About a month before our client died we sat with him and his wife to work through all his insurances (he had been diagnosed with terminal cancer). We did not do a lot of his old policies but managed to get a printout on his policies from the insurance company which showed that there was a death value of R233000 on one of the RA’s (the fund value was less as it still had a few years to run).

After his death we submitted the claim on behalf of his wife and received a recognition of transfer for an amount of R164000. We queried this with the company and were given the usual nonsense about the actuaries having calculated the values etc. We were not happy with this an insisted on a detailed explanation for the discrepancy in the values (this was in the form of at least 5 phone calls as well as 3 written requests).

Good news is that we have just received a revised recognition of transfer with a new amount of R247000 – that’s 50% more than the first one!

Still no explanation of how the value was calculated and no apology. I think we will take the money and run and then follow up later with a further request for a detailed explanation.

Now, imagine that this was a direct client with no advisor fighting for her – the insurance company concerned would probably just pocketed the extra money and the client would have been none the wiser!

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• 23% of US homeowners are in negative equity (they owe more on their house than their house is worth)
• At the current growth rate, India will have more people than China by 2030
• 99% of the world’s fastest growing cities are in Asia
• There are 65 Chinese cities with more than 1million people (only 2 in SA apparently)
• 30% of the world’s children live in India
• More than 1.6 billion Cokes are consumed each day!

And then from the SA Savings Institute-  72 percent of working South Africans earn less than R12 500 a month

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What amazes me is how easily people buy the marketing nonsense and how “loyal” people appear to be to their bank. The reality is that the bank does not care about your loyalty – they are relying on you continuing to believe that changing bank accounts is about the most difficult thing that you could do…and in some respect, thanks to Isaac Newton’s observation that a body will continue in its state or rest or motion unless acted on by an unbalaced external force, it is.

So here I am – that unbalanced external force telling you to get off your butt and stop wasting money. By changing bank accounts I have saved over R1560 in the past year…that is more than R15000 over a 10 year period…that’s a year of school fees at most primary schools…

You need to decide on the new bank (see below for a comparison) and then print out your most recent bank statement and make a list of all of the debit orders that come off. Then you need to write a standard letter that you can send to them all and cut and paste the relevent info for each company…and voila – it is done!

I kept my old account open for 1 month just to make sure that it all worked and guess what? It did! The only thing I missed was an annual debit – but it was not serious and was easily fixed.

You could also use the exercise as an opportunity to go over all your debit orders to make sure that you really still need them all – you could well be wasting more money than you think. And as they say in the classics…”look after the cents and the rands will take care of themselves…”

I’ve know that I have moved forward…just hope I dont need to move too soon again!

Basic banking fee comparison (this is for a fixed-fee offering on a current account and is based on information currently on the bank website):

• Capitec – R4.50 but you pay per transaction after that – very competitive!
• Nedbank Savvy account – R69 (have not paid a cent more than this each month for the past 12 months).
• FNB – Smart Cheque – R69
• ABSA – Silver Cheque account – R99
• Std Bank Classic current account – R95
• The last 3 accounts do not appear to be “unlimited” transactions and you could pay more – read the fine print and ask questions.

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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.

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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:

1. A single life annuity where the capital dies with you.
2. An assured annuity where an insurance policy is purchased to pay out the capital on your death.
3. 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).
4. 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).

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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.”

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One of the interesting things from the workshop was to learn that Financial Planning only started as a career in 1969 when 12 people got together to establish the profession in the USA. 4 years later there were 42 graduates through the CFP® programme. SA joined the CFP® board in 1997 when the old Institute of Life and Pensions Advisors (ILPA) were amalgamated into the Financial Planning Institute and the first CFP’s graduated in SA in 1999.

The FPI is the custodian of the CFP® mark in South Africa and there are about 3500 CFP’s in SA (out of more than 100000 financial “advisors”). We are also one of 24 member countries of the Financial Planning Standards Board – the international body that oversees and sets financial planning standards. There are also more than 125000 CFP’s worldwide and Financial Planning is currently the 2nd fastest growing profession (although I’m not sure what puts us into 2nd place).

So when you engage with a CFP® remember that you are dealing with someone who is part of a global standards body and that all CFP’s need to have and maintain appropriate levels of skills and ethics.

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For me the issue has to do with insurance companies still contractually binding people to long term contracts in this day and age. W e all know that anyone who enters into any contract is bound by the conditions of that contract and if you alter or break the contract there are penalties. This is the case with contractual insurance products such as life insurance RA’s. This is just the way that it is…However, given that the average person will change jobs many times in a working career (some stats say as many as 6 times) there is no way that any client should or could commit to binding themselves to such a contract – it is doomed to fail.

Consider the following:

Mrs Client starts working for Company A that has no pension fund and she is sold a life RA (not the better unit trust option). A year or 2 later she leaves the company and goes to Company B and they have a pension fund so she is “forced” to stop the RA because she can no longer afford the premium and there is also no longer any tax incentive to continue paying. As a result of this she will incur a penalty of up to 30% on the value of her funds.

