The cost of not getting advice

Laura du Preez | 06 October 2021

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.

It is easy to attack advisers for the fees they charge – a compound interest calculation over multiple decades can quickly highlight scary numbers on how much of your wealth advice fees can destroy.

But “the guns may be facing the wrong way” – they should be pointed at the cost for investors of not being under advice, says Andy Hart, founder of the annual Humans Under Management behavioural finance conferences. Hart, who runs his own advice practice, Maven Adviser in the UK, recently hosted a Humans Under Management conference virtually for a South African audience.

Hart says financial advice is a noble business aimed at helping you, among other things, create an income you can’t outlive in retirement.

There is much noise around the destruction of wealth through advice fees though, and consumers are often encouraged to “do it yourself … no help needed … you can be your own financial planner, your own investment adviser, your own behavioural coach”, he says.

Hart says if 30 years ago you had invested $100 with 60% in global equities and 40% in global bonds, you would today have about $360.

If an adviser charged you a 1% fee on that investment, however, you would only have about $267. The fee reduces your final investment amount by more than 25%, which is a scary number, Hart says.

However, if that same adviser was able to nudge you into investing 80% in global equities instead of 60%, your investment outcome would be the same as if you had paid no advice fee - $360, he says.

With 90% invested in global equities, you could be 22% up with a final investment outcome of $441.

Hart says this doesn’t mean you should invest 90% in global equities, because you have to find a portfolio that you are comfortable with and in which you will stay invested. The example does, however, illustrate the concept of “asset misallocation”.

Asset allocation, which is the investment practice of allocating to different asset classes, is a much bigger variable in your investment outcome than fees, he says.

Difficult conversations

Advisers can have difficult conversations with you about the asset allocation you need to reach your investment goals, he says.

This conversation is one primarily about what percentage of your life savings will be in equities – the asset class that allows you to invest in good businesses and provides a rising income over time.

It will also be a conversation about how you behave during the temporary market declines, which are inevitable if you invest in equities, Hart says.

Your adviser should tell you that volatility is your friend and it is the reason why you earn good returns. If you are concerned about the impact of fees, ask your adviser to talk you through the implications of increasing your allocation to equities, Hart says.

Another difficult conversation your adviser should have with you is about why you should pay fees – what value the adviser will add, Hart says.

Investors who are invested in an appropriate asset allocation typically do not need to make changes when investment markets change, but market movements will test you emotionally, he says.

An adviser’s “secret sauce”, Hart says, is in having difficult conversations with you when you are tested and helping to ensure you stay the course.


Managing behaviour

Jeanette Marais, deputy CEO of Momentum Metropolitan, says advisers need to focus more on managing how you behave as an investor. Marais was speaking at another recent virtual conference focussed on financial advice, the Financial Planning Summit hosted by the Collaborative Exchange.

She says the markets’ fall in March 2020 resulted in irrational investor behaviour that destroyed wealth, as has been the case in the past when markets have crashed. Recent unit trust statistics show that many investors moved out of equities after the market fall, locking in temporary losses and losing out on the subsequent market recovery.

While many investors lost out, Marais says advisers were able to help many South Africans over the past few months to make wise decisions to diversify more into offshore markets and, at retirement, to guarantee at least some of their future income.


Many ways to charge fees

as a percentage of assets under management /advice

Assets under advice band 2017 2018 2019 2020 2021
R0-R250k 0.58% 0.61% 0.60% 0.60% 0.59%
R250k-R750k 0.60% 0.62% 0.61% 0.60%  0.61%
R750k-R1.5m 0.59% 0.62% 0.60%  0.61% 0.59%
R1.5m-R3m 0.58% 0.62% 0.60% 0.61% 0.59%
R3m-R5m 0.57% 0.61% 0.58% 0.59% 0.56%
R5-R10m 0.49% 0.52% 0.57% 0.54% 0.55%
R10m+  0.39% 0.45% 0.38% 0.38% 0.44%
Average 0.54% 0.57% 0.56% 0.55% 0.55%
Source: Wouter Fourie and Momentum Retail Investments Actuarial and Wealth

Wouter Fourie, an independent financial adviser and founder of Ascor Independent Wealth Managers points out that there are a number of different ways in which an adviser can charge fees, but it is difficult to measure how much advisers charge under each fee structure. Fourie was also speaking at the Humans Under Management conference.

There is some evidence, however, of how much advisers earn using the popular method of charging a percentage of the amount you have invested – known as the assets under management fee.

Data from the Momentum Wealth investment platform shows that advisers are currently charging on average 0.55% of assets under management, but this fee ranged from 0.59% for investors with less than R250 000 invested to 0.44% for those with more than R10 million invested, Fourie said.

He said the fees had increased slightly over the past five years for those with large amounts, and reduced slightly for those with smaller amounts.


Asset fees on the way out?

At the Financial Planning Summit, Michael Kitces, a US-based financial planner said it has been predicted that in the US, fees based on assets under management are “toast”.

Kitces has been recognised by the US Financial Planning Association for his contribution to financial planning that includes research into adviser fee trends.

Fees based on assets under management suit consumers who are happy to delegate the running of their financial affairs to a financial adviser, he says. However, they do not suit people who are seeking validation of their financial decisions or those who want to manage their own money.

These consumers need hourly fees for different services, or fees for a range of services charged as a monthly subscription, he says.

Kitces says as there are a limited number of Americans with sufficient investments off which advisers can earn a reasonable fee.  Advisers there and in other parts of the world, are moving to charging retainer fees based on income.

However, he says, as a consumer, you should expect an adviser to show what value they can add to your life and you should be able to select an adviser who services people like you – a retiree, a professional or a business owner - rather than an adviser who claims to be a specialist in all fields.