The Financial Coach™ - Managing people & their emotions around money » Financial Planning

Do the Mickey Blue Eyes…

Gregg — Tue, 13 Jul 2010 12:16:01 +0000

I enjoy using lines from movies when talking to clients about investing and financial planning. For example there is the classic line by Jack Nicolson’s character from “A few good men” when he is on the witness stand and being asked about the truth of an investigation to which he replies…”You want the truth? You cant handle the truth”. Sadly we get to use this when telling clients the truth about being able to retire or about their budgetting and the reasons that they are always in debt.

But one of my favourite lines that we often get to use is from the movie “Mickey Blue Eyes” which stars Hugh Grant as the boyfriend whose prospective father-in-law is a gangster boss. Hugh Grant’s character is very proper and speaks with a real hot potato in his mouth. The father wants to introduce him to his gangster friends but cant have him speak with that accent and so he tries to teach him to speak like a mobster…about the only thing he gets right is the line “forget about it” which sounds more like “fur ged abowd did”…and so it is with investments – clients need to learn to do the Mickey Blue Eyes and “forget about it”.

We’ve recently had a few calls from clients about their investment values – this is largely a function of quarterly or half-yearly statements just having gone out combined with the current volatility that is being experienced. Research shows that the more often you look at your investments, the less likely you are to stick to your long term plan/goals as it becomes too easy to focus on the short term volatility.

Unfortunately legislation requires that companies report frequently (how that happened is the subject of another post) and as a result clients are getting statements too often (in my opinion). Combine this with the ability to access the values online and the absolute glut of information by so-called experts it becomes too easy for investors to be distracted from their plans and to make decisions based on the short-term “noise”.

I am not advocating a reckless negligence of your finances but I recommending that if you are an investor (that implies that you are in it for the long haul) and you have an investment plan/strategy in place then you need to learn to do the “Micky Blue Eyes” with your investments and “fur ged abowd did”. Give them time and they will come right!

Fundisa (again)

Gregg — Wed, 19 May 2010 07:12:52 +0000

I have been a huge fan of Fundisa, having written about it often and having encouraged many of my clients to invest in it…however, after initially being a huge fan of the product, I have done some more work on it and as I see it, the big hurdle that Fundisa has is the underlying fund and its potential returns over a 15 year period…so much so, that I am questioning whether or not I can continue to support it.

Here is my thinking…

Following some basic maths, I calculated that the projected return using Fundisa would look something like this (assuming R200 from me + R50 from govt and a 10% per annum return – this also assumes no escalation on the contribution because the bonus is capped on the first R200).

Year	Fundisa
1	3 141
2	6 612
3	10 445
4	14 681
5	19 359
6	24 528
7	30 238
8	36 545
9	43 513
10	51 211
11	59 715
12	69 109
13	79 488
14	90 952
15	103 618
16	117 609
17	133 066
18	150 141
19	169 004
20	189 842

So after 10 years there should be ±R51000 in the account and by 15 years, ±R103600…

However, if I use a simple balanced fund and I put away R200pm, no escalation and I can get a return of 14% pa (which is the historical average return for this sector over 10 years) the results look something like this:

Year	Bal Fund	Fundisa
1	2 560	3 141
2	5 503	6 612
3	8 885	10 445
4	12 772	14 681
5	17 239	19 359
6	22 374	24 528
7	28 275	30 238
8	35 058	36 545
9	42 854	43 513
10	51 814	51 211
11	62 112	59 715
12	73 948	69 109
13	87 552	79 488
14	103 187	90 952
15	121 157	103 618
16	141 811	117 609
17	165 550	133 066
18	192 833	150 141
19	224 192	169 004
20	260 233	189 842

So for the first 9 years or so, Fundisa is a better prospect, however after that, it gets left behind. This is without any escalation on the debit order – which you would normally do and also assumes I use a balanced fund not an equity fund which would be totally appropriate over a 15 year period…

So we have a problem…Given that most people will start saving (via Fundisa) when their kids are very young and will therefore be saving for much more than 15 years, Fundisa is not as good as it appears and anyone using it would be worse off over anything more than a 10 year period…

To my mind, Fundisa needs to do the following to make it a really attractive option:

1. Fundisa needs to have an alternate (more aggressive) fund option such as a balanced or equity fund.

2. Fundisa needs to allow for bonuses on an escalation – this could be capped at 10% per annum.

Even if I escalate my contribution on Fundisa without the bonus increasing, I will still be significantly worse off than escalating the contribution on the balanced fund (without any bonus)…

I have written to ASISA re these concerns and will post their reply if we get one…Fundisa is a great concept, but in my opinion, it was not clearly thought through…

For now, I would hold off on new investments into Fundisa.

