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When it comes to managing our finances few of us can claim to be experts. However, some of us forge ahead and try to manage our money ourselves. Some do it as they believe they know what they’re doing and others do it because of some misguided belief that they are saving themselves money in fees.
However, managing your money solo can be a big undertaking that few of us are prepared for. Here we go through some of the mistakes we can make if we don’t have guidance from a professional financial advisor.
1. Not understanding the cost of death
Tracy Muller, head of fiduciary advice at Nedbank says that passing away without a valid can have devastating long-term implications for loved ones.
There are also other associated costs of death that you may not have thought of. Muller adds: ‘Not understanding the costs associated with death like the cost of dying for example capital gains tax, executor’s fees, estate duty, and funeral expenses and not making provision for these costs, which could result in the executor being forced to sell assets such as your home to cover these costs.’
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2. Choosing the wrong investment solution
Choosing the wrong investment solution can lead to significant costs, taxes and could even set you back on your savings goals. Liberty financial adviser, Sheila-Ann Robey, says there are several ways in which people can get it wrong. These include:
- Investing into products or companies that are not reputable or regulated, which may result in great losses for the investor.
- Not diversifying their portfolio, which runs the risk of losses being suffered if the particular investment is made into only one asset class or into pure equities. ‘The expression “do not put all your eggs in one basket” rings true for any investment portfolio,’ says Robey.
- Having the incorrect investment product. Robey says: ‘For example, most South Africans make use of a savings account at their banking institution, and funds may be better utilized in more tax efficient products for their futures.’
3. Letting your emotions run your investment decisions
Markets can go up as well as down, but when markets are down people tend to panic and not stay the course. ‘Often people are extremely emotional about their own money, which is understandable. But because of this subjectiveness, people tend make impulsive decisions based on short-term feelings rather than sticking to a fact-based financial plan set out by a financial advisor.
‘A big part of financial advice that many people don’t realize, is the behavioural- and emotional coaching that a financial advisor facilitates. If you have a financial plan set out by a financial advisor, stick to it,’ says Ruvan Grobler, head: risk wealth manager, Bovest.
4. You need to understand your Net Replacement Ratio (NRA)
Understanding something as complex as a Net Replacement Ratio can be too complex for most. Francois de Ravel, channel director at Momentum Financial Planning explains: ‘This in simple terms is the pension your life savings will buy you the day you switch from receiving a salary from your employer, and the pension you will earn from your savings from date of retirement.
‘The average individual should target an NRA of 65% of their last annual remuneration. This also takes into account that you have possibly paid for your house, have no obligation to pay for children education and have a moderate expectation for travel and entertainment.’
But few people achieve this NRA target. Or, if they do, draw down more than what they should. Morningstar research titled ‘Alpha, Beta and now Gamma’ as highlighted in this report showed that a retiree’s income would be approximately 31.80% higher if they made changes to their finances with the help of a financial advisor.
De Ravel adds: ‘Based on studies done a few years ago, the average South African has an NRA of 27%. Having a financial adviser and taking action early will certainly help individuals prepare better for retirement.’
Why it’s important to have a financial advisor
According to a recent Nationwide Retirement Institute Survey by Harris Poll in USA among more than 2,000 American adults, 49% say the Covid-19 pandemic made them realise they need help with managing their finances and investments to succeed in the future. Almost one-quarter of Americans (24%) are engaging a financial adviser for the first time ever.
Few are qualified to take on the role of financial advisor themselves. De Ravel points out that this can be true for other professions too. ‘Having a good financial adviser who understands your personal financial needs and own personal circumstances is essential. One would not practice medicine on oneself or try and represent themselves in court. You need a qualified professional who knows their field and will assist you and guide you in your financial wellness journey,’ he says.
