How specialisation is impacting on your wealth
Specialisation is everywhere, niches are cropping up in places that didn’t exist 10 years ago – and much of that feeds the need of the market. It is somehow reassuring to think you are in the hands of a specialist – and when it comes to your wealth – what could be more important?
One of my favourite sayings is “When you have a hammer, everything looks like a nail”
The biggest problem that comes with the myopia of specialisation is the inclination that a solution will only be sought in that specialist area and everything else will be ignored. That’s fine when the whole financial ecosystem has been looked at in it’s entirety first, and the areas that need focussed attention are identified. This is one of the reasons that in the medical field the specialist has to be referred by a general practitioner first. In financial advisory that doesn’t seem to happen – especially with the higher net worth individuals. Everyone seems to have a rolodex of specialists involved in our personal wealth portfolios – medical aid, short-term, life, investment, tax, trust, estate. This has been supported by the financial services industry, and a certain element of snobbery has definitely crept in. Short term, life insurance and medical aid brokers are still tainted by the ‘smouse’ label – which is why you find a plethora of descriptions in those industries. For years it has been ‘cool’ to be an investment specialist.
So what? They are all separate disciplines aren’t they? Yes. But are they independent of each other? Nope. They can’t be put into silos, because if one goes bad, it is going to affect all of them. Not just that, but when each silo has it’s own manager and it is going to be the loudest and most persuasive specialist that gets your attention – and your bucks.
As soon as you have a specialist you can take the ‘independent’ out of independent financial advice. The specialist is only interested in you focussing on (throwing money at) their area of expertise, and unless you’re paying them a fee that is completely unrelated to how much business you place with them, you’re not going to get the whole picture. For example, an investment specialist probably won’t be tell you to place your R500k windfall into a rental property but rather into a stock or unit trust portfolio; a life broker will tell you to put it into an insurance platform investment; your medical aid broker gets such a small commission they won’t care (do you even know who they are?); your short term insurer would love you to buy more stuff they can insure and your spouse has already mentally spent it anyway.
What really is a ‘specialist’ in financial advisory?
Medical aid is always going to be problematic. The capped remuneration structure is such that it is only viable for a medical aid specialist to service large corporate funds. Basically they just sell and administer policies, all queries and claims go straight to the call centre. Frankly, I don’t know why the medical aids even need them.
Short-term is also highly sales and admin focussed – with advice kept to a minimum, at most you’ll get a comparison with your existing policy (which is actually very useful) which is why call-centres have made such inroads.
Life Insurance has always had the risk and investment cover, so these specialists look like generalists. Theoretically, thanks to regulatory requirements, your advisor will determine your ‘needs’, find the gaps and sell you a policy to fill them. There is a problem with that. One man’s need is another man’s luxury. Take dread disease for example – if you have medical aid, how much do you need? That can be worked out quite easily actually, especially for the big 4, where 75% of the claims happen, and now there is also very affordable Gap cover that enters into the mix. If you only look at one silo – medical aid or dread disease cover a client is not going to get the best solution. It might be cheer for example to drop to a hospital plan, save R1000 a month – which can buy a heap of dread disease cover. Life Insurance brokers who will handle investments but only on insurance platforms (as opposed to LISP platforms that only have investment not life insurance) still make up the bulk of the mass-market, but they are going to be under pressure.
Investment specialists will mop up what ever is left after you’ve consumed your income (risk premiums included) and, more often than not are not going to get their hands dirty with tawdry risk policies. They might look all cool calm and collected on the outside, but below the water they are paddling like mad. Their fees are significantly under pressure, globally – thanks mostly to trackers and ETFs (Robos and Algorithms). They are finding it increasingly difficult to justify annual expenses that run up to 4% when with ETfs a client can get the same thing for less than 1%.
The problem is you’ve built up a relationship and trust with all the managers of your financial silos and you don’t want to mess with that… so what do you do? You’re the CEO of those silos, you are the one that has to be able to see the big picture. You need a personal plan that cuts through the ‘pick me’ demands of your silo managers. Even better, you need a plan that addresses your wants and not what someone else thinks you needs. That means involvement and engagement in the planning process – but you are the only one in charge of your dreams.
In business when you do a performance review of your managers you will look at their performance, costs and their contribution to the company. Why is it any different when it comes to your personal wealth? If you have a manager that is sticking with a dated, costly bit of equipment because they are getting a kickback from the supplier – what would you do with them? Right! Fire them…Why is it any different with your personal wealth portfolio? Probably because nobody has given you the big picture, you have no idea where the problems lie and you don’t know enough to do it yourself. I don’t blame people in financial advisory becoming specialists, keeping up with every field, all the providers and changes in regulations takes up chunks of your time, time that could be spent getting new clients.
The landscape is changing. When a client, once the new regulations are in force, now has to ‘pay’ for the plan and advice that he might have assumed was free in the past, he isn’t going to want to pay for more than one. Each silo manager is going to have to up their game – client communication is going to be key – and if they don’t – the client can get the annual fee withheld. No more ‘hit and run’ that has tainted the industry for decades.
There are 3 corners to your long term wealth, income, consumption and wealth – ignore any one of them at your peril. You have to get as good advice on how to boost your income as you get on how to manage your wealth. Irrespective of whether you’re a CEO of a huge company or an employee just starting out on your wealth accumulation, if your consumption is creeping up with every increase in income, then it is going to impact your wealth.
Action: So how do you get a better plan, become a more effective CEO of your personal wealth? The most obvious solution is to get an independent (not tied to one provider or one platform) generalist to bring it all together for you, dissect each silo and see if there are any disconnects. You might be lucky and already have one of those in your management team, and they might even do it ‘for free’ (but don’t count on it). Personally I love doing this – so give me a shout.
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Author Dawn Ridler ©