Category Archives: Financial Planning

Old Mutual Invest Flexible Plan – stay far away!

Dear Old Mutual

If you are going to send me spam emails about your products then I have no issue reviewing and rating them! Please stop sending me unsolicited emails about your products! I dont rate them and will not use or recommend them.

The Financial Coach

The most recent series of spam is a repeated email from savemoney.co.za , an Old Mutual sponsored site that is offering a flexible savings plan for “only R350 per month”.

It took a bit of digging on their site to find the pertinent informationand on the face of it, R350 per month seems like a reasonable and accessible offer…until you dig deeper into the fees section. The following is taken directly from their site

An administration charge of 0.86% per year of your fund value will be charged. This will be deducted at the end of every month. If you do not have a regular investment set up on any of your Old Mutual Invest Plans (i.e. Tax Free or Flexible Plan/s), or if your regular investment is cancelled, the administration charge will be a minimum of R22.80 per month. The administration charge can be reduced or refunded with our Investment Maximisers.

Let’s look at a typical investor who takes out this flexible investment at R350pm and pays for 2 years (24 months) before life takes over and they need to stop the debit order. Ignoring escalations and growth etc, they would have invested R8400 over the 24 months and would have paid a reasonable annual admin fee of 0.86% pa. But then it all goes pear-shaped because once they stop the debit order, this fee will increase to R22.80 per month, or R273.60 per year or 3.36% per annum (that’s before the underlying fund fees)!

Yes, the longer you save the lower the admin fee will be but even if you stop the debit order after 5 years you will be paying an admin fee of around 1.3% per year.

No, there are better ways to do this…consider a unit trust tracker fund with someone like Gryphon where for R200 pm you can invest and pay nothing other than the fund fee of 0.23% per annum!

 

The great South African funeral cover rip-off!

Can someone explain to me why funeral insurance is so expensive? It has got to be one of the biggest rip-offs and forms of institutionalised abuse of South Africans. I did some shopping around online and could find the following quotes for R20000 funeral cover:

Simply – R81pm (but you also have to buy other forms of cover so the minimum premium is closer to R150 pm and includes R50k life cover). Hollard – R104pm, Dotsure – R73pm, Burial Assist – R100, Budget – R102, First for Women – R104, 1lifedirect – R123

Now compare the cost of a funeral policy to a properly underwritten life policy. Using the same information that I used to get the funeral policy quotes, I was able to get a quote for R300000 life cover (which includes funeral cover pay-out of R40k) for under R100pm.

It is clearly very lucrative cover as there are at least 30 providers in SA that I could find…and the vast majority of South Africans are being seriously ripped off by the funeral insurance industry – it is time that the Financial Services Board looked into this…

UT or share portfolio

There are many with strong opinions about the merits of a share portfolio versus a unit trust portfolio. Here’s another one (strong opinion) in favour of a unit trust portfolio.

One of the aims of investing surely has to be to accumulate wealth which will enable you to live “comfortably” at a later stage in life (usually referred to as retirement). In this regard, it is my opinion that a unit trust portfolio trumps a share portfolio, every time!

A retiree’s primary aim is usually security of income and this is where a share portfolio falls short; it is very difficult to draw a regular income from a share portfolio. Investors usually have to depend on dividends which are irregular, sometimes unreliable and the long-term dividend yield is less than 3% (±2.8%). An investor with a share portfolio of R10m would therefore expect to receive less than R300k pa from the dividend yield. Alternately they would need to sell shares (CGT) and this is also tricky as many investors are emotionally tied to their investments.

The same amount in a unit trust portfolio could reasonably generate a sustainable (and close to tax-free) income of ±R500k pa (5%). This would be done by selling units on a monthly basis to provide the income – essentially rand-cost-averaging on the way out. Sure, this is a capital gains tax event but in most cases, this would be very tax efficient (if not completely tax-free).  Most unit trust investors also have no idea of the underlying shares that they hold and the emotional attachment to “granny’s shares” is simply not there.

Emotional beings

Let’s face it, we’re emotional beings (thankfully). We laugh at comedy and cry at tragedy. We give money more easily to beggars on cold and rainy days, or to mothers with young children than to single men on the side of the road. We buy things on sale (with money we don’t have) even though we don’t need them and yet we dump our investments when the markets go on sale.

