Friday, November 19, 2010

Why you don't need an adviser

In my previous post, I had a mini-rant against financial advisers who charge high fees without offering any value added services. My view is that you do not need to pay for a financial adviser if you are willing to do a small amount of homework, do a small amount of work and accept responsibility for your decisions.

Financial advisers cost money. Most charge either a percentage of assets under management or get a commission from anything you invest on or both. There are usually a few other costs thrown in. So what do they offer in exchange for these services? The list may include:

1. basic investment advice: for the most part you don't need this. Even if you want to spend as little time as possible on your investments, reading a few books like The Boogleheads Guide to Investing will be enough to tell you to (i) keep the costs low (ii) go with an equity/bond/cash allocation that suits your age profile, risk tolerance etc. (iii) avoid chasing performance and so on. You don't need an adviser to tell you to do this

2. selecting investments that will outperform: most advisers fail to beat an appropriate benchmark before fees. Even fewer do it after their fees. Past out performance is not a basis for determining future performance. Predicting which advisers will "outperform" is a guessing game with the odds firmly stacked against you. If you want to try and do better than a basic investment investment plan (see #1 above), you need to accept (i) that more work will be involved (ii) the odds are stacked against you (iii) you have a better chance of outperforming if you aren't handicapped by the adviser's fees

3. access to investment products: in the bad old days, there were no ETFs listed in HK, there were no low cost index funds available to the public and it was an exercise in futility trying to access products like Vanguard. Your options were largely (i) buy shares directly or (ii) pay a hefty front end load and a hefty management fee to buy into actively managed funds. Front end loads of up to 5.75% and MERs in excess of 3% pa were not uncommon. And people wondered why the fund penetration rate in Hong Kong was so low. That started to change in November 1999 with the listing of the HK Tracker fund - the first ETF to be listed in Hong Kong. Now there is a wide range of ETFs listed on the HKSE. You pay no front end load on these (only brokerage and other transaction costs which are quite low) and while the typical MER is higher than Vanguard it is still only a fraction of what you would pay for an actively managed fund. It is also easy enough to buy ETFs listed on overseas exchanges if there is something you want but can't find locally. You don't need an adviser to access these - only a broker and a willingness to read the offering document and watch the bid ask spread before you buy

4. domestic tax planning: if your only place of domicile is Hong Kong, you don't need tax advice to make your investments. Hong Kong's tax laws are that simple. Unless you are investing as part of a business, you do not pay taxes on capital gains, you do not pay taxes on dividends and you do not pay tax on interest. There is no estate duty under Hong Kong law. Stamp duties and a few other levies are payable on some investments, but unless you are dealing with very large transactions these cannot be avoided. I see no scope for a financial adviser to add any value here

5. international tax planning: if you are tax resident in another jurisdiction, have assets in another jurisdiction or are a citizen of another jurisdiction, you will probably need to have at least a basic understanding of the tax implications. For most countries the three main issues which need to be considered are (i) withholding taxes on income (ii) application of estate taxes and (iii) liability to pay income taxes. The first two can usually be found with relatively little effort using the Internet. The latter issue will usually require more work and may require the assistance of a professional tax adviser. As a general proposition, if the tax situation is sufficiently complicated that you need an adviser then you need a tax adviser and it would be risky to rely on a financial adviser

6. estate planning: there is no estate duty in Hong Kong. Assets held overseas may or may not be caught in an overseas estate tax regime. There are some legal restrictions on who you can and cannot leave your money to. Depending on circumstances, you may want or need to set up a trust (e.g. to benefit infant children). Advice on these areas is best given by a lawyer (not a financial adviser)

7. insurance: work out how much you need and shop around for the best deal. This applies to term life insurance, medical insurance and home and contents insurance. You don't need a financial adviser to do this for you

8. budgeting: for those having trouble saving and who can't be bothered to do a budget, the most basic solution is to set up an automatic investment plan. Many banks will offer monthly stock purchase plans which include ETFs. Decide how much to invest each month, which ETFs you want to buy and take 30 minutes to go to the bank and set it up. Do what you want with whatever is left in the bank account after those payments. It's not the best financial plan but it's much better than not saving at all. Anyone who can't be bothered to do even this probably does deserve to fall into the clutches of a financial adviser

Quite frankly, I fail to understand why any high cost financial advisers are still in business.

As a side note, I have yet to find a financial adviser in Hong Kong who only charges by the hour (or flat fee).

1 comment:

Online Tax Advice said...

I agree with you that with the small piece of home work by your own self there can be many more solutions that you can handle your own.