Questions you need to ask when you engage a broker

I recently came across an interesting case settled by the FAIS ombud — and it illustrates why it’s important to know if your broker is both qualified and able to provide you with particular advice.

The complainant in the case (let’s call her Ms A) received R120 000 in a divorce settlement and wanted to invest this. She worked as a cashier at the Spar and, aside from having little job security, she also didn’t have the benefit of UIF or medical aid contributions paid by the company.

Ms A’s broker (Mr V) duly invested the amount, but when Ms A lost her job and needed urgent access to the funds she found that the money had been tied up in a retirement annuity, which she couldn’t access until she reached 55. At age 40, broke and unemployed, she was forced to live in her car.

When her attempts to resolve the matter with Mr V failed, Ms A approached the ombud. The ombud examined the documents and noted that under the heading “Needs identified”, the block provided for retirement planning was ticked as “No”. Mr V had failed to conduct a financial needs analysis and couldn’t adequately explain why an RA had been selected as being in the complainant’s best interest, given that she had no other capital and was in a precarious financial situation.

The story has a happy ending, because the company using the services of Mr V had to refund the R120 000 with interest, so Ms A received R144 968,06.

It underlines how crucial it is, though, that your adviser is both qualified to give you advice and also able to do so. These are two separate issues.

The first is now being addressed by a company called Astute, which has developed a system to enable financial services providers to check that their brokers or intermediaries are licensed to provide information in the correct product categories. Companies will have a better chance of using brokers that can give appropriate advice to clients, which is good news for the man or woman in the street.

The lesson one can draw from this is that one should be vigilant because although an adviser may be qualified and licensed by the FSB to provide advice, that adviser also needs to conduct the transaction in terms of the six-step financial planning process.

You need to ask:

  • Is the broker or intermediary I’m going to deal with licensed, with the appropriate qualifications?
  • and

  • If so, will that adviser conduct a financial needs analysis, taking my particular life circumstances into account?

If these bases are covered, you can be reasonably confident that you’ll receive good financial advice.

Astute’s system will be integrated with the Financial Services Board’s database of financial advisers, and financial product providers will be able to tap into this. If a company can validate a financial adviser’s credentials, that’s good news for clients. Astute says it can assimilate information from companies offering life insurance, disability and investment products.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information

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