We buy high and sell low and not the other way around. We resist drafting our wills for fear that it increases the reality of our deaths. We fool ourselves into believing that over indebtedness is for poor people and that our debt is just a temporary phase – one day we’ll win the lotto. Things are going to get better. We promise ourselves that we’ll get around to saving and when we do, we throw money at last year’s winners.
There’s a great scene in the movie, “A few good men” where Jack Nicolson’s character blurts out the famous line in response to the questioning attorney “The truth, you want the truth? You can’t handle the truth!”
The truth about human beings is that we’re emotional beings. And this is especially true when it comes to our money.

 

Financial planning profession in SA – not yet, not even close!

For far too long now we have been talking about financial planning becoming a profession in SA…sadly, we are not even close yet because it still remains an industry dominated by the need to sell products and by the suppliers of those products.

Consider the following:  a medical professional (doctor) requests information (a report) from another medical professional about a patient. It is supplied – there is no need to send a letter of consent or something similar justifying why the doctor requesting the information is entitled to it – it is implicit in the profession that the requester is entitled to the information and it is given! Not so in the financial planning profession…if we are not the “broker on record”, it is implicit in our “profession” that we are not entitled to the information and that when we request it we are therefore trying to obtain it illegally.

Or imagine going to see a new doctor/dentist/lawyer/accountant for the first time and before you get going they pull out a multi-page document that they need to take you through to first explain to you why they can be your doctor/dentist/lawyer/accountant. It’s insane – their ability to act is implicit in their title which is a function of their qualification. Not so in the financial planning “profession” – we have to take clients through a disclosure document – who made this stuff up?

I am tired of the talk of a profession and tired of being treated with suspicion by every single insurance company when I request client information. I am tired of being treated like a criminal trying to obtain information illegally. I am a professional and it should be implicit that any information I request is done so with all the necessary “permissions” in order.

Who are you, Liberty, Sanlam, Old Mutual, Momentum, Discovery et al to decide that I am not entitled to information? Or that the letter of consent supplied is out of date or that you won’t act on the letter of consent and will only send the information directly to the client? Who are you to decide that despite the fact that I submitted the death claim that you will not tell me how much was paid or when it was paid because I am not the “broker on record”? Who are you to reject a General power of attorney just because you don’t like it?

Imagine if a pharmaceutical company refused to service a doctor because he or she did not move enough of its drugs in any given year? You are a bunch of dinosaurs and it is time to change your model – you are ripe for disruption! The sales model is obsolete and in complete contradiction with a financial planning profession.

Or consider the following:

If I set up a service that provides factual advice only and clients pay me directly – no products are sold nor intermediary service provided then I seem to fall outside of the scope of the FAIS Act. Or if I just do a financial plan for a client (which contains factual advice only) then I also appear to fall outside of FAIS…FAIS only applies where there is advice related to product and/or intermediary service…How is it possible that we have significant legislation such as the FAIS Act and it does not cover the very profession we are seeking to establish – it seems to only apply when there is a product involved?

Yes, I am having a rant but it is time that the Financial Planning Institute stood up for its professional members and stopped protecting the interests of the financial service providers first! It is time that the FPI insisted that for its corporate members, that when they deal with a CFP® then there is no need to treat them with suspicion – information requested should be supplied directly to the CFP® without delay!

It is also time that the FSB made a ruling that anyone who wants to do financial planning needs to be a Certified Financial Planner®*. Imagine if you could practice as a doctor/dentist/lawyer etc with a matric only? The industry only has its self to blame for the suspicion with which we are treated by the public at large. It is time to stop selling products and time to start doing financial planning first and properly. Products, if needed, only come at the very end of the process.

*yes I know that there are some very good people out there who have been in the industry for many many years who are not CFP’s – this criteria should be a minimum requirement for any new entrants!

SARS – touching lives negatively

Just received a revised assessment from SARS for a client for the 2014 tax year, disallowing her retirement annuity contribution and thus resulting in a revised assessment and penalties!!!

On what planet does SARS get to disallow an RA contribution? Do they now get to make up their own rules? Are they so desperate for money that they are now issuing frivolous penalty assessments to scare clients into paying to improve SARS’ cash-flow?

This is insane and amounts to victimization by SARS. It’s definitely not in keeping with SARS’ charter of treating tax payers fairly.

Yes, we will lodge a dispute and it will be over-turned but this is such a waste of time and money and just further serves to erode the public trust in SARS that is already in free-fall.

Come on SARS, you can do better – you are touching lives negatively

Suck-session Planning

I recently tried to make an appointment to see my doctor for my annual check-up only to be informed that he has left to “take a sabbatical”. Bottom line is that he is tired and has had enough and is going to do something else.

