Financial Advice and Planning

Fynbos does not give financial advice.

We are authorised to give advice, but we choose not to, and here we explain why and what to do if you still want personalised advice or help building a financial plan.

The short answer is:

1. Proper personalised financial planning and advice costs a lot of money.
2. The long term investment advice you're likely to get as a young person is very generic and not worth paying a lot of money for.
3. Young people don't need to have figured out their goals or drawn up a budget (both prerequisites for a proper financial plan) before they start setting aside some of their income for long term investments.
4. Every month that passes where you put off investing until you have a plan costs you dearly in the long term. Even the best plan in the world is unlikely to ever make up for that lost time.
5. You can't go wrong by simply maximising your contributions to your TFSA as early as possible and investing them in a diversified, low fee, global equity ETF (as long as you've also got an emergency savings account to protect it from any hiccups, because you should never withdraw from your TFSA in the short-term).

Fynbos has packaged an ideal long term strategy for almost anyone under 35 into our product. By joining Fynbos you get this investment strategy, and the tools to execute it for you, all together in an easy-to-use digital platform. You can start investing without worrying that you might be paying too much for advice or doing something wrong.

The "Advice Gap"

Financial "Advice" is defined in detail in South African law, and giving you advice requires following a strict set of specific steps, all of which require considerable effort from an advisor. On top of that, the adviser Code of Conduct requires them to repeat the process every year to ensure they are re-assessing your plan against any new information or changes to your financial situation.

It is a lot of work if it is done properly, and includes a lot of costs related to running a business that has strict compliance obligations.

Normally, advisers charge a fee based on the total assets you have invested. Unless you have over R5 million to invest or the adviser charges an exorbitant fee they are very unlikely to be earning enough to run a sustainable business servicing customers like you.

How do advisers earn enough to survive?

One way to bring in extra revenue is through insurance.

Advisers that also operate as insurance brokers earn a good income from broker commissions. This can help to cover the losses from providing advice to early investors. If your financial advisor is also your insurance broker they may be able to afford doing a proper job on the investment advice side of things funded by their broker commissions from your insurance.

But if you want neutral, impartial advice, insurance commissions starts to muddy the waters. A lot of products that advisers will offer you for insurance and investments come from the same product supplier (and often the benefits to you are somehow "integrated").

A better way to earn enough money serving early investors is to charge a fixed hourly fee that fairly values the effort the adviser is putting into the work.

There are many advisers that will charge you a set fee for preparing your financial plan. They will disclose this up front and you'll know what you're paying and what you're getting before you start. The best advisers will also disclose their obligation to review the plan annual and will tell you how much they plan to charge for that too.

How can advisers offer investment advice at a lower cost?

To run a sustainable business, advisers don't just try to increase revenue, they need to cut down their costs.

They can do this by running an efficient operation, leveraging digital tools and trying to reduce manual work. But that only goes so far. They still need to follow the Code of Conduct and the process is time consuming.

Another cost optimisation is having a generic investment strategy for all clients to reduce the work required per client. This is very common, and for early investors, this is not necessarily a bad thing since your biggest asset is time so simply getting some money into a TFSA earning a good return is infinitely better than wasting money on a sophisticated personalised investment strategy.

For the majority of young people the most important factor is getting started and being patient.

The real value the adviser provides is assurance and emotional support when the markets go down (they always do at some point) because long term investing means riding out those dips.

How to choose an adviser

If you just want to start investing, we really don't think you need an adviser to get you started.

But if you want to a comprehensive financial plan that includes building a budget, assessing your risks, looking at insurance, and short- and long-term investments, then here's a quick overview of how the advice process is supposed to work in South Africa (as defined in the law) and how you can ensure you get the best outcome from it.

Advisers all follow a Code of Conduct which defines a strict process for giving advice:

1. Conduct a thorough fact-finding process to gather detailed personal, financial, and other relevant information from you including your financial goals, risk tolerance, investment horizon, income, expenses, assets, liabilities, and other information they consider important.
2. Based on your financial situation and goals, the adviser must determine your risk tolerance using a risk profiling tool or questionnaire and then assess which products or services are most suitable for you considering your risk profile, tax considerations, and investment time horizon.
3. The adviser should compare different financial products available on the market to ensure you receive the best possible advice and ensure that any products or solutions recommended are suitable for your individual circumstances and goals and aligned with your financial objectives and risk profile.
4. Next, the adviser must provide you with a Record of Advice (RoA), which is a written document detailing the advice they have provided, the basis of the advice, including the information considered in the needs analysis, the products or services recommended, the reasons for the recommendation, and all risks and benefits associated with the recommended products.
5. The adviser must explain the advice and recommendations to you including a full discussion of the benefits, risks, fees, and potential outcomes of the proposed solution, including answering any questions you have about the recommendations, the risks involved, or the financial product(s).
6. Before implementing the plan, the adviser needs your explicit consent to proceed (i.e. a signed document) and then has to make sure that the financial products are set up correctly.

The adviser is obliged to disclose all of their fees and incentives and any conflicts of interest that may exists in their relationships with the product suppliers they recommend.

Fees

Before you start, we suggest insisting on a fixed fee engagement based either on a pre-agreed outcome or an hourly rate.

Most advisors will push for a fee based on a percentage of your investments (AUM). This is convenient because it gets charged by the product supplier and paid in bulk to the advisor.

Unfortunately unscrupulous advisers also like this model because it's easy to downplay these fees when they are put in place (they simply write them on a form) and they know most clients won't try to renegotiate them later. The fee seems small ("a few percent") and it continues to come off your investment indefinitely even if you never talk to the adviser again.

There are advisors that will work with you for a fixed fee, don't believe anyone that tells you otherwise. Ramit Sethi is the author of "I will teach you to be rich" and we believe he says it best.

Engagement

Ensure the adviser follows the full process as defined in the Code of Conduct. If they are trying to cut corners then maybe reconsider whether this is the person you want helping to manage your finances.

Set clear expectations of the outcomes up front. You are paying for personalised advice from a professional. The value they are bringing to the engagement is their experience and knowledge so make sure they are up-front about any tools they use to facilitate the process and how they augment that tool with their own skills.

Ask to be presented with multiple options for each product that the adviser recommends and request that they help you understand how they compare and why they recommend them for you personally.

Check your statements after the first month and make sure the fees you are paying are what you expect. If not, ask your adviser to explain why they are different.

Tied-advisers

Not all financial advisers are independent (IFAs). Many advisers are tied to a specific product supplier or group of suppliers. They are obviously strongly incentivised to sell you products from their house so bare that in mind if you aren't working with an IFA.

Summary

If you're under 35 and you just want to start investing, you don't need a financial adviser. Fynbos gets you started with the basics you need for long term investing. Put the money you would have paid on advice fees into your investments instead, and stop procrastinating waiting for a perfect plan.

If you want to look more holistically at your finances including insurance, risk, short-term savings, etc. then a professional financial adviser or planner can help you do this but make sure you use an independent adviser that is transparent about their fees and commissions and only ever pay a fixed service fee for preparing your plan.

Does Fynbos work with advisers?

We believe there is an opportunity for advisers to serve early investors better by including Fynbos into the portfolio of products they offer.

But this requires advisers to accept that they will not be able to extract fees based on their client's portfolio size, and we know that for many advisers this is not something they are prepared to do.

We are currently exploring how we can work more closely with advisers that want to focus on planning and advice and not on selling products. If you are an adviser that's interested in working with us get in touch: [email protected]