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There is no such thing as free financial advice

advice-fees-2A recent study in America, of 10,000 households that utilized the services of a Financial Advisor, showed that 51% of people interviewed, did not know the cost of the financial service being rendered. Better still, they thought that they were getting their financial advice for free. This is an astounding statistic, and is also probably very true for South Africa households as well.

The manner in which charges for investments and the advice surrounding them are levied, is extremely confusing. This is true even to those folk who are familiar with the industry, let alone investment novices. With every investment made, there are different aspects to the overall total cost experienced by the client. Firstly, is an administrative cost that is charged by the platform service provider. Many asset management providers discount this cost for investments made into their own range of funds, Allan Gray and Ashburton being prime examples. Next there is the asset management cost. This is the cost the fund manager charges to manage the assets. This charge varies and is dependent on a few factors. It is cheaper to manage cash than equities or a balanced multi asset portfolio. An active manager is more expensive than a passive investment strategy using Exchange Traded Funds (ETF’s).

Last but not least is the Financial Advisors’ charge. One needs to measure this charge against the nature and value of the advice being received. Are you merely being charged a sales related fee to sell you a product and to administratively facilitate the transaction, or are you getting quality advice that is relevant to your situation and needs? This fee can range from an initial percentage of the investment amount, to an annual percentage based management fee, or a combination of both.

One thing is as certain as night follows day, and that the sun rises in the East and sets in the West, is that nothing is for free. No matter what you as an investor are led to believe, there is a cost to each and every investment. The current laws of the land, require that these costs are disclosed to investors, regardless of the manner and form in which these fees are levied and the Financial Advisor is remunerated. Take the time to analyze the fees that you are paying and the drag effect that they will have on your underlying investment. In a low return environment, such as what we are currently experiencing, fees have a significant effect on the overall performance of the portfolio and should be closely examined. Paying fees and charges is a normal part of any and every business transaction, but make sure that the fee being paid is commensurate with the professional services being rendered.

This ongoing debate and discussion is not unique to South Africa, a recent article by Andrew Osterland on the CNBC website shares some valuable insights on this issue. As an investor ensure that you get good advice and understand that the cost for good advice is money well spent.

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