Category Archives: Investment Planning

Memories

On a recent car trip, my daughter insisted on playing some of her music – 2 of the songs on the “hit list” were “Bear necessities” from the Jungle Book and “Hakuna Matata” from The Lion King. When the music finished there was a follow up question from her to me – “what’s your favourite Disney movie, dad?”

I thought about it and decided that “Disney” could now include Pixar and went with “The Incredibles” followed by “Monsters Inc”. And then I asked her. “Jungle book, followed by Lion King” was her reply. Her younger brother concurred.
As I pondered this I realised I had just witnessed a case of what behavioural economists call “anchoring” in practice. In short, anchoring can be described as the human behaviour trait that gives more importance to recent history than to things that happened long ago. This tends to skew our view of things…we all do it and we all need to be aware of it, especially when it comes to our money. For a more precise definition read the bit below by the people that first described the concept, Nobel prize winners Amos Tversky and Daniel Kahneman.

 

“Anchoring is a particular form of priming effect whereby initial exposure to a number serves as a reference point and influences subsequent judgments about value. The process usually occurs without our awareness (Tversky & Kahneman, 1974), and sometimes it occurs when people’s price perceptions are influenced by reference points. For example, the price of the first house shown to us by an estate agent may serve as an anchor and influence perceptions of houses subsequently presented to us (as relatively cheap or expensive). These effects have also been shown in consumer behavior whereby not only explicit slogans to buy more (e.g. “Buy 18 Snickers bars for your freezer”), but also purchase quantity limits (e.g. “limit of 12 per person”) or ‘expansion anchors’ (e.g. “101 uses!”) can increase purchase quantities (Wansink, Kent, & Hoch, 1998).” https://www.behavioraleconomics.com/mini-encyclopedia-of-be/anchoring-heuristic/

 

Normal service has resumed

I found myself facing a crisis recently. I have always promised clients that I would only invest their funds where I myself am prepared to invest for myself and my family and yet with the recent shenanigans from our president who saw fit to remove the finance minister, I found myself at a cross roads. From my very simplistic point of view, South Africa is facing one of two future outcomes:

  • We are either at the point where Zimbabwe was 20-25 years ago, or
  • We are facing a short-to-medium term of economic pain (5+ years) from which we will ultimately emerge.

The crisis for me is that if I believe that we are a future Zimbabwe then it requires action now, 10 years’ time will be too late. At the very least it would require financial emigration which would involve selling our house, taking the capital offshore and then renting. On top of that it would mean no longer contributing to retirement funds in SA. That’s a radical departure and advice of that nature could be considered reckless at the least. But it would be what I am doing and it would require telling my clients about the path of action that I have taken.

On the other hand, if I believe that our crisis is going to be short-to-medium term but that we will ultimately emerge then we can stay in SA, keep the house and still continue to make use of retirement funds here. That does not mean to say that regulations around retirement funds wont change (think prescribed assets and the withdrawing of asset swap facilities). If that happens then we adjust at that stage, but for now we continue. In addition to continuing to contribute to retirement funds in SA, it makes sense (from more than a fear point of view) to continue to invest discretionary funds outside of SA via the annual discretionary allowance. It’s a big wide world out there and if you sat on the moon and looked at the earth as an investment destination, you would not put 99% of your money into the very small economy at the tip of Africa. Diversify!

So with these two scenarios in mind I went looking for some answers. The problem is that there are few people who you can ask and who will give an honest answer. There are too many conflicts of interest. Pension fund managers’ incomes are a function of people investing in their products, so too for asset managers and there are few economists who are prepared to be quoted as saying that SA is a complete basket case and that it’s time to get out before it is too late. Yes, there are some “journalists” and commentators who have written about the doom filled future but their articles are too sensationalist, emotive and lacking in substance for me.

I finally managed to have a few off the record chats with some asset managers and strategists and last week I resolved the issue for myself.

I truly believe that we will emerge from the crisis that we are facing as a country. It’s going to be tough in the short term, even if Zuma is removed. There is still a lot that is rotten in Government and our State-Owned Enterprises and this is not going to change overnight. We are also facing an increasingly divided society with yet another generation of poorly educated youth. These are significant challenges that face us.

But there are brave, principled people who are finally starting to take a stand against the blatant and unashamed looting of state resources and our country. These are the future leaders of this beautiful land and this is one of the reasons that I have hope and am not selling my house. I will contribute to my pension fund this year and I will continue to diversify any surplus investments offshore. I also commit myself to building a fairer, less divided country for all. For now, “normal” service has resumed.

