The Financial Advisory and Intermediary Services (FAIS) Act is now in force, protecting you, for the first time, from inappropriate financial advice.
However, the FAIS Act does not mean that every financial adviser is properly qualified, and nor does it guarantee that you will always receive appropriate advice.
The more indepth the advice you need, the higher the level of expertise an adviser must possess. The FAIS Act lays down minimum qualifications for financial advisers, and currently the minimum qualification to sell top-of-the-range financial products is a matric certificate.
The rules that applied when selecting a financial adviser before the FAIS Act was enacted are still valid.
The main ways in which the FAIS Act protects you are:
- An adviser must provide you with appropriate advice.
If an adviser does not have sufficient qualifications, you are not likely to receive appropriate advice, particularly if inappropriate commission structures and perverse incentives, such as trips abroad, are in place.
Types of advisers
There are various levels of financial advice and, depending on the investments you are making, you may need to consult more than one adviser.
Before you can select a financial adviser, you must be able to distinguish between the different types of advisers. They are:
- A company agent. This agent is only licensed to sell the products of a particular company. It is unlikely that this agent will be able to give you proper investment advice, except of a very basic nature.
A company agent should be able to carry out a financial needs analysis for you, which will identify your financial needs and goals.
- A general agent. This adviser is employed by one company, but is allowed to sell the products of other companies (from a list of products provided by his or her employer).
General agents are normally quite highly skilled. They are likely to base their investment advice on your risk profile, and will offer you a wide range of products to meet your needs.
As is the case with a company agent, the advice you receive from a general agent is backed by his or her employing company.
In terms of the FAIS Act, both company agents and general agents are defined as FSP representatives.
- An independent financial adviser. These advisers are not tied to a particular company and may be able to advise you about a wide range of products. However, the level of skill among independent financial advisers can range from poor to excellent, and you must ensure that the person you consult has the necessary qualifications. These qualifications include being accredited as a Certified Financial Planner (CFP) by the Financial Planning Institute (FPI).
A CFP accredited by the FPI will help you draw up your overall financial plan. Although CFPs have quite a wide range of investment skills, they will not necessarily be experts.
Be warned, if an independent financial adviser gives you inappropriate advice, the company whose products you have used will not make good.
- An investment manager. The main requirement for an investment manager is to be registered with the FSB. To be registered as an investment manager, the person has to be able to demonstrate that they are able to meet the requirements of giving investment advice.
If you give someone discretion to make investment decisions on your behalf, they must either be registered as a stockbroker or as an investment manager with the FSB. Preferably, you should deal with a Certified Financial Analyst (CFA), of whom there are few.
- Adviser networks/adviser companies. To an increasing extent, independent advisers are joining adviser networks, which provide back-up expertise in such areas as investment, tax and estate planning.
If you are seeking independent advice, you are more likely to get good advice from an adviser network or adviser company than from a single person, because the network has more resources at its disposal.
10 rules to apply when dealing with a financial adviser
There are 10 rules you should follow when dealing with anyone who gives you financial advice. The rules are:
1. The adviser must be registered in terms of the FAIS Act. You can verify that an adviser is registered by contacting the FSB (go to www.fsb.co.za or telephone 0800 110443).
2. Check the adviser's qualifications and experience.
3. Get proof that the person has a contract with the company whose products are being sold to you.
4. It is better to deal with someone who has the backing of a large company of group of brokers. This is particularly important if you need advice covering the spectrum of financial planning, including investment, estate planning and tax.
5. Ask the adviser for references.
6. Never let anyone rush you into making an investment decision. There are many investment opportunities available and missing one will not undermine your wealth.
7. Always get any recommendation given to you in writing. This includes the initial proposal as well as all documentation relating to the performance of your investment/s. If a promise is made to you verbally, ensure you also have it in writing.
8. Be prepared to pay for the advice and assistance you receive, but, be aware of what you are paying for and how you are paying. There are many ways for a financial adviser to be paid, from the direct payment of a fee by yourself, to commissions and/or fees paid indirectly, on your behalf, by the company providing the financial product. These commissions and/or fees may be paid once or annually, and are negotiable.
9. Any payment you make should always be made to the company providing the investment product. When buying a product, never make out a cheque in favour of, or give cash to, a financial adviser.
10. Ask "stupid" questions. If you cannot understand the advice you are being given, or if the product seems extraordinarily complex, avoid it. You should only invest in products that you can understand thoroughly. Seek a second opinion if you are unsure of the advice you have received.
The questions you should ask (and get written replies to) include:
- What are the costs (both initial and annual)?
- What commissions are paid (both initial and annual)?
- What is the investment period?
- What are the underlying investments - for example, are they shares, or bonds or something else?
- How often will you receive reports on your investment?
- Are there any guarantees on the capital and/or investment growth?
- What has been the return on the investment over the past five years?
- What are the tax consequences of the investment?
- What is the name of the company marketing the investment?
If you are given patronising or unsatisfactory responses to these questions, walk away.
Inseta helps raise the bar
The Insurance Sector Education and Training Authority (Inseta), which played a major role in ensuring that thousands of financial advisers met minimum qualification requirements for registration in terms of the Financial Advisory and Intermediary Services (FAIS) Act, is now helping to upgrade the qualifications of financial advisers.
In terms of the fit and proper qualifications under FAIS, the minimum qualifications for financial advisers will be increased over the next two or three years, depending on the type of products an adviser is licensed to sell.
Inseta, in partnership with education institution Intec, is launching a continuing professional development programme through which financial advisers will be able to study and achieve the number of credits required to meet the FAIS requirements. Any adviser who does not meet the new minimum qualification requirements will not be permitted to continue providing financial advice or selling financial products.
Inseta is going on a roadshow to explain how the programme will be structured. The sessions, which are free to financial advisers, are at 10am and 2pm, in:
- Midrand, on October 11, at the Unisa School of Business Leadership;
- Cape Town, on October 12, at Old Mutual Business School in Pinelands;
- Durban, on October 13, at the Durban Country Club;
- Port Elizabeth, on October 14, at the Havelock Hotel; and
- East London, on October 15, at the Esplanade Hotel.
This column is based on an extract from Bruce Cameron's book
Retire Right (Zebra Press, 2004).