If it sounds too good to be true…
One of the reasons I write these blogs is to rip the veneer and mystique off the financial services industry so that everyone out there can become better informed, especially when it comes to the crucial decisions that need to be made with investments. Way too often an episode like the ‘Stringfellow’ affair will shock an already reluctant investor into absolute paralysis. Procrastination can be just as deadly, so I try and point a spotlight on the crucial questions you need to be asking your broker/advisor/planner/asset manager. In a climate where the returns from investments have been lackluster, it is understandable that higher than average returns can be attractive – but this latest little lark has shown us that you can offer returns that appear just above the market and still get ripped off. The major disappointment for me is that a Trusted Advisor (and Trust is absolutely key in this profession) with hundreds of millions in Assets Under Management and an award-winning Unit Trust has single-handily undone years of work done by hundreds of investment professionals to clean up the industry.
Here are some of the questions you need to ask your advisor/planner/broker:
Is the person/company an FSP (Financial Services Provider) you can check this on the FSCA (Financial Services Conduct Authority, previously the FSB). This is no guarantee that you’re not going to get ripped off mind you but is a start. The FSCA number should be on all correspondence.
Is the person is a registered representative or key person of such Financial Services Provider This should be in their ‘letter of disclosure’ along with the products they are accredited to provide advice on. Again, no guarantee that you’re not going to be ripped off.
Are the investments ‘regulated’? This means that the investment is regulated by either the FSCA, Life office of SA or CISCA, and that will be in the paperwork you sign (application form or mandate). If you’re not sure, ask (you’ve got the acronyms now). Unit Trusts are regulated by CISCA, Bespoke Investments (investments run by Asset Managers that mimic Unit Trusts) are JSE regulated under the FSCA. Pension investments are regulated by the Pensions Fund Act and the Life Offices’ of SA. (Are you still awake? Yup, boring stuff). This should be made clear in the paperwork (now that you know what you’re looking for), but it may be in the small print. Ask your advisor to show you where it states who the regulator is in the paperwork. Don’t be shocked if they haven’t a clue – this is a complicated industry and those kinds of specifics often go right over the advisor’s head because it is complicated and boring and with so much else that has to be absorbed, this might have been glossed over – but recent events have highlighted just how important it is.
Do you know the ‘normal’ rates of return and associated risks? Comparing apples with apples when it comes to investment returns is important. The compounded interest on money market for money on call (immediate availability) is, 5 – 7% pa is average (you can get a bit more from the ‘good’ part of a certain bank that has seen a miraculous resurrection of late), up to 9.5%pa for a fixed 5 year term (mid July 2019). High-quality Bonds can range from 8% to 10% (more than 12 % you need to question the quality). JSE stock market has been pathetic for 5 years now, with the odd pocket of opportunity now and then. Historically the JSE has given some of the best returns of any stock market in the world, and might return to glory one day. Abnormally high returns should be a red flag, keep the ‘greedy’ devil on your shoulder under control.
Do you know what ‘normal’ fees are? In this new-normal of low growth, high fees can erode your investment dramatically. Your proposal should clearly spell out fees and make it easy for you to determine the ‘effective annual cost’ (EAC). Some brokers (usually if they are used to working on an insurance platform) still take ‘upfront fees’ and a maximum of 3.5% is allowed. If you follow my blogs you’ll know that I abore insurance-based investments because of early termination penalties caused by upfront commission. ‘Ongoing’ fees range up to 1.5%, and are usually charged on a sliding scale. 1% is average for investments under R5m, but should drop sharply thereafter, with 0.5% usually being the bottom of the range.