One page financial plan

I have just finished reading this excellent book by Carl Richards…

The One-page Financial Plan – some notes from the book:

“The best financial plan has nothing to do with what the markets are doing, nothing to do with what your real estate agent is telling you, nothing to do with the hot stock your brother-in-law told you about. It has everything to do with what’s most important to you.” p7

• know why you are planning
• time spent + money spent = what you really value.
• it’s about making best guesses (and not obsessing about getting things exactly right) – a lot can happen between now and the future!
• It’s about giving yourself more time!
• Things you have to invest: money, time, energy and skills – all NB to consider
• Most people don’t have a clear understanding of their current financial situation. Budgeting = awareness
• budgeting & flossing: both insanely important, super simple, & for many of us, nonstarters
• save as much as you can
• spend less than you earn
• don’t lose money
• life insurance plays 1 role: it covers economic loss. It is an expense, not an investment…it’s about the risks you are ok with and the risks you’d like someone else to take care of. Economic need, not emotional loss.
• Paying off debt = investment with guaranteed return
• Speculation and intuition are not investment strategies
• Invest and then behave for a really long time

You should be ashamed of yourselves, Liberty Life

I just came across a client who has been sold a decreasing life annuity by someone representing Liberty Life. Yes, I know that there is no such thing (officially) as a decreasing life annuity (no one would buy it if there was) but this is effectively what a non-escalating life annuity is. You have condemned the client to future poverty!

While the initial income may look more attractive, in 20 years time (the guarantee period on the annuity for a 65 year old with stage 3 cancer and no financial dependents?) she will be getting an income which will be less than 1/2 of what she should be getting if there was an inflation linked escalation.

This is the kind of product and advice that gives our industry a bad name. If the insurance companies and ASISA wont act then perhaps it is time that the regulators banned this kind of product.

Is there anyone out there at Old Mutual, Liberty and Sanlam?

One of the frequent tasks we face for clients is something known as a Section 14 transfer – this involves moving a retirement annuity (or preservation fund) from one company to another. Typically this would be from an insurance company to a unit trust company. Reasons for clients wanting to do this are many, such as:

  • No/limited transparency from the insurance companies with respect to costs and performance of their investments. Many investors suspect that the fees are high and performance is poor but they are horrified when they find out the actual figures. The high fees are not limited to the “old generation” RA’s – there are many “new generation” products with very high annual fees! Investors should stay away from any investment via an insurance company…there are better options elsewhere – let the insurers focus on insurance!
  • No/limited flexibility when it comes to making changes to the contribution amount or term and did we mention the penalties that are frequently applied to anyone wanting to move their funds? This is a legacy to an archaic pricing model. People’s circumstances change, often through no fault of theirs and to penalise someone who can no longer afford to pay a premium as a result of being retrenched or being forced to join a work pension fund is immoral and a bad business practice. There are better ways to do business!

So, to any of the insurers out there, here is the message from consumers. There is something fundamentally wrong with the business model when the S14 dept is “understaffed and backlogged” to quote one of the employees. The longer you take to action S14 transfers (180 days is the “legal max and many of you are abusing this) the more the reputation of your company is damaged. This applies to all the insurers – you may think you are keeping the funds for longer and making it difficult for people to transfer and that as a result they might eventually give up in frustration, but the reality is that in the process you are losing clients forever.

Address the issues that are leading to so many clients wanting to move – and it’s not advisors chasing commissions! Rather, it is a fatally flawed business model that is constantly dependent on new business to survive.

Lies we tell ourselves

I recently had a conversation with someone who told me that when she was on her way (walking) to a very important meeting, a bird pooed on her head and clothes. That meant that she had to turn around, go home and shower and get changed into a fresh outfit. “Oh well” she said, “isn’t it supposed to be a sign of good luck?” Rubbish – it’s not lucky – you’ve just been crapped on!

This got me thinking about other lies we tell ourselves to make us feel better when it’s too difficult to face the truth. Like the client who is in debt up to his eyeballs and who was justifying spending R65k on an overseas holiday for the family on the grounds that 3 weeks, in SA over Easter, would not have been much cheaper. Rubbish – that’s a lie to justify willful spending of money they dont have.

Or the client who cant afford to save for retirement because they need to have a new car, or put their kids through a very expensive private school education – they will get to it later. What’s that they say about the road to hell being paved with good intentions?

There are so many examples of the lies that we tell ourselves to make us feel better about our poor relationship with money. It reminds me of the classic scene from the movie “A few good men” when, under cross-examination, Jack Nicolson’s character finally cracks and shouts out “the truth, you want the truth? You cant handle the truth!”

And so we tell ourselves little lies to make us feel better about what is actually happening – how else can you explain the folklore that it’s a sign of luck if a bird poos on your head?

 

Nedgroup Core Accelerated Fund

Regulation 28 has long been a frustration of many retirement fund investors with the Financial Services Board having applied a “one size fits all” approach. That means that within Regulation 28 confines, a 20-year-old investor in a retirement fund is treated the same way as a 64-year-old investor with respect to the maximum exposure that they can have to growth assets. This is insane!

