Choosing The Right Advisor Is Vital For Investors

Choosing The Right Advisor Is Vital For Investors

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In the past decade there has been a dramatic increase in the number of participants and competition in the fund management industry.
The private client arena offers a wide array of unit trusts, including SATRIX funds for investors to invest in, and while clients are not required to be involved in the decision-making, they might find the number of options bewildering. There are currently more than
1 000 unit trusts available locally and over 80 000 offshore.

A range of investment options

Individuals seeking more comprehensive service, including share portfolio management and financial services such as retirement planning, income tax compliance and the creation of trusts can select from a range of trust companies, private banks, stockbrokers, assurance companies and specialist fund management companies. If investors want to participate actively in the management of their share portfolio they might decide to use the services of a stockbroker specialising in private clients.

As individuals, investors must shop around for the company that has products, or will structure products, that meet their specific requirements. Intense competition in this market and large differences in fund performance, make the choice of an adviser an important decision for any investor. It is no longer sufficient to invest in funds without taking into consideration the volatility of a particular fund relative to another as standard deviation, which measures the upside and downside of a portfolio over a period of time. This measurement will prove far better when understanding the risks associated with individual investments. Selecting a top performer does not guarantee future success. Past performance is a guide and nothing more. Teams change regularly and you may find that the performance achieved was the work of a team that has subsequently moved elsewhere.

Factors that need to be considered when deciding on an adviser include:

  • individual financial circumstances and income requirements
  • the need for capital growth, particularly in view of inflation
  • reporting requirements
  • the amount of personal attention you want
  • the price you are prepared to pay
  • your appetite for risk
  • your existing portfolio, including direct shares and unit trusts

Beware quarterly reporting

A further consideration is the culture of “quarterly reporting mania” that has developed in South Africa, in line with investment behaviour in Europe and America. This focuses on quarterly reporting and has its share of pitfalls, such as the risk of selecting a fund only on its short-term performance.

While performance is bound to fluctuate with market conditions, investors should not be overly concerned with quarterly performance. It should also be borne in mind that changing your investments frequently is expensive, and there is often the risk of changing just as the original investment starts to deliver a return. Another important point worth considering is the performance of the entire basket of investment – the performance as a whole, as opposed to the performance of the individual components. With the increasing sophistication of the investment medium and the vast number of products on offer, it is vital to ensure that you select a suitably qualified advisor who is familiar with the ever-changing investment environment.

Knowledge & skills

The introduction of regulations governing financial advisors and, in particular, the issues relating to the provision of appropriate advice, has resulted in new levels of expertise.

Advisors have to be more proactive in their assessment of investors’ requirements. This means more contact with the investor to ensure that the advice provided is still in line with the required risk and needs objectives of the individual.The advisor may have to charge clients more for the service and they would be well advised to pay this increased amount if the advice enhances the understanding between investor and advisor, and ensures that clients’ needs are met.

Finally, investors must never lose sight of their original objectives and, if they change, this must be communicated to the financial advisor so that, where applicable, the investment portfolio can be appropriately restructured. I always like to remind investors that if they are investing in anything to do with growth assets (equity, property and hedge funds), their time horizon must be at least seven to ten years and beyond.

Bryan Hirsch
BRYAN HIRSCH has been in the financial services industry for 47 years and is a director of Bryan Hirsch Colley & Associates. He has written two books, the first Bryan Hirsch’s Guide to Personal Finance and more recently, Steps to Financial Freedom. Bryan has written for many of South Africa’s top financial and business publications, has been a weekly guest on Radio SAFM for 18 years, and has his own weekly TV show You & Your Money on Summit TV.