A costly fallacy: I'm not rich enough for a financial planner
The commonly held belief that you need to be wealthy to have a financial planner is a dangerous misconception, which could be holding back millions of South Africans from improving their lot in life.
"Good financial advice can set you on a trajectory to building wealth," says Henry van Deventer, the head of wealth strategy at Old Mutual Wealth. "Wealth is not driving a Bentley. It's having enough money to live the life you want to live. Which takes careful planning and discipline."
He was commenting on the findings of the latest Old Mutual Savings & Investment Monitor, which again revealed that most people surveyed (62%) feel they don't have enough money to warrant seeing a financial planner.
Only 13% of working South Africans in metropolitan areas have a financial planner, the survey found, and the incidence was negligible in lower-income households.
Van Deventer says that if more people understood the benefit of sound financial advice, there would not be this misconception that you needed to be wealthy to engage a financial planner.
"For anyone with dependants, the basic question is: What kind of life do I want to give the people I love, and am I willing to compromise that by not planning for the consequences of my premature death or being rendered disabled and incapable of supporting them? There are huge risks to failing to do proper financial planning."
When it comes to investing for retirement, as we age our sense of dignity is more closely linked to money, he says. "In research by Morningstar, people in retirement were asked what their greatest fear was in retirement. Only 39% of retirees feared death; 61% feared running out of money."
This year's Old Mutual Monitor also found that 25% of respondents said they did not need a financial planner because they did their own planning. The highest percentage of people who responded to that statement earned more than R40,000 a month.
Van Deventer says that just having a lot of money does not qualify you to manage it. "There's little correlation between earning a lot of money and being able to retire with enough money. Because the more we earn, the more we spend."
While it may be possible to do your own financial planning, you will need a lot of time to do the research and projections yourself. You would also need to navigate the complexities of finding your own life cover, minimising your tax and checking what will happen to your estate after your death.
If you really cannot afford to pay for advice, attend financial planning workshops and seminars to learn as much as you can.
Financial planning is one thing we can least afford to get wrong, Van Deventer says. "If the consequence of making a mistake is potentially massive, it makes sense to check in with someone qualified to make sure there isn't something you've missed."
Mike Abbott, the head of wealth at Sable International, says the reason most people do not seek financial advice is because "you don't know what you don't know".
He adds: "Everyone knows skydiving is dangerous. However, the effect of costs and inflation on an overly expensive, inappropriately constructed pension fund only becomes clear at retirement - when it's too late to fix the problem.
"Essentially, financial planning involves complex concepts like time-value of money, time versus money-weighted returns, rand-cost averaging and rand-cost ravaging, gross versus net compounding, and so on. When investigating these issues, it can seem to the newly initiated as though we are fiddling at the margins. However, all financial advisers know that these seemingly small issues have big effects over time."
Van Deventer says there are three main ways in which advice adds value.
"The first is tax efficiency. A financial planner can help you maximise your use of retirement savings vehicles so that you save tax. Appropriate tax planning can add up to an extra 2% returns a year on your retirement savings, which is substantial."
The second is helping you avoid bad decisions such as buying high, selling low and repeating your mistakes until you're broke. "Withdrawal strategies can add another 2.5% a year on your returns," he says.
The third is managing your behaviour, which can cost you about 1.5% a year, he says. "You could buy a house that's a little too expensive, or a car that's a little too expensive. These mistakes compromise your money's ability to last as long as you will."
If clients of financial planners can be 6% better off, this answers the question: If I'm going to pay my adviser 1% a year, will I be at least 1% better off with an adviser than without one?