Last Updated on July 24, 2022 by The MediFi Guy
Many financial advisors are linked to particular companies and are authorized to sell the products of that company. Every time they successfully sell the product, they receive a commission from the sale. That’s why in many cases it’s free to meet and talk to a financial advisor. They get paid by the company once they successfully sell you the product. This incentivizes the FA to push a whole host of products onto you that may have little to no benefit to you given your circumstances, and at worst may actively harm your financial wellbeing, in order to maximize commissions for themselves.
Chief amongst this type of commission-generating product is Whole Life Insurance – which generates some of the highest commissions. You will notice that many FAs will put immense pressure on you to purchase whole life insurance even in the case where you are unmarried with no dependents or debt ( some of the few situations where it may be of benefit to you) which in the long run will unnecessarily cost you millions of Rands in the form of high premiums and the opportunity cost of said premiums. Even in the case that you are married/have dependents/debts, you may still find that limited-term life insurance is the more economically sound option, but since it offers a lower commission to the FA they are unlikely to present you with that option.
Such incentives are also present when it comes to the choice of investment products offered.
FA’s will attempt to sign you onto high-fee actively managed investment products instead of passively managed index-tracking products. For the simple reason that they receive a higher fee for the active management of the fund. A guaranteed percentage-based fee that they receive regardless of how much work they do, the investment growth or losses, or the ups and downs of the market. They always get their percentage. A percentage that compounds along with your investment.
So while the “small” 1% fee may have initially amounted to as little as R1 per month when you were a first-year intern, by the time you’re 40 years old you could be paying as much as R 10 000 per month for ostensibly the exact same services.
If this seems a bit strange to you it should because this is how many people unknowingly end up giving away close to 40% of their entire investment gains throughout their lifetimes. All of which can be avoided if you simply take a few months to learn how to manage your own finances.
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