Talk about a conflict of interest…

Gregg — Wed, 05 May 2010 12:00:12 +0000

I have written quite a bit about the fiasco that was Ovation Investment Services, a linked investment service provider (LISP) that was put into curatorship as a result of its links with Fidentia. Well that was more than 3 years ago now and still there is no end in sight to the curatorship – at least not according to the curators… “As for the last question posed in your email, at this point in time, it is impossible to guess how long the curatorship will last. The Ovation business is in the process of being wound down, which will significantly reduce costs and therefore reduce the levy required to be deducted from the retention. There is still some litigation currently in process and there is still more litigation, which has not yet commenced. This may take some years before this can be closed out.”

There is talk that curators have been earning in excess of R250000 per month (each) and when you are earning this kind of money and there is no end date to the contract, it poses a massive potential conflict of interest.

To quote Allan Greenblo in the Business Report (Aug 2008)…”Put simply, attorney John Levin and accountant Barend Petersen are paid at hourly professional rates. The curators’ second report to the court on Ovation, for the six months to last August, showed their fees for the period came to R3.45 million, or R287 000 a month for each of them…Even these curators, with the best will in the world, might find it difficult to devote all their attention throughout every working day to Ovation and nothing else. Levin is a consultant in a large law practice and Petersen is a director of several companies, including De Beers, where he owns a slice of its empowerment entity.”

As at July 2009 the total cost of the Ovation Curatorship was more than R15million (that is for just over 2 years work) – it is nigh impossible to get the current figures but based on my calculations, at the rate the fees are being deducted from the “curator’s retention” money market account (±5.8% of each investor’s funds), there is enough money for the curatorship to last at least another ±3.5 years…and this is consistent with the email reply from the curators where they say it may still take some years to finalise…Roll on 2014!

But then again, when you are earning +R250000 per month why would you be in a rush to end the process? And they say that there is no conflict of interest here?

RSA Retail Bonds

Gregg — Mon, 03 May 2010 12:48:55 +0000

Much was made about the RSA Retail Bond when it was launched and about how it would provide a safe and cheap investment with a reasonable returns to the “man-in-the-street”.

Well, I have been trying to buy some of these for a “man-in-the-street” using the RSA Retail Bond website – what a nightmare. There is an application form online but no details where to submit it or how to pay the funds into an account.

So I sent an email to the address on the site – 4 days later and still no reply. So I tried calling the telephone number (which is the number investors are supposed to use if they want values) and it just rings and rings and rings until it goes dead…

I know that you can also buy these at Pick n Pay or via the Post Office but if that is the only way to do it then why have forms on the website? And if no-one is going to reply to emails or answer the phone, why have an email address or telephone number on the site? And if you are not going to reply, how do you expect investors to get information or communicate with you?

This is my first experience of using this investment vehicle for a client and so far, I am not impressed.

I have written to the communications manager at National Treasury – let’s see if we get a reply.

What’s worse?

Gregg — Sat, 17 Apr 2010 11:17:05 +0000

When you finally get to retire from your pension fund or retirement annuity you are faced with a significant (and very important) choice about what kind of annuity you will purchase (with the compulsory portion of your fund).

Simply put, there are 2 choices: a conventional life annuity (through an insurance company) or a “newer” Living Annuity (usually through a unit trust company). The differences are explained below…

Life Annuity: you purchase an annuity from an insurance company and they guarantee to pay you the annuity until your death when the capital “disappears” i.e. it dies with you. You have the following life annuity choices:

A single life annuity where the capital dies with you.
An assured annuity where an insurance policy is purchased to pay out the capital on your death.
A joint life annuity (with your spouse) where the annuity would cease on the death of the second annuitant (and the capital as well). This form of annuity is often structured so that annuity decreases by a third on the death of the first person (this allows for a greater initial income).
Annuity rates change on a weekly basis (according to the prevailing interest rates) and quotes would have to be obtained at the time of purchase.

