Good financial advice can help you save and invest more and get better returns. Bad advice can have the opposite effect – you might invest in products that aren’t suitable or the fees are so high they leave you with no investment return. We identified 10 signs that might indicate you’re getting bad financial advice and got some good advice from South Africa’s Financial Planner of the Year for 2020, Hester van der Merwe of Ultima Financial Planners.
1. Your adviser does not take the time to get to know you
If your financial adviser knows very little about you and doesn’t ask questions about your financial goals or why you want to invest, they are unlikely to be able to give you advice that will help you achieve your goals.
Hester says you and your adviser need to get to know each other to see if you are compatible. Let your guard down a little when you meet a financial adviser and tell them about yourself and your finances. Sharing and collaborating is critical to a good relationship with your adviser.
2. No financial needs analysis is completed
All accredited and qualified advisers are required to complete a financial needs analysis, known as an FNA, when they first advise a client. It is an important part of the advice process. It assesses your current financial situation, and identifies your financial needs in detail, such as what insurance you need or how much you need to invest for a comfortable retirement. We are not always objective about money, and we don’t always know all our needs upfront, and without an FNA there is a risk you won’t identify an important financial need.
3. Your adviser doesn’t take your budget into account
Your financial advice must be tailored to what you can afford. An adviser might correctly identify that you need to save for retirement, for instance, but then recommend a product where you are tied into investing an amount you simply cannot afford. The result could be that you lose money, because you have to pay penalty fees if you stop the investment or reduce the amount you invest each month.
Hester says you must feel comfortable enough to explain what you can and cannot afford, without feeling pressured into accepting a product you cannot afford. “Remember, there is no shame in not being able to afford something. Give yourself a pat on the back for taking that all important first step in seeking advice.”
4. You are pressured
When you are being asked, persistently and forcefully, to sign a document without fully understanding it, or the adviser tells you they will complete the form for you, there’s a risk that you are being sold something unsuitable.
There could be serious consequences for your finances. In the case of long-term insurance, for example, if your adviser completes the form, or you are pressured into doing it in a rush, it may not accurately reflect your full medical history. Any non-disclosure of an existing health condition could result in your insurer declining a claim.
It is wrong and illegal for a financial adviser to rush you and demand that you sign forms without explaining them in full. If you are ever pressured by an adviser, that’s a red flag.
5. Your adviser doesn’t explain the risks of your investments
Investments are designed to grow your money and deliver good investment returns. But every investment has risks. The investment may not perform as expected or the product may have high penalty fees if you withdraw early. Advisers must explain this, so you understand the risks. Even if an investment is guaranteed, your adviser must take you through exactly what the guarantee means.
6. Fees, costs and services are not explained
Financial advisers are legally required to explain all their fees and commission as well as the costs of any product or service they recommend. Good financial advisers will have disclosure documents with details of their fees and any other costs and talk you through these. Hester says fees and costs should be addressed upfront so there are no misunderstandings.
Your adviser should also tell you when you first meet what sort of services they offer and what you can expect in the future. This should be confirmed in writing in your Service Level Agreement.
7. Your adviser doesn’t stay in touch with you
“Your life is not cast in stone,” Hester says. As your life changes, so your financial plan must change. Your adviser needs to check in with you to keep you updated on how your investments are performing, and to find out if any changes in your life necessitate a change in your financial needs and financial plan. If you don’t hear from your adviser again, it is a warning sign that they were interested only in selling you a product.
Hester says you need to work on your finances every day. Think of it like gym – you don’t see changes after one session, you see them after months and you have to keep going back to gym! The same is true for your financial plan – you have to keep working at it if you want to achieve your goals. Just as you get stronger from regular exercise, you will also become ‘planning fit’ if you work on your finances. This includes building better budgeting skills, building a trusted relationship with your adviser and a better understanding of your investments.”
8. Your information is shared without your permission
If you get calls from people saying they got your details from your adviser and you did not tell your adviser they could share your information, you need to be wary of any advice given by the adviser. Sharing your information without your permission is also illegal.
9. Your adviser does not refer you to specialists
Money is a very broad topic, and you may have a tax problem or complicated will that you need expert help with. Hester says she refers people to specialists, for example trust specialists, where she is not an expert. A good financial adviser will know when to use a specialist.
10. Your adviser is not appropriately certified
All advisers in South Africa must be FAIS accredited, which means they are competent and qualified to give financial advice. FAIS is the Financial Advice and Intermediary Services Act that regulates financial advice.
Hester says before you first meet an adviser do some homework and find out about them and check their qualifications and certifications. You can check on the Financial Sector Conduct Authority’s website to make sure that your adviser is FAIS accredited.
Take your time – it’s worth it
It’s always important to take your time when it comes to money and think things through carefully so that you make the best decision for you. Good financial advisers will help you through this process, using their training, experience and expertise to help you reach your financial goals.