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Thursday 24 January 2019

Learn This One Skill And Save Yourself Millions

Mad skillz! 
A few weeks ago, I fired up the Stealthmobile. Instead of the car greeting me with the soft purr that I had become accustomed to over the last 7 years, I heard a subtle rattling noise. Because we were already running late (which is pretty much the norm when you have a toddler in tow) I figured we would take our chances.

As we cruised down the highway, the noise seemed to get progressively worse and more annoying (on a scale of 1 to me talking continuously about Comrades, my wife put the annoyance factor at a firm 11). In true ostrich-head-in-the-sand style, we fixed the noise by turning the radio up – problem solved, and we got to our destination unscathed.

Then, time for the trip back home. I started the car, and the symphony of metal was still there (did I really think it was just going to miraculously disappear?…). So we figured we would nurse it home and then decide what to do about it after the weekend.

Solid plan.

Except a few kilometres up the highway, we heard a strange clanging noise (like something dropping out of the engine), and Stealthmobile was now screaming worse than Junior when he gets his water in the wrong colour cup. It really didn’t sound good.

Fortunately we were pretty close to my Father-in-law’s house, which was great – because he is more than handy when it comes to cars. So we pulled up, he opened the bonnet, and within a few seconds he had diagnosed the problem and already knew how to fix it. (Out of interest, two bolts had managed to work their way out of the pulley attached to the water pump. The rattling noise was due to the pulley wobbling as a result of being attached by too few bolts. The strange noise we heard on our attempted drive home was the second bolt falling out of the pulley).

My father in law has a stash of bolts of pretty much every size imaginable. Problem solved.

Cost =R0 (okay technically it cost two bolts, so what, like 20 bucks?)

This got me thinking. Knowing your way around cars is a pretty handy and worthwhile skill to have!
If I had taken the car to a mechanic, the labour alone would have run into the thousands of rands (to get to the pulley, some tanks and engine components had to be removed and put back once the fix was made). You can save a lot of money by being able to fix your own car!

In addition, being car-smart also means you could do your own services as well. That will also save you a couple of thousand a year. And over a lifetime, you could end saving yourself tens of thousands of rands.

And, of course, there are other skills that can be very worthwhile to learn. If you teach yourself some DIY, you can save yourself some moola by fixing stuff around the house instead of getting a handyman/repairman. (And, as an added bonus, you get man points from the missus… unless of course you don’t do a good job, then you get minus man points (this may or may not have happened to me…. :))

And I’m sure you can think of plenty other skills you can learn which can end up saving you a lot of money. Plumbing, cutting hair, knowing your way around a computer etc...

But I quickly realised that there is one skill that saves you so much money that it makes all the others look like child's play! A skill that could save you Millions of Rands1 over your lifetime. And the best part about it is that it is not even that difficult to learn!

But before we get there, I first want to briefly discuss one of life’s oddities - Commission Based Financial Advisers.

Let me introduce you to Mr. R Ipoff. He’s a financial adviser who charges a 1% advice fee – a pretty standard rate in the industry.

Seems reasonable right?

Well…let’s see…

Mr R. Ipoff has two clients, let’s call them Sam and Richie.

Sam has only been working for a few years, and has managed to build up an investment portfolio of R50,000. Richie on the other hand, is close to retirement, and his portfolio is worth R3.3 Million Rand (drinks on Richie!)

Okay, let’s take a closer peak at how much these two gents are paying their financial adviser:
  • Sam: R50k portfolio, @ 1% fee = R500 a year, or R41.67/month.
  • Richie: R3.3 Million portfolio, @ 1% fee = R33,000 a year, or R2,750/month

Two very (very very) different fees.

Despite the fact that Mr. Ipoff performed the same services (risk assessment, goal setting, account set up, chit chat about the family), and took the same amount of time, used the same amount of skills, and completed the same amount of paperwork, how is it that one clients ends up paying him 65 times more than another client? Crazy right?

Richie is paying R2,750 a month for something that Sam gets for less than 42 bucks?

In fact, Richie is getting ripped so badly he is effectively buying and maxing out his financial adviser’s a full TFSA contribution every year! Or, put another way, Richie could max out a TFSA for one of his kids/grandkids, or more or less pay University tuition for a year, or go on an overseas trip every year. But instead he is handing fistfuls of his hard earned cash to his financial adviser.

It makes absolutely zero sense!2

The Fee Grid

To further illustrate the ridiculous “the more you have the more you pay” system, the grid below shows you the monthly amount someone would be handing over to their financial adviser, depending on the adviser’s percentage fee and the investment balance. (Click for a larger image) 

Monthly amount paid to a financial adviser according to portfolio size and % commission

So if you starting out, and you have a R100k portfolio with an adviser who charges 0.5%, you are paying  around R41 a month. Probably not a train smash…

On the flip-side, someone with a R5 Million portfolio, with an adviser who charges 1.5%, will be handing over a whopping R6,500 per month, every month! That is a LOT of money for only a few hours worth of work by the adviser (people, we are in the wrong industry!)

