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Investment #feesmustfall

in Asset classes, Group Benefits, Investment, Retirement funding Leave a comment
The Passive revolution

All over the world investment fees have fallen substantially, not just as a result of lost trust in investment bankers’ post 2008, but with the massive increase in the use of ‘passive’ funds that use cheap computers instead of expensive asset managers to structure long term portfolios. In other words they just follow what the stock market is doing and don’t try and get clever and ‘beat’ the market. The losers are the ‘mutual funds’ what we call Unit trusts or collective investments here in RSA. Gone are the days when asset managers could get away with fees of up to 3%. Passive investments usually come in below 0.5%, and some even lower than 0.3% and we haven’t seen the bottom yet. Why are we in SA dragging our heels to keep up with this global trend?

One answer could lie in our much higher inflation for the fees to hide behind. If you take 3% off a 10% growth you’re still getting 7%. Factor in inflation of 6% and the real growth is only one percent. It looks very different to taking 3% off a 5% growth ( which is in line with the kind of growth they have been experiencing in the West), their inflation is still around 1%, so the nett effect is the same – but the perception by clients is way different. Basically we have been hiding behind double digit growth. Investors are happy to share in times of good growth, but when things swing down they aren’t quite so magnanimous.

The trend to lower cost passive investing has already started in earnest and clients that are following offshore trends are (rightly) insisting on these lower fees, especially for long term investments like retirement funds.

Performance fees – which are essentially hidden – are another bone of contention and the government has woken up to the problem and started to demand ‘clean’ pricing (without the dirty performance fees) for retirement funding, starting with the Tax Free Savings accounts. Performance fees have a number of issues. Firstly they are imposed on future performance based on past performance. In other words, new money coming into the fund has to pay the fee despite not having enjoyed the return in excess of the benchmark. Secondly, some collective investments build their own benchmark – making it impossible for you to compare apples with apples. It’s like doing your own performance review.


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Eat right. Exercise. Live longer… Die Poor

in Asset classes, Retirement funding Leave a comment
Longevity isn’t for sissies

Every year we get a greater understanding of what shortens or prolongs life. Medical research finds ways of extending life and life expectancy increases – to universal celebration. This increase in life expectancy has to be funded in the retirement years. In countries that have decent government sponsored pensions this is causing a severe problem, exacerbated by the slowing birth rate. In effect in those countries they are using pension contributions from the young to pay the old, because estimates made decades ago as to how long people would live were way out. This is all going to implode one day.

In South Africa, where most working South Africans will have to make their own provisions for retirement, and cannot rely on the government safety net, this problem is right on our doorstep. The retirement models that many financial planners use, still assume that we will live maximum 20 years past retirement age of 65. In other words 85. These models assume total capital consumption because preserving capital makes the required savings ratios out of reach for most struggling families.

Unfortunately it is much more realistic to assume that you will live 30 years past retirement. There is another growing trend that is going to impact this even more. Families are postponing having children into their thirties, and even their forties. This means they will have dependants will into the traditional ‘accumulation’ years, perhaps right to the edge of retirement. It’s an uncomfortable fact that children put a significant dent in your consumption and makes it very difficult to top up retirement savings. If couples that delay starting family are doing that high accumulation and retirement saving before children, then there wouldn’t be an issue, unfortunately most couples are consuming much of that income on travel, leisure and lifestyle assets. It is going to take 20 years for that problem to become really apparent, but if you fall into that demographic I recommend you sit down with your financial advisor and plan out a happier outcome. The good news is that the proportion of your income you need to put away is going to be fraction of what it would be in your fifties.

Wealth is what is left after you have consumed your income. So it is simple, if you want to increase your wealth, increase your income or decrease your consumption.
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Group Benefits – Ignore at your peril

in Financial Plan, Group Benefits, Investment Leave a comment
The good, the bad and the ugly

Group benefits – including pension and provident funds – are often ignored, even by financial advisors when coming up with a financial plan. This may be due to the fact that the average employee doesn’t actually understand what they have and what they can and can’t do with it. For the majority of South Africans, this is the only retirement savings or life cover they have and it is a crying shame that isn’t respected more. I have recently had the opportunity of uncovering some nasty excessive fee-taking in a group retirement fund that had been going on since 1998, and allowed to continue despite being transferred to a very large employee benefit specialist company (with an ‘ag sorry, but we’re too big to care’ or words to that effect).

Part of the problem is that fees in group retirement funds are not capped ( because they aren’t called ‘commission – remember that next time you moan about commission which is regulated), and are ‘acceptable’ as long as they are disclosed. That is all very well put it out there in black and white on a benefit statement, but when the employee is completely oblivious as to what an ‘acceptable’ fee is and the employee benefit consultant is too big to care, then this practice carries on unabated.

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The Danger of Investment Risk Profiles

in Asset classes, Behavioural finance, Risk profile Leave a comment
Weapons of mass wealth destruction

In terms of the regulations in financial advisory (the FAIS act), every advisor is obliged to determine the ‘risk profile’ of their client. Many advisors and brokerages have interpreted this to mean a canned questionnaire, now decades old, originally established by certain insurance providers. If you’ve ever taken out an investment policy with a broker you’re probably familiar with the form. There is increasing concern that this questionnaire is used as a blunt instrument, mostly for ass covering if everything goes pear-shaped. Even at the Financial Services Board it is recognised that thought and care needs to enter the equation too.

