Dumisani asks: In 2009 I took out a retirement annuity with Momentum to supplement my company provident fund. I contribute R500 per month to it.
I recently requested that my portfolio of underlying unit trusts be restructured into a higher risk portfolio and I was just appalled to discover that my financial adviser gets an upfront commission of R900 just to get this done. I also pay an “allocation” fee of R14 per month.
I am considering two options now:
1. Exit the RA and pay off all short-term debt, then build my portfolio of unit trusts.
2. Moving to a lower-cost RA. Is changing my RA worth the hassle?
Maya replies: I always believe that good advice is worth paying for, but when you are paying for no advice that is just a rip-off. The question is whether the financial adviser has earned the fee.
An adviser plays an important role as a sounding board. For example you may have read an article on investing offshore and maybe want to make some changes to your investments. But you need to consider your specific situation first — that is where an adviser comes in.
To earn the fee your adviser should be in contact with you once a year to discuss your investment. It is during this conversation that you discuss whether or not the underlying portfolio has the right risk profile for your needs and to discuss the pros and cons.
An adviser should also re-assess your financial situation each year to ensure that you are on track with your goals. Are you saving enough for retirement? What about shorter-term goals?
If the adviser was involved in your decision then that advice is worth paying for. If you made the decision without the adviser, the question is why you did not speak to the adviser and were you concerned that the original advice was not appropriate?
Get a full breakdown of the fees paid. The allocation fee is around 3% of your investment which comes to R168 a year. You are probably also paying an annual fee. If you have been investing for two years your value is probably around R13 000 — if your annual fees is 1% then so you are paying around R130 in annual fees.
All together you may be paying around R300 a year for advice. That is a good rate if you are getting advice, but R300 you could be saving if you are getting no advice.
I would not recommend that you cash in the retirement annuity as they are very effective retirement planning vehicles especially from a tax point of view.
Rather than cancelling the RA, speak to Momentum and tell them you are unhappy with the service you are receiving. Perhaps you need to have another adviser or they should cancel the fee.
It does seem strange that your adviser would receive R900 to restructure a portfolio when this advice is effectively paid for through the monthly and annual fees so question that.
You can move to another RA and this may be an option if you cannot come to an agreement with Momentum — but it is a hassle. It will also depend on whether or not the structure of your existing RA carries any penalties for early surrender. Good options are unit trust RA’s with Allan Gray, Coronation or Investec.
What is important is not to throw the baby out with the bathwater. Don’t short change your retirement because you are unhappy with your adviser.
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