Middleman – An unnecessary evil in Financial Planning?

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sandwich

Meaty Filling or a mess?

Vilifying the middleman became a national pastime with the birth of the direct insurance industry, a hobby that seems to have quietened down somewhat recently, but the topic bears scrutiny – the mud has stuck. I like to think that one of the reasons this topic has quieted down is that the customer isn’t that gullible, and in response the massive advertising campaigns have switched to ‘service’ (excuse me while I choke on my coffee).
“We don’t charge commission!” Yay! So that means your premiums are going to be proportionately lower… Right? Nope. Well… maybe, I haven’t done enough comparative quote to put any kind of statistical certainty on it, but I haven’t found one apples-for-apples quote from a direct life insurer that can’t be beaten hands down by traditional insurers with full commission. It makes sense. They might not pay commission, but they have massive call centres to fund, prime time TV ads to run, print ads, events, sponsorships etc. That money has to come from somewhere – Yup… Your premium. It is merely a redistribution, not a saving.

One of the most important role of anyone providing risk assurance is determining how much you need. A needs analysis. “How much can you afford” is not a needs analysis. Call Centres are held to ‘lower’ standards of qualification (sorry to sound like such a snob), so it’s not their fault. If the provider only has ‘life products’ so they are going to persuade you to put as much of your hard earned money with them. Remember – you aren’t doing your family any favours if you put all your funds into a fat life pay-out just in case you die, only to have to become their dependants because you don’t have enough retirement funds. Determining Life cover is a fairly easy exercise. Disability cover, much less so – a minefield for the inexperienced and unqualified. It is almost impossible to put a ‘need’ value on dread disease – it’s a want really, not a need.
Now if you really want to muddy the water and add layers of smoke and mirrors, promise all your premiums back if you don’t claim for, say, 15 years. Yay! Free money… Hang on… What’s that extra premium? You are basically ‘investing’ that money – but if you lapse the policy… Poof! Gone! Step one. Do a basic return on investment. There are some of these ‘investments’ that are a no-brainer – BUT (and it is a big BUT) – if it is linked to a ‘loyalty card’ be sure you know just how much of a gym bunny you need to be to get the full amount. Put it in a savings account rather, at least it’ll always be yours.
The discussion around middlemen in investment is far more complicated – because there are layers and layers of them! Asset managers, Platform managers, Fund managers, Financial Advisors, Administrators. All wanting their bite of the cherry. Theoretically you can unravel these costs by examining the TER or Total Expense ratio. This doesn’t take the performance fees into account – and if you read the small print on that you’ll get the fright of your life. So you thought that they only get a fee when they outperform the benchmark by a big chunk, right? That’s only fair isn’t it. What if the benchmark was artificially low? What if the lekker graph showing performance against benchmark is deliberately dated back in ancient history to cover up for recent less than stellar performances? When are high TER’s worth it, and when should you do it yourself?

If you want a pure equity fund that merely tracks the JSE, use a Satrix fund. Their fee is .45%, against up to 2.8% for exactly the same thing. That adds an extra 2% per annum to your investment. Money market unit trusts make no sense, unless you have to use them to ‘balance’ your portfolio to comply with the pensions funds act. Bonds? Unless you are familiar with them, steer clear and leave it up to the experts. In the long term your return is going to approximate cash, certainly if you start taking out the TER. Pure Property? Do your homework and check the volatility. The ‘new normal’ post 2007 has made this asset class much more volatile than in the past.

Where those ‘middlemen’ do add value is in the ‘blended funds’. This means any fund where they mix more than one asset class, or more than one unit trust (a fund of fund (FOF) – warning – the TERs can be very high because of the dozens of middlemen). Every advisor has a different methodology for ‘choosing’ the funds from the thousand odd that are available locally. Personally I like to work with a maximum of 20 collective investments, all of which I watch carefully. They all have at least 5 years track record and I follow the research and commentary of the asset and fund managers. I don’t do flavour of the month, nor new flashy funds; I don’t like nasty surprises. Research done recently has shown that investment advisors add on average 1.8% to their client’s portfolios – how? By ensuring solid financial planning. Read the full article here: ” title=”Marketwatch article” target=”_blank”>http://www.marketwatch.com/story/are-financial-advisers-worth-their-fee-2012-09-26

Need help? Give me a shout. dawn@kerenga.com

Author Dawn Ridler 

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