If You Called South Africa Home

If you called South Africa home, life would be very different….

south-africa

There is at least one thing though that would be pretty similar- the approach you and your financial advisor take to develop your financial plan.

Greenspring recently had the privilege of  hosting Bruce Fleming from the Financial Planning Institute of South Africa (FPI). Bruce won the FPI Financial Planner of the Year competition for 2016-17. This is a very prestigious award given to the most deserving recipient after three rounds of judging; the winner then serves as FPI's lead volunteer brand ambassador for one year. Bruce was attending conferences in Baltimore in September and he had time to sit down with us.

What was so striking when we met with Bruce was that despite all the differences in our countries-regulations, politics, language, currency, even the seasons- the fundamentals of financial planning are universal.  First an advisor will help you examine and really think about your financial goals. Does your spouse or significant other share these goals or are there other things to consider? Next, we assess where you are today financially and where you want to go.  After a thorough analysis, we develop a plan to get you where you want to go that incorporates risk management (what could derail my plan?), tax implications and strategies, and estate planning. The best laid plan is useless unless it is efficiently  implemented (hint: let your advisor do the heavy lifting here!).  After all the implementation items are checked off, you may think you can put the plan up on the shelf and go on about your way and all of your financial goals will come to fruition right on schedule. Not likely. Life happens, things change and so will your plan. You and your advisor need to meet as life changes, or at least annually, to monitor the plan and course correct when necessary.

As financial advisors we are dedicated to an ongoing relationship where we can help you achieve your financial goals. Whether you are meeting with Bruce in Cape Town or sitting down with us in Towson, we would all would be doing pretty much the same thing and following a similar process. Yes, Bruce has a much cooler accent, but at the end of the day your experience would be remarkably similar. As with many things in life, putting a clear plan and process in place is an integral component of achieving ultimate success, in whatever country  you might call home.

 

(It Pays To) Keep It Simple Stupid

This principle has been around for decades, applied to situations ranging from aviation engineering to modern architecture to the animation masters at Disney. Yet, when it comes to investing our emotions tend to distract us from this guiding principle. In fact, if you take a closer look at the mutual fund industry over time you would find that straying away from this concept has proven to be very costly. Since Vanguard was founded in 1974, it has been able to save investors hundreds of billions of dollars directly and indirectly. It has done this in three different ways: lower fees, lower turnover, and the “Vangaurd Effect”. Eric Balchunas details this in his Bloomberg article:

Vanguard has saved investors $175 billion in fees since it was founded in 1974. This is based on the historical difference between the asset-weighted average expense ratio of an active mutual fund versus that of a Vanguard fund, as seen in the chart below. The difference is multiplied by the firm’s assets each year — in other words, the amount an investor would have paid if Vanguard didn’t exist.

The firm has also saved investors about $140 billion in trading costs or turnover. Every time a fund manager makes a trade, it costs a tiny amount. Generally speaking, every additional 1 percent in turnover comes with 0.01 percent in extra costs. Active mutual funds have an average turnover approximately 50 percentage points higher than a Vanguard fund.

Finally, there is the “Vanguard Effect”: The company’s influence leads other funds to lower their fees in order to better compete. For example, the average fee for active funds has dropped from .99 percent in 2000 to .77 percent today, which can also be seen in the above chart. This decline benefits the investors who make up the $10 trillion in active mutual-fund assets. In other words, Vanguard has saved non-Vanguard investors about $200 billion in active funds alone.

From this it is easy to see how one can best control costs by using a low-cost, passive mutual fund. This may feel counter intuitive by doing less, but this allows you to do more. More focus on the proper asset allocation for your risk level, more time spent on your financial planning and (most importantly) more money towards your portfolio instead of towards fees. The global market’s movement day-to-day is far too complex to try to predict. Instead we should simply focus on the things we can control: fees, diversification, taxes and discipline (rebalancing). Keeping to a more simplistic investment focus has shown to be more rewarding, as well as a much more effective use of our time.

The Worse The Product The Higher The Commission

If there was still any doubt that brokers have been selling clients products that aren't in their best interest, this should put it to bed.  An article in Financial Advisor magazine reported the following:

Through August, sales of non-traded REITs were $3.15 billion, down 55 percent from the same period a year ago, according to the Robert A. Stanger & Co., which tracks the industry.

Sales of BDCs through August were $1.07 billion, down 62 percent.

Non-traded REITs, the bigger category, should reach around $5 billion this year — about half of last year — said Keith Allaire, managing director at Stanger.

What are non-traded REITs and BDC's you ask?  These are products with high commissions and fees (sometimes over 15%) with countless examples of massive blowups.  In this day and age with Google, it is hard to believe they still exist in their current form.  Just google "non-traded REIT scam" you'll find over 17,000 hits with the first few links being stern warnings from the SEC and FINRA.  The old adage that these products are "never bought but sold" is entirely correct.  You almost exclusively see these products sold by brokers.  So, what is the reason for the massive drop-off in sales?  The article states it pretty clearly:

"That's primarily due to the change from full front-load structure, to a trail commission structure," he said. "It's a matter of getting new products in the pipeline, and at B-Ds trying to figure what structure they want on the platform."

Translation:  cut out the big commissions and brokers won't sell it anymore.  This goes to show you that little concern was given to the quality of the product (anyone looking closely at these things knew that a long time ago) or the client.  The appeal of these products was always about the huge upfront commissions.  With the advent of the Fiduciary rule, requiring all brokers advising retirement accounts act in the client's best interest, it seems like some of these horrible products are seeing asset flows dwindle.  That's a great thing for consumers.

If you are in the market for an advisor, I urge you to find one that always acts in your best interest (not just for retirement accounts) so you can avoid situations like this.  The best way to find one is through the National Association of Personal Financial Advisors (www.napfa.org).  While you aren't guaranteed to find a great advisor (you still need to vet them further), at least you will know that advisor is not incented by selling you products (NAPFA members cannot accept commissions or kickbacks in any form).

Full disclosure- Greenspring is a member of NAPFA.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.