I’m disappointed, but I guess I’ll just find another doctor. It will take a bit of time, I’ll ask around for some recommendations and will probably go and see one or two before making my choice. Just the same as I would do if my accountant, dentist, lawyer or any other professional retired/died/left the business. That’s the way it works…

So, what’s the FSB’s obsession with succession planning in the financial services industry? Why the need for a succession plan (as part of legislation)* which just adds to the cost of running a business and ultimately increases the cost of advice to clients?

If I leave/retire/die my clients can find a new financial planner. There is no financial risk to the clients and they won’t lose any money – they’ll just need to find another financial planner. That’s the way it works in any profession, except ours…but I guess we’re not yet a profession as much as we like to pretend that selling products is financial planning.

 

*a succession plan is good business practice, but to force it as part of legislation seems crazy to me.

 

At Liberty to do what they like?

It seems that Liberty Life have decided that they can do what they like and ignore written instructions from their clients. They appear to have adopted a policy of sending policy information requested by a non-servicing advisor, on behalf of a client and with the client’s written consent, to the client and not to the advisor who requests it.

This is NOT what the client has requested? How can they get away with this?

It also makes the work of the financial planner so much more difficult to do (and adds to the cost of servicing the client). I’m prepared to venture that this is not in the spirit of TCF!
If Liberty are worried about advisors obtaining information fraudulently then perhaps they need to look at the quality of the average advisor with whom they are doing business and not upset their existing client base either.
Rather than retaining the business, this kind of attitude goes a long way in encouraging clients and advisors to move business away from Liberty Life.

 

 

 

The watched pot…

There’s an old saying about the watched pot never boiling which simply means that if you wait anxiously for something to happen, it seems like it takes forever.
When one considers the markets over the past few years, it has behaved much like the proverbial pot and anyone desperately watching their funds, waiting for them to go up would most likely have grown despondent by now, thinking that markets will never go up again.

And then, all of a sudden, and almost while no one was watching, the ALSI is up over 6% for the month of July*. If you’ve been sitting in cash on the side lines waiting for the “pot to boil” before you climb in, you’ve missed this.
Once again this reinforces the wisdom that you cant time the markets and that ultimately it’s time in the markets that counts.

*yes, it is only back where it was about 2 years ago…but that’s not the point

 

 

 

Your greatest financial risk is not financial; it is physics!

Over the years as we have chatted to clients about financial planning we have settled down to the “big 5” risks that everyone faces and the resulting financial (and emotional) risks that they present to the person and their family. Simply put, these are (in no order of importance):

  • Dying too soon
  • Living too long
  • Disability
  • Funds for emergencies, and
  • Debt

A lot of the work that we have done with clients has been around identifying these potential risks and then implementing strategies to address them.

However, I have recently become convinced that there is a much greater risk that people face but that is hardly ever spoken about. I also think that this risk is likely to increase as the process of disintermediation increases.

Rightly or wrongly, Albert Einstein is often credited with saying that compound interest is the greatest force in the universe (or the 8th wonder of the world, or some other version thereof). And indeed, compounding is a significant force but I have become convinced that another scientist, Sir Isaac Newton, had much more to add to the debate.

Indeed, the “biggest” force that haunts people is to be found in Newton’s First Law of motion (you should have paid attention during science lessons). Newton One states that “a body will continue in its present state of rest (or motion) unless acted on by an UNBALANCED external force.” This is known as the rule of Inertia…or the tendency to do nothing or remain unchanged.

Simply put, we are all subject to Inertia and will continue to do the same things over and over unless we come into contact with an unbalanced external force. And that’s why people have personal trainers to hold them accountable to exercise and get them fit, that’s why we have seen an increase in the demand for life coaches and it is also the role of the financial planner.

Don’t get me wrong, I have no issue with people doing their own financial planning and/or investing. The problem is that they don’t! How else do you explain the father of 2 young kids who has no will 10 years after they were born, or the divorcee who has not changed beneficiaries on her life policy (or updated her will) or the employee who has not yet started saving, or the entrepreneur who has never submitted a tax return? I could go on…

The cold hard truth is that we are often our own worst enemies when it comes to things financial and it is my strong opinion that we all need an unbalanced external force in our lives to get us out of our inertia. As long as Newton’s First Law of motion holds, there will always be work for financial planners and for that I am very grateful! We have an incredible privilege as we help clients identify and manage their financial risks and then keep them accountable to address them.