‘Needs Analyses’ are so last year…
One of my mother’s favourite phrases was “I want never gets…” a typical ‘protestant ethic’ I guess. I have news for her, wants are what makes the world go round. Once we have sorted out our ‘needs’ the only thing that takes our productivity to a new level is chasing ‘wants’. Marketing is the art of changing wants into needs – so we feel better about it. We never knew we ‘needed’ things like deodorant, toothpaste, conditioner until marketers got involved and changed your perceptions. Is it still socially acceptable to ‘need’ something, but not to ‘want’ something?
The truth of it is that your dreams – your bucket list – the stuff that puts a smile on your face – has everything to do with wants and nothing to do with needs. “Needs” drag you out of bed on a Monday morning to a grumpy boss and job you try not to hate. “Wants” propel you skipping out of the office to enjoy your annual vacation, or to that concert you’ve been thinking about all week or into the bookshop to buy that brand new book by your favourite author.
This distinction between wants and needs have become increasingly clear to me when helping clients to determine exactly what their ‘emergency fund’ should be – that bucket of funds as a safety net if you’re retrenched or a fat expense comes along and blindsides you. This “needs” conversation is often involved in discovering ‘temporary disability’ needs too. I think it is smart to cover risk, but no more or no less – I would far rather a client divert hard earned income into wealth and investment than over-insurance. This ‘temporary disability need’ is the amount of money you need to keep a roof over your head, food on the table and kids at school. The real needs. When push comes to shove, given a list of our monthly expenses, we can all prioritise expenses. The things that will get paid first. You will get advisors who will try and prioritise it for you, but it is very individual because it is based not just on needs but wants that are your needs.
Get some perspective
When markets wobble badly, it is natural for fear to kick in. When it’s combined with a Rand in free-fall it isn’t easy to be an optimist, but before you bail out of all your investments and put your cash under the mattress, take a step back. Markets breathe in and out, sometimes more forcefully than others. The market has been correcting since mid April, in fact it is only a couple of percentage points off an official ‘correction” (20%). Is it the start of a massive bull-market? Probably not. The 2008 ‘great recession’ was caused by a very fundamental problem in credit markets in a market that was already contracting. That is not so now. Most non-commodity economies are pretty solid, and this correction is probably in response to the second biggest economy in the world (China) slowing down. There is very little doubt that the Chinese stock market was in a bubble with triple digit growth. Bubbles burst and some people get wet. Here are some things to take into consideration before making a rash decision with your investments:
No pain, no gain. The only asset class that will give you inflation beating returns in the long term is equity, and if your long term investment isn’t exposed, at least to some extent, to the stock exchange – directly or indirectly – you are just not going to get that growth. Investments that are high in equity are called ‘aggressive’ and when markets turn down sharply, the only aggressive investors you’re going to find are the ones on the phone to their stockbrokers who didn’t anticipate the sell-off . It is exactly this ‘risk’ that comes from volatility that demands the higher return from stocks. The most common long term investment of course is retirement funding, and while it is restricted to a 75% equity holding, that is more than enough for the investment to grow and meet retirement expectations. As soon as you start making the long term investment more conservative then you have to put more away or dial back on your retirement income expectations. Unless you’re about to retire and can’t afford a hole in your capital – don’t try and catch a falling knife. Look at the long term trend, not short term correction.
The Time in the market: This is the key to all your asset allocation in investment. How long is the investment going to be in place until you need it? If it is a long term investment, like retirement then 75% equity makes sense. If it’s for an emergency fund however then cash is far more sensible. Long term is more than 8 years, short term is less than 2 – what about somewhere in the middle? Your asset allocation is going to depend on the objective of the investment for the medium term. Can you afford to lose capital? If the answer is no, then make the investment more conservative.
Valuable Service or worrying trend?
Over the last decade we have all watched in awe as direct insurers have grown to become massive companies. The change in advertising spend over that time has been very interesting, in every medium. Groceries have been mostly relegated to junk mail and inserts, ditto IT companies. The unsecured loan industry had their day in the sun (when did you last see a Wonga advert?) until the African bank fiasco opened that can of very noxious gas over that grubby market. (Interestingly adverts from that sort of company still dominates the UK TV with APRs (Annual Percentage Rate) of 1000%!). Direct insurers take up a chunk of premium TV airtime (just one of them is estimated to spend R400,000,000 pa)– but have they seen their heyday?
The biggest threat to the direct insurers is that their premiums creep up to a level that they are no longer the ‘cheapest on the block’ (this is already happening) and then as time goes by and those client actually have to claim they find out the value of an intermediary over a huge company and anonymous call-centre agent who has a mandate to pay as little as possible. It is much easier for some salary paid employee to say “sorry for you” than a short term broker that has built up a relationship with you and will help you fight the insurer to get what you are due and isn’t perversely incentivised to ‘minimise the claim’.
The direct model was never going to be cheaper. Those massive marketing budgets and call centres have to be funded. Commission by any other name is the same thing when it costs as much. At least commission feeds an entrepreneur whose success is tied to your success, not a fat cat corporate who pay minimum wage, do the bare minimum of training and re-distribute the premium to lawyers and retention agents who will wear you down before letting you cancel. They might have been able to golden-handcuff clients with bonuses, but as soon as those are lost due to a claim and then to add insult to injury they are screwed over during the claim, they start looking around.
