Tag Archives: Financial Planning

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!

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.

 

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.

 

 

 

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.

 

 

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

Some things can be ignored

Following another bout of load-shedding I noticed that the clock on the clock-radio in our bedroom was flashing on and off (it needs to be reset each time the power goes off). I was too lazy to reset it (again) and decided to ignore it (maybe my wife would do it if I pretended not to see it).  This got me thinking that there are some things in life that can be ignored but there are also some things (especially in our financial lives) that cant be ignored – such as the need to have a valid will if you are married and/or have dependents.
The resistance to drafting a will (that many people experience) is one of those completely irrational fears that we have. We are all going to die (someday) and yet somehow we think that if we draft a will, or even talk about it, we have tempted fate and summoned the grim reaper. The reality is that the consequences of dying intestate (without a valid will) could be devastating for your family. They could be left without access to funds and worse still, your assets could end up in the guardian’s fund (which is in a mess) and your children could end up in state care. Need any more motivation to get it done?

In short, you need 4 things to draft a will:

  • An executor – the person who will do the winding up and distribution of your estate
  • Beneficiaries – who do you want to inherit if you are no longer around.
  • Guardians for minor children – they are the people who will look after your minor children if you are not around. Don’t think into the future but rather appoint the people who are currently the most appropriate. You can always amend this again in a few years.
  • Trustees – they are the people who will look after the money for your minor children and need to have a good track record when it comes to dealing with things financial!

Armed with this information you can approach just about any Certified Financial Planner® or attorney for assistance. Typically you could expect to pay between R500 and R750 for the will to be drafted. Once you are satisfied with the wording then you need to sign it in the presence of 2 witnesses, who must not be people mentioned in the will and who also don’t need to read the will. They are just witnessing that you are signing it. They will also need to sign in the appropriate places.

Once signed, either hand it back to your financial planner or attorney for safe-keeping, or put it into a safe place at home/the office. Just make sure that you have told someone else where you have put it – if no one can find it when you die then it would almost be the equivalent of not having one.

Remember, drafting a will is a simple exercise that does not increase the probability of your death and unlike the flashing clock it cannot be ignored!

Deceivery Life

I just received an invitation to the Discovery Life financial planning summit…on opening the invitation I noticed a few things:

  1. The invite is for a financial planning summit
  2. The agenda is dominated by sales techniques – sure there are some other topics thrown into the mix but it appears that the main motive is to make better (more proficient) sales people who can sell more products as a result. This is not financial planning. 2 of the agenda items are as follows:

LESSONS FROM THE WORLD’S GREATEST INSURANCE SALESMAN

Peter Rosengard’s extraordinary life story is packed with valuable lessons and insight into how he achieved greatness in the life insurance industry. He shares practical and inspiring advice based on his own success and reveals how you too can consistently prosper.

HOW TO BE THE MOST LIKEABLE FINANCIAL ADVISER IN THE ROOM

All other things being equal, clients choose the financial adviser they like. It’s as simple as that. Learn how to synchronise attitude, body language, and voice tone so that you instantly become someone the other person likes. Nicholas Boothman reveals how to read attitude, pick up on nervousness, the subtle difference between words that open a conversation and words that shut it down, powerful compliments, eye cues, the magic of opposites attracting, and more. Prepare to be liked!

  1. The programme is “endorsed” by the Financial Planning Institute…with Continuous Professional Points (CPD) points for attending. CPD for what – learning how to be a better sales person?

 

What are we getting at – does the FPI, as an institute, stand for financial planning or selling disguised as planning? With events like this where selling is disguised as planning and CPD points can be earned, it is no wonder that the public and regulators are confused about what financial plan is and is not! Come of Discovery and the FPI – let’s call a spade a spade. This is not a financial planning summit!

The role of the financial planner…

Have been busy with a death claim on a retirement annuity and have managed to get an extra 50% added to the payout value…read on for the details that once again highlight the value that a financial planner can add to a client’s portfolio.

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!

 

Imagine this…

Imagine that the body that regulates medical doctors (or any other profession) went to the doctors and said something like this to them: “We are terribly sorry but (due to a whole lot of reasons) we have let a whole lot of people who have not been suitably qualified as doctors, practice as doctors. And now as a result of this we need all of you to write (more) exams so that we can try to ensure at least some minimum kind of compliance.”

Unthinkable in just about any professional arena – the regulating body would be hung out to dry!

Not so in the Financial Services profession…exactly because of the above we now all need to write exams before the end of the year. So if your financial planner is grumpy (and I know I am) you now know why!