Investmenting can be a daunting prospect. The choices, jargon and complexities can at times become overwhelming. We often justify waiting, but the only way to enjoy the long-term benefits is to get started. You could try go it alone by reading the latest investment news and keeping a close eye on market fluctuations, but consulting an independent financial advisor will most likely improve your chances of success.
The role of independent financial planners is to assist with long-term financial planning, using their experience and objectivity to help you achieve your goals. More than mere product pickers, they help you meet the full range of challenges you may face.
Avoid common investing mistakes
Independent financial advisors can help you make the right decisions for your circumstances and, most importantly, avoid the risks of investing on your own. These include:
- Investing without a financial plan
A detailed plan is critical to your financial freedom. An independent financial planner can help you develop a realistic strategy, tailor made to your financial needs and goals.
- Picking the wrong product
There are truly a mind-boggling number of investment products available, each with their own objectives and tax structures. An advisor will help you make the right choices to suit your circumstances.
- Ignoring the effects of inflation
Inflation erodes the value of your money with time. An advisor can help choose the right product to achieve returns that, at the very least, compensate for the effect of inflation.
- Not preserving your retirement savings when changing jobs
Don’t make the mistake of spending your retirement savings if you are retrenched or change jobs. It is highly likely that you won’t be able to retire with enough savings to live on. An advisor is able to compile and help you evaluate the best options available at the critical juncture.
- Focusing on one asset class or market
Diversification is one of the keys to successful investing. As the saying goes: “ Don’t put all your eggs in one basket”. An independent financial advisor will help you to diversify your investment portfolio, broadening your exposure to different investment options.
- Making decisions based on emotions
Investors are known to be emotional in their decision-making and poor timers of the market. They destroy the value of their savings by switching between investments at the wrong time. Advisors can help you avoid these emotional pitfalls and develop a more rational plan of action.
Questions you should ask your financial advisor
Your relationship with your financial advisor should be based on trust, so it is imperative that you feel comfortable before becoming a client. Not all advisors are equal so here are a few questions to consider when evaluating a financial advisor:
There are two type of advisors, independent and tied agents. Independent advisors do not earn any commission off the products and do not work for a particular product provider. Tied agents are employed by product providers and may have incentives to sell certain products.
Ensure that your advisor is independent, since their objectivity will help set you on the road to your financial goals. They can help you differentiate between the numerous products available and select one that meets your circumstances and needs.
- What are their qualifications?
The Financial Services Board (or FSB) must, by law, license all financial advisors. This requires that the advisor pass a regulatory exam and fulfill the Fit and Proper requirements, as set out by the FSB. These requirements include integrity, honesty and competency. An advisor’s maintenance and development of their professional competence is evaluated by the FSB on an ongoing basis.
Find out about your prospective advisors academic history or any other credentials. It is important to read and understand the disclosure documents provided by the advisors. This will inform you of which products your advisor is licensed to recommend and offer advice on.
- What are their fee structures
Full disclosure and total transparency is very important. Make sure your advisor explains, upfront, what fees you should pay and how they work. Typically, fees are charged as a percentage of the investment’s value and there might be an initial fee, as well as an ongoing fee.
Some advisors charge directly for the advice they provide (typically an hourly rate). Make sure you understand the fee structure before agreeing to anything and do not pay any fees that you have not agreed to.
- How can they help to grow your wealth?
Good financial advisors take the time to understand your needs and help to develop a plan that reflects your risk appetite and your goals. Advisors help you to gain more discipline and be more rational during the investment process.
Emotions often lead investors astray, causing them to buy and sell at the wrong time or switch between products, which could decrease the value of your investment.
Where can you find a good independent financial advisor?
Trust is one of the key considerations when it comes to choosing a financial advisor. They help you make some important life decisions so you shouldn’t take this process lightly. A great starting point is a recommendation from someone you trust and who’s judgment you value. Another option is to contact the Financial Planning Institute of Southern Africa (or FPI).