The reason these profiles are required is that rogue brokers in the past sold high risk investments to pensioners who lost all their money. Is the current format going to fix the problem? I don’t think so, it I time for a rethink.

I have made no secret of the fact that I think these questionnaires are dated, and in the hands of an inexperienced broker can be a weapon of mass wealth destruction. What have questions on short-term insurance excess got to do with investment risk appetite today? If a client has a decent emergency fund, but actually has a conservative investment profile, the fact that he or she takes a higher excess because he or she can afford it, is irrelevant. Asking questions like “Would you rather invest R20k, and potentially grow it to R50k or maybe lose it all” or (in the other box) “Grow it to R25k, but not lose anything” – is probably going to skew the results to gamblers and others.

Interestingly robo-advisors use a variation of the risk profile questionnaire to place their clients into funds, but in the US they are coming to realise that this does not constitute ‘advice’.
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Rotten legacy products

in Investment, Retirement funding Leave a comment
Beware the rushed Section 14 transfer

Legacy investment products are those investments where “early termination” results in a penalty to the client – usually endowments and retirement annuities on life insurance platforms. Investments started before 2007 can still result in a 30% penalty, thereafter 15%. This penalty is not on the premiums but the full fund value. The reason for this is that those penalties is because the broker took upfront commission equal of up to 27 years of commission in the future. “Unrecouped expenses” the insurance companies call it. Guess what, it is still happening. I shudder when brokers justify these products as ‘doing a service to South Africans who wouldn’t otherwise save’. Excuse me while I puke.
Anyone who follows my blogs knows that these products are my pet hate, but the good news is that the much maligned “Retail Distribution Review” is likely to have these products first on their hit list, awesome news for the man on the street who is still conned into these products by brokers out there who prey on the fear of retiring in poverty. I would like to see this prohibition extending to all the historical products too but, with all due respect, I am not sure that the FSB has the teeth or the b*lls to take on those big insurers. I have been in business long enough to know that if I was an insurer I would have written off those costs a long time ago and not feel the need to gouge 30% of a fund value of a pensioner who has been with my company for 30 years because his broker sold him a ‘graveyard’ policy that matures when he is 85.

What is the alternative? For many years brokers have had the option of placing a client’s retirement annuity on a LISP platform where they get ‘as-and-when commission’, ‘trail fees’ and/or ‘fees for assets under management’ or ‘ongoing financial advisory fees’ – and no early termination penalty. I know this sounds like industry gobbledygook, but it is very important to understand how commissions, fees and penalties work so that you can make an informed long term decision – so bear with me.
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6 ways to recession proof your wealth

in Financial Coach, Financial Plan Leave a comment
white orchid
Don’t worry, make money

Recession? What recession? There never was a recovery… I think most of us agree, post 2008 there has been a new normal. The only sector significantly adding to their staff compliment is the government, and while that takes people off the streets, guess who is paying for it (and wait for more tax, probably more VAT next)? We are part of the ‘resource exporting’ block of economies that are being hardest hit by the slowdown in China, even the GDP in Oz is down to the 2% range. We have dipped into negative GDP for the last quarter, and a second dip will officially put us in recession. So, how can you protect yourself?

Protect your income: If you’re an employee, retrenchments are on the rise. Those retrenchments are coming from expected industries like mining ( if you’ve been watching the economy), but if you look offshore, some of those job layoffs are coming from unexpected sources. Deutsche Bank is shedding 23,000 jobs about ¼ of its workforce. Those jobs are coming from technology and back-office departments. Don’t put your head in the sand, is your job secure? If not, what can you do about it? Can you up-skill and make yourself indispensable? One of the best investments you can make is in yourself and your education, irrespective of your age. Should you get a really professional CV together and get it out there? If you’re looking to move job, download my free eBook HERE to show you how to protect your wealth when you do so. If you don’t have an emergency fund of at least 3 months expenses, start it now. This is a great place for your bonus, get your brain used to the idea of investing your bonus before you or your spouse mentally spends it.

Be flexible: One of the best ways to stay  financially flexible is to pay down your debt. Start with the most expensive debt first – usually credit cards – and once paid off, close them. It is often a good idea, especially if you travel, to have one Visa card and one MasterCard, but that Mastercard could be a cheap debit card like Capitec ( it works just fine overseas, it is all I use from ATMs to tills). Keep up to date with mainstream technology, today that isn’t just PCs it is tablets, apps and mobile technology too. There are classes available in all of those if you’re clueless. Let go of the assumption that you’re going to be in the same job for the rest of your life. Unemployed is one thing, unemployable is another – and that is probably your fault. If you’re putting a new investment together make sure it is flexible and that you can stop and start it immediately without penalty (yes, they still exist).

Stay curious: Whole new careers are being invented every week, being proudly clueless could be the death sentence to your job or your company. It is important to have a vague idea of what is going on in the economy, and a more than vague idea about your personal wealth portfolio, including your group benefits. Technology has been here for decades, it isn’t going away, and it can actually be fun (the economy – not so much). An app like 22seven (available in the iStore and Play store) is a great and fun way to keep ontop of all your bank accounts and investments on your smart phone or tablet.
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