In short, regulation 28 limits the exposure that an investor can have to certain of the asset classes. Equity exposure is limited to a maximum of 75% of the fund and property to 25%*. Reg 28 also limits offshore exposure to 25% of the investment.

And while it has been possible (in theory mostly) to construct an “aggressive” retirement portfolio with 75% in equities and 25% in property, the reality is that this has required frequent rebalancing in order not to fall foul of the regulation.

The resulting “default” has been for investors to make use of “balanced” or “managed” funds. Unfortunately for younger (and more adventurous) investors, who may have a 30+ year view on their retirement money or who are just wanting more growth, most balanced fund managers manage their portfolios with a 5-7 year time horizon because this is how they are measured (it makes no sense).

The result of this is that it unusual to find a balanced fund with more than 65% in equities and 5-7% in property. Over a 30 year term, this conservative approach could seriously undermine the returns that investors can achieve – further compounding the issue of most South Africans not being able to retire with sufficient funds.

Things were not looking all that attractive in the Reg 28 space…until recently, that is, when Nedgroup launched their Core Accelerated Fund.

The Core Accelerated Fund is the latest addition to their Core (passive) range of funds that is managed by Jannie Leach and his team. It is reg 28 compliant and has a static asset allocation of 75% in equities and 15% property at all times with the balance in bonds/cash. That’s 90% in growth assets at all times! The fund will also have 25% offshore exposure (as long as the legislation permits this). And the best thing about the fund is that being a passive fund, it has a very low annual fund fee of 0.35% (this is as low as 0.25% if you access it via one of the LISP platforms).

So now it is possible to have a high growth oriented retirement fund with an all-in annual fee of less than 1%**.

This fund gets a big thumbs up!

 

 

*This includes 25% offshore exposure.

** this includes the fund, admin and advice fees.

Oxymoron

When a client of mine visited me may years ago, he picked up a pen and piece of paper to make a note and immediately challenged me about whether I was an independent financial planner or whether I worked for the company whose pen and pad he had picked up?

He was being facetious but he made a very valuable point (for me at least).

How can I claim to be independent but then I hand a client a pen from company A when she signs an application form for company A and all the while pressing on the desk pad from the same company?

Right then and there I cleared my office of anything that had reference to any company that we use – we are independent financial planners and can afford to buy our own stationery and calendars. There is no marketing material from any financial company in our office – they dont pay us to advertise on their behalf and will not compromise our independence either.

I was reminded of this when I saw this sign on the wall outside a financial planning practice in Cape Town…I understand what they mean but does the average client? Are you independent or do you work for Discovery?

Sanlam Cumulus Echo RA

I was recently approached by someone for help with her Sanlam RA’s – they are the bad, old traditional life RA’s with opaque fees, poor returns and hefty penalties if you make any changes before the term ends. It seems that Sanlam has found a way around this though with their Cumulus Echo RA where they are encouraging clients to move. The “carrot” is no penalties when the move to this RA and bonuses if they see out the term. Sounds good, or does it?

It took quite a bit of digging to find the fees on these new RA’s but after a while I found 2 pages* on the Sanlam website that say it all. The first one is the advice and marketing costs which are “hidden” behind a “more information” button. Here is what it says…

“If you prefer to select your own funds and will be investing recurring monthly payments, the following marketing and administration charge is applicable:”

Fund value band Yearly marketing and administration charge % of the fund value of the plan
First R500 000 4.10
R500 001 – R1 000 000 3.75
Excess above R1 000 000 3.50

The fee for using internal funds is slightly lower but still far too high to make it attractive.

But I think that the most insightful part of the investigation was an example of how much an investor could expect if they used the RA (including future bonuses).  “The Example is based on a monthly payment of R1000, taking into account an annual inflation increase of 6% over 25 years. It assumes an investment return of inflation plus 2% after fees.”

2% after fees? We know, that it is reasonable to expect a “balanced” unit trust fund to generate CPI+5% (after fees) over the long term (25 years). Sanlam seems to be acknowledging that their fees are so high that an investor should expect to only receive inflation+2% over that time. The loss of the 3% to fees, compounded over 25 years, will be devastating to your retirement and will result in significant damage to your ultimate fund value (bonus or not).

My advice to anyone considering the Cumulus RA is to run far away – pay the penalty for transferring away from the old RA and find a unit trust RA with an underlying passive fund – your total annual fee should come in at around 1-1.25% pa (advice fee included).

 

*One of the pages: https://www.sanlam.co.za/personal/retirement/savingforretirement/Pages/sanlam-cumulus-echo-retirement-annuity.aspx#Works