Let's say you're talking to a financial advisor about a product – what questions should you ask?
Financial advisors can play an important role in helping people manage their affairs, especially when there are many moving parts – salary, tax considerations, dependents, life insurance, a compulsory pension plan, other assets, long-term debts, and so on.
Before choosing an advisor to manage all aspects of your finances there are a bunch of questions you should ask but we'll save those for another article. Right now we're focusing on questions to ask when a single product is under consideration.
Q: What do I want to achieve with the product? Does the advisor understand my objective? Is the advisor sure the product will achieve my goal?
Why you should ask: Even the best financial advisor can't tell you how to live your life. When considering a product you should know what you want to achieve. Make sure the advisor understands that too.
Q: Does the advisor understand my risk capacity?
Why you should ask: Risk is always a factor in the financial markets. Ask the advisor if the riskiness of the product is in line with your goal and your capacity to take on risk.
Q: What is the net rate-of-return after all costs and deductions?
Why you should ask: Product fact sheets show returns net of fees charged by the product supplier (eg, the unit trust management company), but there are usually other costs not on the fact sheet – like the advisor's fees, and sometimes administration fees charged by a 'platform'. Make sure the advisor can tell you the net historic returns after all costs. And make sure you get a range of actual historic returns across various periods, not just future estimates.
Q: What is the EAC on the product, including any advisor and platform costs?
Why you should ask: Related to the above point, the advisor must be able to provide you with the Effective Annual Cost, a prescribed measure of charges that includes the cost of advice, administration, investment management, and any other charges.
Q: How does the rate-of-return compare to an appropriate and recognised index or benchmark?
Why you should ask: Comparisons are important when it comes to investment products. An apparently impressive historical return is less impressive when you find out that the fund badly underperformed an industry benchmark and that many other comparable funds performed better.
Q: How much commission will the advisor earn?
Why you should ask: The advisor is required by law to tell you this, but often it's just a footnote on a form you sign and the actual percentage is glossed over as inconsequential. Talk percentages, even if the rand amounts seem small – remember, if the advisor is earning 3% and your net return before commission is 6%, you are giving half of your returns to the advisor.
Q: Will the advisor continue to earn fees every year or only upfront?
Why you should ask: Commission models vary across platforms and management companies – don't be scared to ask exactly how the advisor gets paid. Will the advisor earn recurring fees, an initial once-off commission, or both?
Q: Why should you buy the product via the advisor and not directly from the product provider?
Why you should ask: Most investment products can be bought directly from the product suppliers. What can you expect from the advisor in return for using his or her services? Related to the previous point, if fees are ongoing, what will the advisor be doing for you to justify those recurring fees?
Q: Do any of the companies represented by the advisor have incentive schemes?
Why you should ask: Financial advisors are in the business of selling. Sometimes they're incentivised via kickbacks or travel rewards or other inducements to sell more of one company's product than another. This is not really allowed under the latest regulations, but some companies find creative ways of getting around the rules – it's always worth asking if the advisor has any incentive for recommending one product over another.
The bottom line
Half of the questions above are related to costs – that's because rates of return can fluctuate but costs are charged regardless. The lower your costs, the better your chances of getting a good rate of return, so if you do nothing else, make sure you are not overcharged.