Note: Most quotes do not automatically show an escalating income and it is essential that there is an escalation on the income taken – you do not want to have the same income in 10+ year’s time!

Living Annuity: you purchase an annuity from a (linked product/UT) company and have to draw an income of at least 2.5% (max 17.5%) from the capital. You take the risk in that the annuity is a function of the capital amount and if the capital is badly invested, or the income draw too high, you could erode your capital. The theory (and practice in my experience) is that as long as you have growth at a greater rate than the income drawn, you will get an ever increasing income. On your death, any remaining capital passes on to your beneficiaries who must use it to provide an income for themselves.

You can move from a living annuity to a life annuity if you ever change your mind, but you can’t move from a life annuity to a living annuity.

Over the years, Living Annuities have received a lot of bad press (sometimes rightly so) usually because the proverbial little old lady has “lost all her money” because the money was inappropriately invested – i.e. it was put into the “wrong” unit trust funds and/or she was taking much too much income and now the capital has been eroded…

To try to combat this, ASISA (Association of Savings and Investments in South Africa) has recently introduced a standard of good practise for Living Annuities. While this might go some way to try to improve the sale and management of living annuities, what amazes me is that they have still not done anything about life insurance companies that continue to sell/market the traditional life annuities that don’t have any inflation linked escalations on the income. In other words, with this kind of life annuity, if you live for 30 years after retiring, you will still be getting the same income as when you first retired. (* see note below)

My question to ASISA (and the FSB) is this: what is worse, a badly invested living annuity or a traditional life annuity without any escalation on the income? Are they not essentially the same thing as in both cases, the investor is much worse off over time? And if so, why has there not been a move to stop the sale of non-escalating life annuities?

Note: *The (only) reason that I can see that companies do this is because the initial income looks so good, especially when compared to an annuity with an escalation on the income. For example on R400000, the fixed annuity rate is ±R3700 pm compared to a±R2200 pm on an escalating annuity. You will be better off on the escalating annuity after 10 years (infl @6%pa).

Appropriate advice?

Gregg — Tue, 13 Apr 2010 13:50:54 +0000

Consider the following – what would you advise the client?

Client A took out an insurance based RA in 2003 (23 year term). She started a debit order of R450 pm (escalating at 10% pa).
The current fund value is R63500
The company claims a return of 11.8% pa on the funds but the maths shows that she has had about 6% per annum.
She now wants to move the RA to a unit trust RA (where there is no contractual obligation and no initial fees). This will be done via a Section 14 transfer and the company can (legally) penalise her 30% of her fund value if she moves.
Her R63500 will then reduce to R47000.
Should she go or should she stay? What is appropriate advice in the situation?

I have not been a fan of moving this kind of policy but a quick look at the maths reveals quite a lot and has got me questioning things:

If she stays where she is and continues to receive 6% per annum for the next 15 years she could have ±R602000.
If she moves, incurs the penalty and invests the R47000 (no fees) but then gets a 10% return for the next 15 years she could have ±R802000.
That’s R200000 more inspite of a 30% penalty!

How could anyone not make a case that it is completely appropriate for the client to incur the penalty and move the funds elsewhere? I am pretty sure that as long as this is well documented and motivated, the FAIS Ombudsman would find no fault with this.

At issue for me are 2 things:

How can the insurance companies continue to claim performances on their portfolios which bear little or no resemblence to the reality on investor’s funds?
How can the industry still actively promote the continued selling of these awful contractual savings products, especially when there are substantially better products available. It is my contention that in years to come there will be a flood of complaints at the FAIS Ombudsman from people who have been sold these contractual RA’s instead of the cheaper and better unit trust alternate. There can be only one reason that they are still sold and that is commission!

Dilbert on Finance

Gregg — Thu, 08 Apr 2010 12:01:13 +0000

The Dilbert cartoonist, Scott Adams, earned a MBA from Berkeley, worked at a bank (got held up twice at gunpoint), and is worth millions. So we presume he knows a thing or two about money. In an interview with the Akron Beacon Journal, Adams says he read about a dozen personal finance books and began working on one himself. However, he found it all boiled down to these nine points and he “couldn’t figure out how to fluff it up.”