Even in short-term insurance, the ‘brokers’ of old have wised up. We’re living in an era where service is a valuable, sought after asset. Yes, it is easy to insure a tangible asset like a car or house, they can be easily valued and usually easily replaced, but it takes a human to understand that with every loss of an asset there is a very real hurt, even trauma. Unfortunately too many of us have first-hand experience of this. A home invasion or hijacking will alter you forever. Even a burglary will leave you feeling vulnerable and violated. This is often where a direct insurer will come short. Call centre agents are usually young, inexperienced, poorly paid and not recruited for their people skills. In the last 18 months I have not been able to get a short-term quote for a client from a traditional short-term company that hasn’t beaten a direct company and given better terms. The service is an added bonus. If the direct insurers have done nothing else but make premiums more competitive then it’s a service to all of us.
You’ve probably noticed that those direct insurers have now turned their focus on the ‘life’ industry. Even Vodacom now flogs life insurance. Your life, on injury or death is not a commodity, but it is possible to reduce it to a number. Using a handful of questions (which they usually dispense with BTW) you can determine a person’s basic life cover needs, so you can see why direct insurers are now moving their focus into this arena. They are still small at the moment, but I predict that they are going to become a dominant force on our landscape. Why?
Is added value a myth in Financial Advisory?
The buzz word right across the business world is ‘value proposition’ – supplanting mission statements as the platitude of the year. In Financial Advisory it has taken on a sense of urgency in response to the recommendations made by the Retail Distribution Review (RDR). To put it simply, while financial advisors provide a multitude of services: Identify and quantify needs – usually at a location of your choice ( house-calls); analyse risk and investment portfolios; manage, switch, modify, upgrade contracts; transfer skills to clients; draw up reports and make recommendations; run investment scenarios; review portfolios; assess impact of regulatory change; identify new benefits and match them to changing needs; draw up wills; do estate and retirement plans handle claims and implement new policies (broking). At the moment it is only in the last stage that they get remunerated, it is in the broking or ‘implementation’ that they get paid, usually as commission but also as an “asset under management” fee on LISP platforms.
This is all going to change. It is recommended that there be no commission on investments, only fees. This is going to have a huge impact on ‘insurance’ investments. It’s all very well for me to say “I’m okay Jack” because I don’t use them, but thousands of traditional advisors do and you cannot suddenly replace that up-front lump-sum commission with the month by month as-and-when commission overnight. It takes years to build up a ‘book’ to replace upfront commission. Not just that, but the as-and-when asset under management fee can be switched off by a client if they are not receiving ongoing communication and advice on that investment (and even if they are but see no value in the advice they are given). For a broker that has been used to being paid upfront for all the advice – and there being no repercussions if he never sees the client again, it is going to be a nasty shock. Advisors are going to have to ‘add value’ to their investment clients and there is only one way to do that – communicate frequently with those clients to reassure them that the broker has his/her finger on the pulse of the economy, tax implications, regulatory changes and investment choices and offer a wider range of higher quality services. Whether it is fair or not, brokers that do not have access to all the different investment and insurance investment platforms are going to come off second best. Investors are much more savvy than they were even a decade ago and will know when advice is restricted to a single platform. Investments on insurance platforms usually have to be managed right where they are because of the onerous ‘early termination’ penalties.
Commission on Life products will also change, while they aren’t recommending they be scrapped immediately, it is expected to start with a 50% cut. The recommendation is that the difference in remuneration be made up by fees. That’s fine. If you want to charge a fee for all those other services that clients have been used to getting ‘for free’ then you’re going to have to add value. Lots of it. Paying lip service to your ‘value proposition’ isn’t going to cut it.
Why are Medical Aid Brokers so thin on the ground?
Medical aid premiums, as a percentage of your disposable income, has been growing every year – not even salaries have been keeping up with the double digit growth. I have come across very few people who are still on the same level of plan they were a decade ago, and more often than not that downgrading has happened several times. For many of my clients medical aid premiums are easily more than their life cover or short-term insurance – often combined. With that sort of ‘investment,’ you’d think financial advisors would be crawling over you to get the commission on the deal, but it just isn’t so. Most people have no idea who their medical aid broker is and all queries are channelled through to the call-centre.
Why is this? It boils down to remuneration (like most things). Like life insurance, the allowable commission on medical aid is capped at 3%. Where it goes pear-shaped is that this is capped at R69 (in other words as soon as the premium goes over R2300 pm, no additional commission is paid). This cap has been growing at 2.3% per annum, when medical aid premiums have been growing in the double digits. In other words, unless your broker has a substantial book of corporate clients, he or she is probably looking after your medical aid as a service – it certainly isn’t going to make them rich, in fact it probably won’t even cover the cost of looking after it for you. The major motivating factor for them looking after your medical aid is to keep out other brokers who might make a play for the rest of your (much more profitable) risk and investment portfolio.
Is it a train smash that you get ‘low or no’ advice on medical aid? I know from experience that trying to get on top of all the small print on just one medical aid is a nightmare, and it changes every year. It is almost impossible to know just what sort of cover is available for every condition, and anyway there ‘appears to be’ a large element of subjectivity involved. Claims or authorisations have been refused because the medical aid considers the member ‘too old’, the premature baby ‘too small’ or the liver transplant recipient ‘an alcoholic’. Trying to decipher the real changes in a medical aid plan every year needs Sherlock Holmes, and the average member hasn’t got a hope!