Now you may look at some of the balances in the table above and think, that’s a lot of money, I will never get there! But let me tell you, it will surprise you how compound interest can sneak up at you and in a few years you check your balance and ....boom!

So What Should Richie Do?

Well he has two options:
  1. Move over to a flat fee financial adviser who will charge him an hourly rate. Even if he finds someone who charges R1,500 an hour (steep) and uses him for 6 hours a year (way too much time), he will still be much, much better off.
  2. Moving over to a flat fee adviser is the bare minimum! If he wants to go to the next level and keep all his fees for himself (which will compound into more and more over time as he finishes his work career and all through his retirement) he should learn to manage his own investments.

And What Should Sam Do?

Right so I think we agree that Richie was getting proper shafted. He should definitely make some changes. But what about Sam?

Well R41.66 is probably not a bad rate to pay (it’s less than the cost of most bank accounts in South Africa). Of course ideally he should be paying 0, but maybe he can live with R40 a month less (as long as he also remembers the lost compounding as well).

For now Sam can probably stay with his current adviser, but best he keep a close eye on his investment balance, because as he progresses and contributes more and more to his investment, and starts earning returns, he is going to reach the point where he will start getting ripped.

When that happens, he better know how to manage his own investments, or move to a flat fee adviser.

And Finally, What Should You Do?

Every month, throughout South Africa, people pay away thousands of Rands to commission based financial advisers in one of the biggest cons ever invented. It’s total craziness.

If you are one of these people, start spending some time learning what will probably end up being the most valuable skill you'll ever learn – managing your own investments.

Now I accept this is not something that can be learnt overnight, and it will take some time, effort and quite a bit of reading, listening and watching. So best you set the wheels in motion (and the fact that you are at this point in the article, tells me you have what it takes!)

Learning to manage your money may seem like a daunting task, but there are a growing number of ordinary South Africans who are doing just that, and I promise you the millions of rands of savings will be well worth it!

If you suspect that you may be paying for your your financial advisers holidays, sports car, and watches, and would prefer to keep more of your hard earned money for yourself, it's time to take back some control. Now I can appreciate that maybe you don’t have the knowledge or confidence to manage your own money just yet, but here is what you can do in the meantime while you up-skill yourself. A sort of stop gap in the interim:
  1. Call or email your financial adviser and find out what their fees are. If the answer has a percentage sign associated with it, move on to step 2
  2. Check what your investment balance is, and calculate, in Rands, what you are paying per month (check this article for more info on calculating the rand value of fees). If this amount (and the potential lost growth) seems like a rip off, move to step 3
  3. Tell your adviser that the fees you are paying are too high. There’s a small chance they will offer you a better rate. Check if the rand value of fees on this new rate seems reasonable to you. If not, move to step 4
  4. Find an adviser who charges a flat fee for his/her services. An hourly rate is a much fairer way for a professional to charge for their services (a doctor doesn’t check your bank balance before sending you the bill).
  5. Once you are with a flat fee adviser, it's time to start soaking up the knowledge. Learn about Asset Classes, Tax Efficient Investments, ETF Fees - in fact everything you can. It really is not that difficult!
Remember that saving on fees is a double edged sword - your portfolio grows faster because of less fees, and because of the bigger portfolio, you end up saving even more on fees. I think the term is a virtuous cycle?

And then for bonus points, on top of this virtuous cycle, the fee saving is automatically reinvested because you don’t really “see” the cash savings – it doesn’t get absorbed into your normal expenses and there is no temptation to spend it because it is sort of automatically reinvested for you. It's like a virtuous cycle wrapped in a unicorn on top of a rainbow.

Okay, this is now starting to get very whimsical… I think I will leave it at that…

Just one more thing before I go. A while back I came across a tweet which seems to have stuck with me. Unfortunately I cannot remember who said it, but it went something like this:

"Financial advisers are for people who are too lazy to learn about personal finance"

Your thoughts on that?

Till next time, Stay Stealthy!
 - ~ - ~

1 A rough calculation shows that over a 40 year retirement, and with my current income needs, by not using a 1% commissions based financial adviser I would save in excess of R3.2 Million in today's money! (And that's just the fees, think about the growth that money would have had if it wasn't paid away in fees)

And of course we not even covering the fact that an adviser is unlikely to put you in the cheapest product! Think about the lost growth and extra fees people are paying because they have been put into old style RA's or TFSAs that charge a monthly fee!

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