1. Make a will.

2. Pay off your credit cards.

3. Get term life insurance if you have a family to support.

4. Fund your 401(k) to the maximum.

5. Fund your IRA to the maximum.

6. Buy a house if you want to live in a house and can afford it.

7. Put six months expenses in a money market account.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

If we adapt these to South Africa they might read something like this:

1. Make a will (you are going to die one day and the consequences of not having one if you have beneficiaries is too great to contemplate).

2. Pay off your debt including your credit cards and home loan.

3. Get life insurance if there is financial risk at your death (i.e. you have a family to support or debts that need to be paid including estate duty).

4. Fund your pension fund to the maximum (that the company allows).

5. Fund your Retirement Annuity to the maximum (if you dont have a pension fund).

6. Buy a house if you want to live in a house and can afford it. I guess the same logic would apply to buying a car - if you can afford it.

7. Put six months expenses in a money market account (once you have paid off your debt).

8. Take whatever money is left over and invest 70% in an equity based unit trust or exchange traded fund (etf) and 30% in a bond fund or 100% into a balanced unit trust fund and never touch it until retirement. As South Africans, probably at least 20-30% of this should be offshore (i.e. out of SA).

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

SARS – just like Alice

Gregg — Fri, 26 Feb 2010 11:36:42 +0000

I had to make a trip to SARS in Cape Town this am to hand in the 6 paper provisional tax returns that I cant get on efiling – this is despite several email and telephonic requests to SARS to get them on e-filing.

As I arrived there I was greeted by the site in the picture below…

this is a many-hour queue (and it has been like this since November last year according to the SARS lady that helped me). Fortunately, I did not have to stand in line as I just needed to hand in docs and get stamped copies.

The whole exercise has got me thinking about SARS and e-filing and just how much like Alice SARS is…

For those of you who dont remember Alice (it is not a reference to the song) but rather to the little girl with the bump in the middle of her forehead. When she was good she was very good but when she was bad she was horrid!

And so it is with SARS and e-filing – when it is good it is excellent, but when it goes wrong it is awful! It is hard to argue or reason with a computer and even more so with a disinterested clerk at the other side of the call-centre telephone line.

Despite this though, e-filing is on the whole still brilliant – if you are not registered to e-file your annual and provisional tax returns then you are welcome to join the queue. Guess I will see you in August when I make my next trip to SARS to submit the few paper returns that I still cant get on e-filing – but at least I wont be waiting in any queues.

Electricity increases…

Gregg — Wed, 24 Feb 2010 12:31:51 +0000

So Eskom’s been granted increases of 24.8%, 25.8% and 25.9% for the next 3 years. Not as big as they wanted but still significant. What does it mean for us as consumers?

There is a beautiful little rule called the “rule of 72″ which states if you want to know how quickly something will double in value/cost you need to divide the number into 72. So based on this, an increase of 25% means that the price of electricity will double just under every 3 years (72/25 = 2.9).

So if you are currently paying R3oo for electricity then this will increase to about R600 in 3 years time (see the tables below for the actual figures). Basically, the cost of electricity will double over the next 3 years and while this may not seem like a lot to you and me right now, the real cost will come through in the related inflationary effects and only time will reveal what that will be.

So as we say in our house when ever you leave a room at night “Eskom thanks you for turning off the lights”.

If it sounds too good to be true…

Gregg — Mon, 15 Feb 2010 06:46:34 +0000

Oh dear…the old adage certainly rings true (yet again). Following on the most recent post about Fundisa, a friend and I were re-doing the maths…seems like I got it totally wrong…apologies for that!

The returns seemed too good to be true – the problem is with my maths and understanding of how the product works…which raises some important issues that need clarifying by ASISA re the product.

I am just making sure of my maths this time and will update the figures as soon as I have them correct.

Bottom line is you wont get nearly close enough to a degree on R200 pm but I still think it is the best product around and still have 1 for each of my kids.

Watch this space for more info as soon as I have checked it (properly).

Gregg