Knowing More Part 4: Financial Literacy for Beginners
Know What You’re Paying For
Fees. The one word that sends shivers down the spine of any crooked, sly or cunning financial professional. The one topic that is conveniently “forgotten” in discussions, often hidden away in the fine print and between over-complex terms, containing conditions that the client (and even some advisors) struggle to understand. Do you know how much you are paying and what you are getting for it?
There are three building blocks that should make up the “fee pyramid”. Each layer will be explored below in order for clients to understand what they are getting in return for trusting someone with their money.
1.) Asset Management Fees
The asset management fees form the base of the pyramid. The financial advisor or planner has no control over this amount which is paid. This is the fee that is paid to the asset managers who make all the decisions within the fund that you are invested in e.g. Allan Gray, Old Mutual, Coronation etc. These asset managers are responsible for picking the right stocks in which to invest on behalf of the client, in order to obtain the targeted return. Asset managers perform the vital role of determining the asset allocation for funds which ultimately determines which strategies planners should use.
2.) Admin./Platform Fees
Like asset management fees, the advisor or planner has limited control over the admin/platform fees. Admin./platforms are exactly that: these platforms perform all the admin. work for the planners. From generating statements and valuations, to determining the internal rate of returns, and providing a platform for planners to submit all client documentation. Planners cannot directly control the price of these fees, but what they can control is which platform to use on behalf of their clients. There are also different reasons why planners use different platforms. It could be because the planner has a good relationship with the admin./platform so that any queries or concerns can be rectified quicker. Alternatively, it could be from a cost saving point of view. Different platforms offer different fees for clients with some platforms lowering their platform fee depending on the size of a client’s investment.
3.) Advisor/Planner Fees
Without a doubt, the most important fees of which clients should be aware is the advisor fee. Here, the advisor can determine how much is paid directly to him/her. The advisor can charge anywhere from 0% to 3% in upfront fees (simply taking over client assets). What you need to question is the value which the planner adds to the client in order to warrant whatever these fees are. I urge every client to ask their broker/planner/advisor this question. It is of the utmost importance that clients understand for what they are paying. If a client finds out that they are paying a 1% ongoing advisor fee but don’t see their broker at least 2-3 times a year, a huge value of the investment is being lost. If a client is paying this fee but receiving no real financial advice, would it not be more advisable that a client simply access this information online and do it themselves, saving that 1%? This ongoing advice fee is exactly that. Advice. Not simply investing a client’s money into a product or fund and never seeing them again. A financial planner/advisor should be paid for their expertise in creating a Lifestyle Financial Plan that helps clients with their tax planning, estate planning, retirement planning, investment planning, and risk planning. All these services should form part of the advice fee being offered.
Fees should be a transparent talking point and brought up often in discussion. They should be simple, easy to understand and not hidden away in the last line of the fine print. Financial planners should revel in the opportunity to promote the work that they do for their clients. And likewise, clients should call out unscrupulous “advisors” and make them answer the abovementioned questions. If you don’t feel that you’re getting what you paid for, perhaps it’s time to start looking elsewhere.
“In opera, as with any performing art, to be in great demand and to command high fees you must be good of course”- Luciano Pavarotti