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Monday 18 February 2019

A Reader's Story - The Great Rip Off

Seems fair? 
I recently wrote about one of the great rip offs of investing – financial advisers who charge percent based fees. My main issue with the way these advisers operate is that, despite them using the same set of skills, the same amount of time, and the same resources for each client, the clients with more money pay more.

As your investment grows, your adviser takes more and more money from you, despite him performing the same service.

I came across a great analogy for this (courtesy of the Barefoot Investor). The original may be different, but here is how I recall it.

A fat man and a thin man walk into a restaurant. They sit down, take a look at the menu, and they both order the 200g Sirloin. Medium rare.

The chef receives the orders and goes about preparing the food. He uses the same equipment and utensils and the exact same ingredients, in the exact same amounts The steaks are cooked on the exact same stove top in the exact same pan. Both steaks receive the exact same treatment from the exact same set of skills that the chef has acquired after years of studying and working, and the chef spends the exact same amount of time on each steak.

The result – identical steaks, perfectly cooked.

The steaks arrive, and both men finish them and then ask for the bill. When the bill arrives, the fat man notices that his bill is twice as much as the thin man’s bill. This despite them ordering the exact same thing.

So the fat man asks the waiter, “Why is my bill so much more than the other guys?”

The waiter replies, “Because you are fat”

And that’s pretty much the way percent fee financial advisers work. Just because you have more money (are fat), you pay more for the same set of skills, time and resources. It doesn’t make sense?

Unfortunately many people go through their entire working careers not knowing that they are paying their adviser more and more as time moves on and their investment grows. Eventually the amount of money being handed over to the financial adviser becomes totally ridiculous and makes you wonder about the advisers morals!

As an example, I present to you exhibit A – an email received from one of this blogs readers.

Let’s call him James. I have condensed, summarised and edited the original email to protect identities, improve accuracy, and prevent any witch hunts.


I was wondering if you do case studies as my wife has approx R5 mil with her dad's old financial adviser charging 1.0% (likely excl VAT) for their services. It's taken me a long time, but I have managed to convince her to move to cheaper platforms/management fees etc. The only item making a profit in her portfolio is her adviser, and this irritates me to no end.

I struggle to find practical information as to how one moves an entire portfolio (mostly with company X). What is actually entailed to do this in the most efficient way possible? What are the implications, fees , options etc?”

James also attached a statement from his wife’s investment, so I could check out some of the details.

The portfolio is broken up between different funds, and an example of the financial adviser fees she is paying can be seen in the snippet below. It shows the transactions for one of the funds in her portfolio. I have underlined the percent based adviser's fees.

The pink I chose for the underlining is about as shocking as the amount of money this adviser is making. I really wish I had lower ethics and became a financial adviser, then I would be retired already! more people would examine their statements more regularly and in more detail.

As you can see, every month, this person is paying a cool seven hundred bucks for just this small part of her overall investment. Rough calculations show that this is 1.15% per annum. The same goes for all the other parts of her portfolio. This means her adviser is netting a cool 1% of her overall portfolio (the other 0.15% goes to VAT).

Now bear in mind that the overall portfolio size is around R5 Million. So let’s look at the total amount this financial adviser is stealing from charging her. Make sure you are sitting down...

1% of R5,000,000 = R50,000 (that’s per year).

R50,000 a year = R4,166/month

That’s enough to fund a University education for a year!

That’s enough for 2 holidays to Thailand every year!

That’s enough to max out a TFSA and then still have R17k left over every year!

People, we are in the wrong occupation!

And what do you suppose that R4k a month gets you? Maybe an annual phone call, or if you lucky a meeting. Let’s be generous and say this person got a solid 5 hours out of their adviser a year. That means the adviser earns around R10,000/hour! That’s around 4 times the hourly rate of some of the top paid Neurosurgeons in South Africa (according to this)

I repeat, people, we are in the wrong occupation!

And then onto the second part of the email – what can you do if your adviser, platform or fund is overcharging you?

 Let me give some high level pointers:

What to do if your adviser is overcharging you?

  • I know this can be really tricky, because often a relationship has been built with an adviser, and sometimes the adviser is even a family friend. The closer the relationship is, the harder it can be to confront the amount of money that is being milked charged.
  • Either way, this is your money and you need to ask the question – why are my fees so high? Can you give me a better rate? Ask for a Rand amount of the fees you will be paying –is it reasonable?
  • If you cannot come to a decent arrangement with your current adviser, it is time to find one who charges a flat hourly rate for the services they provide. These types of advisers can be tricky to find, but they do exist. Google, ask around, and set up some meetings.
  • In the reader's example above, even the most expensive hourly rate adviser in South Africa, that is consulted for many many hours, will still come in cheaper than the current adviser.
What to do if your investment platform and funds are overcharging you?

  • Moving investments is actually not that difficult. There will be some paperwork involved, but the amount you can save on costs will be well worth it. It can take some time though, because there is usually a lot of red tape and regulations that needs to be navigated. Expect a lot of waiting around while nothing seems to happen.
  • Often the best approach is to initiate the move from the side of the provider you would like to go to. Remember they want your business and so they are likely to be very helpful to get you to come over. Start by asking them for the forms to initiate the transfer to them
  • There are usually no penalties for moving (except for some of the old school RA’s). But you do need to watch out for Capital Gains Tax if you have made some profit on your current investment (you currently only get the first R40k of profit tax free per year). You can of course phase your investment out by using the R40k Capital Gains exclusion every year, and move a part of your portfolio annually.
  • And of course, if you are using a financial adviser (one that charges an hourly rate of course!) get them to help you!
Okay, that’s enough of that, I’m off to start studying to become a Financial Adviser go calculate how much I have saved by not making use of a percent based fee adviser.

Till next time, Stay Stealthy!
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