, this person will be privy to a lot of information, from how much you paid in taxes last year to the outstanding balance on your bond. So, while it’s very important to select someone with the right experience and qualifications, it’s equally important to find someone you can trust. Here are our top tips on how to do just that.
Tip #1: This isn’t the time to just thumb through the yellow pages
Get referrals from people you know and trust in similar financial situations. Start by filtering your candidates through some basic screens. Your advisor should: • Be more than 30 years old. • Have a minimum of five years experience as a financial advisor. • Have a degree such as a certified financial planner (CFP) or a certified financial advisor (CFA). • Be licensed with the Financial Planning Institute (FPI).
As a first step, your financial planner should clearly explain the services he or she provides and define both parties’ responsibilities. This is required in terms of the Financial Advisory and Intermediary Services (FAIS) Act.
Remember, not all financial planners are qualified to give you advice on all aspects of your finances. You may find that your planner can advise you on estate planning, but not on tax. If this is the case, he or she may outsource a qualified tax practitioner (and charge you for the service) or refer you to one.
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Tip #2: Find out what you’re paying for
One of the most crucial questions you need to ask is what your advisor is going to charge you. And you need to understand explicitly how payment works by Karin Iten – you don’t want to find out later that there are hidden costs.
There are generally three types of cost structures used by these professionals:
1. Fee-only planners charge you only for the advice they provide and don’t actually sell any products such as insurance or unit trusts. They may also charge you a percent of the value of the assets they’re managing for you, by the hour – or with a flat fee. Setting up a basic plan should take 15 hours and will set you back around R3,500 – depending on the complexity of your situation. A more detailed plan could cost you up to R25,000.
2. Commission-only planners, on the other hand, doesn’t charge you for advice. They earn their keep when you purchase the financial products they’re selling. In many cases, they’ll draw up a plan on a complimentary basis in return for having you invest through their company. Often working with someone on a commission basis can save you money.
3. An advisor who charges fee plus commission will charge you for his advice and also earns commission on any products he sells you. Generally, fees will be lower than the fee-only advisors since the advisor also earns commission.
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Tip #3: Scrutinise every answer
Once you’ve narrowed down your search to three or four advisors, the interview process begins. Head into these interviews armed with a comprehensive list of questions (I’ve given you some examples below). Asking the right questions can mean the difference between a bright financial future or losing your life savings to an unscrupulous conman. And don’t forget to ask for a list of references.
1. What financial-planning qualifications do you possess?
2. How long have you been offering financial-planning services?
3. What professional associations do you belong to?
4. Have you ever been cited by a regulatory body for disciplinary reasons?
5. Will other professionals (such as attorneys and tax practioners) help prepare or implement my plan? If so, who are they?
6. Do your services include recommendations for specific investments or products?
7. Will you take possession of, or have access to, my assets? 8. How are you compensated (fee only/commission only/combination)? What about commissions? 9. What’s your area(s of expertise? Who will handle my needs in other areas?
Important: Ask all candidates the same list of questions to make it easier to compare their answers. And don’t forget to bring your spouse with you for the initial consultation – good advisors should work equally well with both partners.
Tip #4: Make sure you’re on the same page
After you’ve finally selected your financial advisor, you’ll need a written engagement letter that sets out the scope and nature of your relationship. The letter should cover your specific goals, the financial advisor’s understanding of your goals and the amount and form of compensation. To help square away the parameters of the engagement letter, you and your advisor will need to have a very thorough, joint understanding of your current financial status as well as your financial goals. The more current information you can bring to your planner, the more thorough the engagement letter will be and the greater your shared understanding of your financial plan. Always leave copies – keep all original documentation for yourself.
Tip #5: The best return for your effort – A planner you can trust
If you put in the effort to find a financial advisor that’s the right fit for your needs and goals, you’ll have taken a giant stride toward securing your financial future and ensuring your legacy passes on to your family intact. Unfortunately, given the nature of sound financial planning, you won’t see the success overnight – this plan will be for the long haul. That’s why selecting the right financial planner is so important.
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