Wairarapa Times Age

April 20, 2008

Recent events in global and local financial markets have put the spotlight on the financial advice industry, and rightly so. With the sharp drop in share markets, the collapse of local finance companies, and the freezing of various mortgage and fixed interest funds, investors have a right to query the advice they are being given. There are some truly horrific accounts of advisers putting clients’ funds into products that clearly don’t suit their aversion to risk, their stage in life, their need for liquidity, or the fundamental requirement to diversify. I recently read an article about an Australian investor who had his family’s life savings in shares in one company, MFS Australia. He thought he was onto a winner until their share price plummeted by 70% in January this year. My sympathy for him disappeared when I read he was actually a financial planner. I suggest he should now be looking for another career.

Investor concern about the markets inevitably raises the question about how we pay for financial advice. Are investors receiving value from their adviser? In New Zealand, most financial advisers charge on a “funds under management” basis. You are charged a percentage (1%-2% per annum) of the value of the assets in your portfolio. But what is your adviser doing to earn this fee? Are they receiving dividend and interest payments on your behalf, receiving and acting on correspondence relating to your holdings, liaising with your accountant at balance date, and reporting on the performance of your portfolio? Or are they hitting the print button on their computer at the end of the year, and generating the same report for every client at virtually no cost to themselves? And if your adviser has most of your investments in managed funds or unit trusts, are you paying a second tier of fees?

I guess coming from a farming background I have always tended to aspire to doing things myself. This has been the case with my investments and I have always used a sharebroker to invest directly into shares, fixed interest securities and listed funds. I pay brokerage whenever I buy or sell these securities, but am not paying ongoing fees to hold them. I keep all of the gains made in my portfolio, and none are paid to an adviser in fees. I do, of course, have to deal with the administration myself. For example Auckland Airport and the Canada Pension Plan cut down an entire rainforest in administering their recent takeover offer, and all that paperwork has to be understood and processed.

All I’m suggesting is that if you are paying someone else to manage your portfolio, then that is exactly what they should be doing. You shouldn’t mind paying for a service provided you are receiving value. But you have every right to question what is it that your adviser is adding to your financial position whenever you hand over your hard earned cash.

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