The Real Value of Advice

In the investment world, where results are measured in percentage terms, it is very easy to lose track of the real value of advice. Of all the participants in the ‘investment value chain’, historically it has been the financial adviser who has most keenly felt the pressure to reduce their fees. Being people centric at heart, quite often they oblige. As it turns out, quite unfairly, as we will explain below.

Consider the illustration showing investor returns:

ComparisonReturn % per annum
Stock market (eg JSE, S&P, Dow Jones)10.0%
Managed Equity Fund (a fund manager)12.0%
Excess Investor Return (Difference between stock market and the Fund2.0%
     Less: fund manager fees (cost of accessing the fund)1.25%
Net return received10.75%

At a glance this shows the investor receiving a net 10.75% return from the fund manager for a fee of 1.25%. Seemingly a good deal.

Take then a financial advice fee of 0.75% p.a over and above the fund manager’s fee, and we are back to square one: the stock market return of 10.00%. Many investors do this simple comparison and start to question the value of advice, with the fund manager receiving substantially more gratitude for the returns delivered.

The reality could not be more different. This comparison, while simple, illustrates how the value of advice can get lost in the numbers.

Here’s why…
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Small Business: high risk, high reward for the canny investor

The value of small businesses in our economy is often overlooked when planning an investment portfolio. But small businesses equate to a substantial impact in nearly all economies worldwide. There are more than 25 million small businesses in the US alone, accounting for up to 60% of jobs – and in a recent study by Paychex, small businesses have produced 13 times more patents than larger firms.

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A Cool Head in Hot Markets: effects of local and global forces on investments

You can never be too comfortable or too canny when it comes to investments. In a world that is ever-changing, there are going to be ups and downs, not to mention the occasional unexpected swoop one way or the other. Many factors affect the markets – which are built on speculation and perception – and your reaction may be just one link too many in a chain reaction that can unravel years of quiet progress.

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Philanthropic Investment: people and the planet

Developments in science, environmental concerns and the rise of social media have created greater awareness of human activity and the ensuing damages we effect around the world. Along with this greater understanding, comes a more responsible investor who takes specific interest in how investments may be used for the benefit of the planet.

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Will you outlive your retirement capital?

Solving the Retirement Riddle

For many years investors have enjoyed the benefits of local investment markets which have delivered returns far in excess of more conservative and ‘normalised’ financial planning budgets. Money market – the lowest risk asset class – has beaten inflation by 4% per year, for 25 years! Local equities have delivered almost 9% in excess of inflation, property more than 12%! Which makes the more recent market returns somewhat sobering: negative real returns in 2016 for the average balanced fund, and only inflation matching returns for the past three years.

For investors in retirement these lower returns have started to cause real concern: will their retirement capital be sufficient to last their lifetime?

The boom years made it relatively easy to sustain higher lifestyles and levels of drawings from portfolios, typically out of a living annuity (where the investor takes the risk on the longevity of their capital). High returns hid the fact that the majority of retirees were under saved, overdrawing, or both. As it stands the average living annuity drawing rate in SA is about 6.5% per year, in excess of the recommended guidelines.

Download the full article here.

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