You only need to open a newspaper to see stories of Financial Advisors who run away with people’s money. Couple this with the public perception that Financial Advisors just ram insurance down your throat and that the financial services industry is seen by many as just a giant Pyramid Scheme and you may wonder: Should I just skip talking to a Financial Advisor altogether?
The title “financial advisor”, is thrown about way too easily, in my opinion. All one needs is a school-leaving certificate, a possibly unrelated degree, a couple of weeks of training on how to sell financial products and someone looking over your shoulder for three years to be called a “Financial Advisor”.
These days it only takes a couple of hours of browsing around the interweb to compare insurance quotes, find out about all the different savings accounts, different Investment options, how much your car payment will be and check the fee schedule of your bank. Your work provides you with a Pension fund and Medical Aid, your home loan payments and credit cards are under control and you have a monthly budget that you stick to.
Why do you need a Financial Advisor then?
Financial Advisers are specifically trained in areas that most of us don’t know much about.
Here is what a Financial Adviser will look at:
* Will you be able to afford the car payment and home loan payment when interest rates go up by 1% or more. Your bank may say you can afford it, but can you really?
* Will your pension be enough to live on when you retire? Your pension may not be linked to inflation, so your fixed pension payments may be worth much less a couple of years down the line. At South Africa’s current inflation target of 6%, your pension will be able to buy only half of what it could at the beginning after 12 years. (see the “rule of 72“)
* Is the source of the investment advice credible? (see the “pump and dump” post) Is the investment option suitable to your ability and willingness to take risk?
* Do the insurance quotes you compared have the same benefits? Some policies may provide complimentary car rental when you have an accident while some may not, for instance. Do you have enough insurance?
* Do the savings accounts have penalties you should know about? What happens when you have to withdraw your money for an emergency. One savings account may have the highest interest rate, but have the highest penalty when money is withdrawn before the end of the lock-up period.
* Does your Medical Aid provide the benefits your family use most? (see this “medical aid reader question“)
You should think of a Financial Advisor as your “Personal Finance Coach”. You are still responsible for your own financial affairs, but you have someone who can look at the big picture, chart a course for you to reach financial security or look over your shoulder when you are about to make an important financial decision.
Being destitute in retirement or leaving your family with no assets if you die are much too important to leave to chance. Find someone who you can trust with the necessary expertise to ensure you can provide for yourself and your family now and in the future.