Or on a slightly different tack, she has an RA through an insurance company and her employer decides to implement a pension scheme with compulsory membership and again she is forced to stop her RA because she cant afford to contribute to both funds. As a result she will lose up to 30% of the value of her RA. These penalties are as per the Statement of Intent (SOI) that was signed between the Minister of Finance and the Life Insurance Industry some years back.

This is just wrong! And yet insurance companies still insist on selling these products and still insist on penalising clients when they break the contract (I am still trying to get statistics from an insurance company as to how many RA contracts actually make it through the entire term but have not been able to get these yet).

As a result of the penalties that an investor in a life insurance RA is likely to incur, could he/she not make a case for “inappropriate advice” against any advisor who puts him/her into a life RA? Especially when the advisor knows full well that the client is extremely unlikely to be able to stick to the contract for the entire term and as a result will incur penalties of up to 30% each time they need to alter the contract.

If the life insurance RA was the only option then there may be some leniency that could be applied, but there is a perfectly good (if not superior) alternate product in the form of the unit trust RA where there will never ever be any kind of penalty because there is no contractual obligation to continue paying? And more importantly, the fee structure on them is completely different – there is no accounting for future earnings in today’s income statement.

Perhaps the time is coming when the FAIS Ombudsman could well find the following case of “inappropriate advice” on his desk…

“Mr Broker, you put me into a contractual product, knowing full well that I would probably not be able to adhere to the terms of the contract and that at some stage in the future I would have to alter the premium. As a result of that I will incur penalties…and all along you could have put me into a unit trust option where there are never ever any penalties…surely that was inappropriate advice”?

Perhaps the same approach will be used when the National Savings Scheme is finally introduced and many people who have RA’s will be forced to stop these as they will be obliged to contribute to the NSS and will not be able to afford to do both the RA and the NSS. At this point, anyone in an insurance RA will incur penalties of up to 30%. My thinking is that either the insurers will be legislatively forced to waive these penalties or else there could well be more than a few cases for “inappropriate advice” on the FAIS Ombudsman’s desk against advisors for putting clients into life RAs when they knew full well that the NSS was coming and that there would be penalties when the contracts were altered, especially when they could have put the client into a non-contractual (unit trust) RA.

How about it? There must be some good legal minds out there? Could a client make a case of inappropriate advice against an advisor for putting them into a life insurance RA where they have incurred penalties when there was a better product with no penalties (albeit with much lower commission) available?

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Well so much for professing to be a financial planner – he just compared himself to a car salesman! Surely there are better comparisons for someone claiming to be a professional?

I have a friend who has an excellent (in my opinion) definition of the word “free”. He says that free means “positioned to secure good faith to sell you something at a later stage.” Financial planning is not about selling things to people – it should never be for “free”. There are too many big financial services companies and individuals with hidden agendas that are trying to disguise product selling as financial planning.

There is very seldom anything for “free” – yes, there are times when we might waive the initial consultation fee but rather than comparing himself to a car salesman, would it not be more appropriate to compare himself to a doctor? You make an appointment (with a well qualified person) and you leave with a diagnosis (you might want a 2nd opinion for which you will pay), a prescription and an invoice. You are then free to purchase the medication anywhere you choose. There was nothing for” free” and there was no feeling of “it was for free but I think I’ve just been had!”

In its raw form, financial planning might never ever even involve products. It is about identifying financial risks – not about disguising the sales process.

So yes, be careful how you choose a financial planner – find out if he/she really is a financial planner or a disguised product salesman. And while there is nothing wrong with selling products and there are in fact some really good salespeople, it is not financial planning! So dont be fooled – there is seldom anything for free!

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1. Investing takes time – equity markets can be extremely volatile – remember the past year? They can and do move rapidly in the short term (up and down) and so, if you don’t have time, you cant afford to invest into equities solely (diversify).
2. You cant time the markets – if you moved to cash a while back (after the market fell) and are still sitting there – sorry for you! You have missed  the best part of the rally. You are either in or out – you cant be both and you cant time it right either!
3. Learn to ignore the noise around you – have a plan (know why you are doing what you are doing) and stick to it. Don’t be swayed by the noise.
4. Cash is not necessarily a “safe” or “low risk” option – it hardly ever beats inflation over time. And as an investor, inflation is your biggest enemy.
5. There are probably still some significant risks in the financial system – share prices have run hard in anticipation of earnings…there are plenty of people trying hard to talk the market up but if there are earnings disappointments then expect to see some more down days…
6. Inflation risk is still on the upside – big time – just imagine what the increase in electricity price increases is going to do to inflation (we are not alone in this – the UK is facing similar problems). Tradtionally high inflation is not good for shares…but it could still be a while before we see any siginificant increases in inflation.

Bottom line is this – have a plan and stick to it! If necessary find a good financial planner/coach who will guide you through this and coach you to stay the course.

The Financial Coach™

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