Category Archives: Pension Funds

Marcus Jooste’s school-boy error

Much has been written and much will still be written about the Steinhoff saga but after listening to some of the testimony and reading the bit below…there is only one conclusion that can be made and that is this: Ethics aside, Marcus Jooste’s biggest mistake was failure to diversify. It’s a classic school-boy error of over-confidence. We have seen it before with the collapse of Lehman Brothers where employees had their entire life savings invested in just one share and we will see it again in the future.

If there is a financial planning lesson here it is this: diversification is essential to a successful long-term investment strategy. Even if you are the CEO of a huge company you should not have all your money invested in just your company share. You need to diversify and this means holding a wide-range of different asset classes and currencies. Failure to diversify will ultimately result in failure to accumulate wealth!

“Jooste family trust held R3bn in Steinhoff shares on day of fallout

On the day of the Steinhoff share price fallout, Jooste’s family trust which has an investment company Mayfair, lost R3bn. The company held 68 million Steinhoff shares.”

 

It’s time to do the Mickey Blue (again)

I recently watched someone using a leaf blower to clear their pavement. As I watched, it struck me what a pointless exercise it was and it crossed my mind that the leaf blower must be one of the most senseless machines yet invented. Continue reading It’s time to do the Mickey Blue (again)

It’s time that treasury stopped being short-sighted when it comes to the wealthy!

A few years ago, during the National Budget Speech, government put a cap of R350k pa on retirement contributions. It appears that no one at treasury has given this much thought Continue reading It’s time that treasury stopped being short-sighted when it comes to the wealthy!

It’s time we had different conversations with our clients…

I recently had an interesting discussion with a friend of mine (we don’t do her financial planning). The conversation turned to money Continue reading It’s time we had different conversations with our clients…

A case for higher offshore weighting within a living annuity?

There is this strange phenomenon in SA called Regulation 28 that is applied to retirement funds. It stipulates that retirement fund members may not have more than 75% of their funds in equities and no more than 25% of the fund invested offshore Continue reading A case for higher offshore weighting within a living annuity?

8.5% per month in fees?

Am I reading this incorrectly or can it be that the monthly fee on this pension fund contribution is 8.5%?

Can it be that R240 of every R2808 in contributions is being eaten up by costs? Every month? And this is before the fund fees?

In 2017 with all the legislation that we have  – FAIS, TCF and RDR?

I’m completely stunned – please can someone tell me that I am reading this incorrectly?

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. Continue reading The watched pot…

Remove all sharp objects…

I attended a presentation by one of the SA asset managers recently…it was a good job that there were no sharp knives around. It was real slit-your-wrists stuff!

Their view is that SA is pretty much stuffed and that unless there is a significant change in ANC leadership that we are on the “low road” scenario. The reasoning is as follows:

  • SA stuck is in a no growth-low inflation scenario. The only reason the Reserve bank is not cutting interest rates is due to political risk fallout.
  • The global search for yield has kept the ZAR strong (for now) – they see it considerably weaker over 3 years, especially if we get the Moodys’ downgrade on local debt (it seems inevitable at this stage).
  • SA consumers are very stressed with much higher than normal variance in the payday compared to mid-month purchasing patterns (there is a massive spike at pay-day compared to mid month and this is much higher than normal). In addition to this, people are switching away from brand names to “no-name” products.
  • SA food retailers have noted significant change in the composition of the average food basket – food inflation as measured by retailers is very different compared to what is measured by Stats SA.
  • One of the SA retailers reported that for every R100 they are lending consumers, there is an additional R1700 in unsecured credit! Unsecured credit demand has increased radically.
  • Another SA retailer has reported worst figures in 20 years.
  • There are 17million people on social grants and this number is increasing rapidly…government is running out of money to fund this.
  • SA facing poor consumer confidence (reduced spending), poor business confidence (reduced investment in SA) and poor employment numbers.
  • The revenue (tax) base is shrinking, SARS is missing money due to incompetence.
  • SARS (and treasury) have been haemorrhaging skills and there is a significant loss of expertise at both organisations.
  • Tax payer non-compliance has increased as a result (and will continue to increase) thus worsening government revenue.
  • Government is going to be desperately short of funds!
  • The risk of a return to “prescribed assets” for pension funds has increased and along with this a limit on moving funds offshore and possible cancelling of asset swap capacity for local funds!

 

It’s a good job that there were no sharp knives around…having said this though, they are still positive medium-to-long term IF the Zuma faction is outed from government.

The value of advice?

Much has been written about the value of financial advice. There are many people who believe that financial planners offer little value for the fees charged while there are others who believe that the value financial planners add is very significant.
Research by Morningstar has revealed that the value of advice (they call it “gamma”) can be as much as 3% (of the client’s portfolio) per annum. This is, among other things, a result of managing investor behaviour and greater tax efficiency for the advised client.
We have more than a few clients who prefer to manage their own funds with no on-going advice fees and who will then consult with us from time to time when they think it necessary. And while this may seem to save them an “annual advice fee”, in my experience, it has almost always cost them significantly more than the fee that they would have paid as an “advised” client. Consider the following example from our practice.
The client retired a few years back and transferred his funds to a living annuity – he met with us around the income draw, asset allocation and resulting fund selection and has been looking after it on his own since then. He has been drawing the minimum income (as a result of some consulting that he was doing) until the anniversary earlier this year when the consulting stopped and he needed to increase the annuity. Which he did – without consulting us and without any thought to the tax consequences.
He did not consider that he had a discretionary pot of money from which he could effectively draw (close to) tax-free income. The result is that he is now paying at least R100k in tax that he need not be paying. This is R100k that we would have saved him if he had been an advised client (or if he had at very least sought advice before making the change). The R100k is certainly many times the quantum of the annual fee that we would have been paying. And he is currently staring at an estate duty problem because of the choice to increase the annuity income draw and leave the discretionary assets in his estate.
Add to this the fact that he recently switched funds – “the funds had done nothing for the past few years” and so he made the change. The move was at exactly the wrong time and his asset allocation is now also out of kilter (way too much offshore exposure for a living annuity with a 5% draw). The annual fund fees that he is paying is also way too high – he had “no idea that was an issue”.
Clearly in this case, the value of advice would have been way less than the cost to his portfolio. But then, perhaps we have ourselves to blame. If all clients think we do is choose funds then why would you pay (a significant) ongoing fee for that?
We need to make sure that clients fully understand that asset allocation is but one part of the value-add from a professional financial planning service. There is so much more to the financial planning service, but they wont know that if we don’t tell them and more importantly, if we don’t demonstrate it.

 

 

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/