How to spot a good financial advisor
And what they should comply with.
Everyone needs financial advice at some point in life, depending on their financial circumstances, the amount of money they are willing to save or invest and risks they need to protect. Financial advice is most valuable when you’re going through a big life event such as when you start to work, buy a home, start a family, take retirement or manage an inheritance. Regardless of what circumstances you are in, you are likely to have some short- and long-term personal financial goals. Your financial advisor can help you to ensure that your financial goals become realistic. They can also help you to implement, monitor and review them on a regular basis.
Financial advice can range from a specific recommendation, guidance or proposal as to which products you should invest in, buy or sell. Some advisors can only sell one product or solution so this may mean that the advice given may not cater for all your specific needs and objectives.
Financial planner vs financial advisor
It is important to differentiate between a “financial planner” and a “financial advisor”. They are different; but can both help you to save, invest, and grow your money and protect your risks. Financial planners help you set up a financial plan that sets a blueprint for your financial future. They look at your financial affairs holistically and will assist you with investment planning, retirement planning, estate planning, wills and trusts as well as tax matters. They charge an hourly fee or flat rate for their services and they do not earn commission at all. Financial planners are accredited by a professional body such as the Financial Planning Institute and would place the abbreviation “CFP”, short for Certified Financial Planner, after their names.
Once a financial planner has set up a financial plan, you can take it to a financial advisor to implement it on your behalf. Note however that some financial planners also offer financial advice in addition to financial planning services and they may help you to implement the financial plan. It is therefore important to ask a potential financial planner if they give specific financial advice or only offer financial planning services.
What should financial advisors comply with?
Like other professionals, financial advisors have an obligation to comply with legislative requirements. A financial advisor must be authorised by the Financial Services Board (FSB) as a financial services provider (FSP) or act as a representative of such an FSP. The FSP must ensure that its representatives are at all times competent to act on their behalf having due regard to their educational qualifications and experience.
The Financial Advisory and Intermediaries Services (FAIS) Act 37 of 2002 has been enacted with a strong emphasis on consumer protection and fair treatment of customers. The Act lays down standards for market conduct and requires both financial advisors and their representatives to comply with the fit and proper requirements, as follows:
Financial advisors must –
· Be of good character and have integrity;
· Be competent with specific reference to qualifications, regulatory examinations and experience;
· Demonstrate operational ability;
· Meet the financial soundness requirements; and
· Meet continuous professional development requirements.
As regards operational ability, the financial advisor must have basic facilities such as –
· a fixed business address;
· adequate access to communication facilities including at least a full-time telephone or cellphone service, and typing and document duplication facilities;
· adequate storage and filing systems for the safe-keeping of records, business communications and correspondence; and
· an account with a registered bank including, where required by the Act, a separate bank account for client funds.
Financial advisors are required to comply with the above-mentioned fit and proper requirements at licensing stage and are obliged to demonstrate ongoing compliance with such requirements and the FAIS Code of Conduct after licensing.
Disclosure of relevant information
A financial advisor must provide a breakdown of the fees and indicate to you who gets how much and for doing what. The transparent disclosure of fees will give you an understanding of the fees, costs and other charges payable to the different stakeholders and enable you to consider the impact of such fees on your investments or premiums.
Furthermore, it is common for conflicts of interests to exist due to the manner in which some of the products are distributed. Financial advisors are required by law to act in the best interests of clients and must avoid conflict of interests. Where conflict exists, financial advisors must disclose such to the client. It should be left to the client to decide whether or not they would like to proceed with the business relationship after such disclosure.
Maintain a relationship with your financial advisor
The financial advisor must monitor your financial affairs. It is important that you establish an ongoing business relationship with your financial advisor. The person must always be there to attend to your ongoing financial needs, assist you to review your existing financial portfolios, and also be there for you when you need to make a claim on your policies or draw income from your investments.
Finally a financial advisor should have the necessary policies, procedures, systems and controls in place to eliminate potential risks as far as reasonably possible and ensure that business is carried on in an orderly and efficient manner and in compliance with all applicable laws.
Treating Customers Fairly – Retail Distribution Review
The financial services sector is currently undergoing significant regulatory reforms, and the signing of the Financial Sector Regulation Act 9 of 2017 into law on 21 August 2017 paves the way for introducing an enhanced conduct framework that aim to strengthen the supervision of regulated entities by ensuring that the Treating Customers Fairly principles are core to their culture.
The Retail Distribution Review will introduce regulatory reforms that:
· Support the delivery of suitable products and provide fair access to suitable advice for consumers. This promotes financial inclusion and unbiased financial advice.
· Enable consumers to understand and compare the nature, value and cost of advice and other services that financial advisors provide. As already indicated above, financial advisors are currently compelled to disclose costs and charges relating to a financial product and service to consumers. These reforms will emphasise this requirement.
· Enhance standards and professionalism in financial advisory and intermediary services to build consumer confidence and trust. The competency requirements which a financial advisor must adhere are referred to above, as they relate to qualifications and experience.
· Enable consumers to benefit from fair competition for quality advice and intermediary services, at a price more closely aligned with the nature and quality of the service being rendered. The aim is to promote financial inclusion and transparency in as much as the consumer understands how much they pay for what service, rendered by which person. It further aims to ensure clarity in the mind of the consumer about who is accountable for the financial advisory service rendered.
· Support sustainable business models for financial advice that enable advisor businesses to viably deliver fair customer outcomes over the long-term. Such sustainability is necessary to support the long-term relationship with financial advisors as mentioned above.
The reforms will be effected over three broad phases aligned to the legislative timetable for implementing the overarching Twin Peaks architecture. The reforms are subject to rigorous stakeholder engagement, including engagement with consumers.
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