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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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Too many financial specialists spoil the portfolio

in Behavioural finance, Financial Advisory, Financial Coach Leave a comment

How specialisation is impacting on your wealth

Specialisation is everywhere, niches are cropping up in places that didn’t exist 10 years ago – and much of that feeds the need of the market. It is somehow reassuring to think you are in the hands of a specialist – and when it comes to your wealth – what could be more important?

One of my favourite sayings is “When you have a hammer, everything looks like a nail”

The biggest problem that comes with the myopia of specialisation is the inclination that a solution will only be sought in that specialist area and everything else will be ignored. That’s fine when the whole financial ecosystem has been looked at in it’s entirety first, and the areas that need focussed attention are identified. This is one of the reasons that in the medical field the specialist has to be referred by a general practitioner first. In financial advisory that doesn’t seem to happen – especially with the higher net worth individuals. Everyone seems to have a rolodex of specialists involved in our personal wealth portfolios – medical aid, short-term, life, investment, tax, trust, estate. This has been supported by the financial services industry, and a certain element of snobbery has definitely crept in. Short term, life insurance and medical aid brokers are still tainted by the ‘smouse’ label – which is why you find a plethora of descriptions in those industries. For years it has been ‘cool’ to be an investment specialist.

So what? They are all separate disciplines aren’t they? Yes. But are they independent of each other? Nope. They can’t be put into silos, because if one goes bad, it is going to affect all of them. Not just that, but when each silo has it’s own manager and it is going to be the loudest and most persuasive specialist that gets your attention – and your bucks.

As soon as you have a specialist you can take the ‘independent’ out of independent financial advice. The specialist is only interested in you focussing on (throwing money at) their area of expertise, and unless you’re paying them a fee that is completely unrelated to how much business you place with them, you’re not going to get the whole picture. For example, an investment specialist probably won’t be tell you to place your R500k windfall into a rental property but rather into a stock or unit trust portfolio; a life broker will tell you to put it into an insurance platform investment; your medical aid broker gets such a small commission they won’t care (do you even know who they are?); your short term insurer would love you to buy more stuff they can insure and your spouse has already mentally spent it anyway.
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Financial evolution – from Broker to Coach.

in Behavioural finance, Financial Coach Leave a comment
Real financial advice to fund real dreams

Whether we like it or not, go along with it or not, everything evolves. Some sectors of the economy evolve faster than others and one might expect that financial advisory would be slow – and then only in response to changes in law and regulation – right? I mean if you have companies that still proudly have ‘Old’ in their name what can you expect?

I have always been determined to forge my own experience of the ‘financial advisory sector’, and never worried much for the poor perceptions caused by a few rogue brokers and ‘investment specialists/bankers’ – I have enjoyed being part of an industry that actually can make a long term difference. I can hear a groan… Let me explain.

At the most basic level, life insurance can, and does, make a difference to families left behind when the breadwinner dies prematurely. Most people will bring sympathy and a bunch of flowers to a funeral, the broker brings the promise of a cheque. That basic ‘need’ has been addressed by brokers for decades despite being unfashionable and it has evolved into every other aspect where we might ‘need’ financial help ( like disability and dread disease), and then into retirement savings, with perhaps less success. Making enough money to cover your needs, and the insurance to protect them is necessary but not exactly inspiring – and this is where the ‘evolution’ comes in.

While I am sure that there are millions of people who do go to work just to cover their “needs” – with maybe a little left over for gifts and an annual holiday – and have little ambition to go beyond that, most of us have had dreams at some time in our life, even if they have been put on the back burner. The world needs ‘worker bees’, they play a vital role in society and society would not be able to function without them. If everyone wanted to be the CEO then there would be millions of very dissapointed people. Sometimes the dream is to be our own boss, without having the responsibility of employees – I have been in both places and I know which one I prefer.  Often, somewhere in life’s journey the dreams we had as a youngster get forgotten or crushed and we join the worker bees by default.

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7 deadly sins and your wealth

in Behavioural finance, Financial Coaching, Wealth Ecology Leave a comment
Emotion and wealth – a lethal mix?

Avarice: Coveting something is a very familiar behaviour, but is often disguised and whitewashed to be almost acceptable. It can be disguised as ambition, determination, desire or drive. Kept in check, these emotions can drive us to be better, do better, innovate and create. When out of control it will eat into your consumption and lead to the collection of ‘stuff’. Steering avarice into the ‘collection’ of true assets – rental property, investments, stocks, even gold – is the doorway to long term wealth. If you want some independant help with this, consider some financial coaching. Have a look HERE.

Envy: Keeping up with the Jones. Consuming your income without any concern for simultaneously building your wealth. It is so easy to fool yourself, call something an ‘asset’ when it isn’t. Your home, your holiday house, your cars and toys. Envy usually masks an underlying need to be recognised, a lack of self-esteem. Unwinding this behaviour alone would have a huge impact on your wealth.

Wrath: When you see red, your vision becomes very cloudy and decisions made in anger one will inevitably repent at our, much poorer, leisure. There is nothing like losing money unexpectedly – whether in reality or merely ‘on paper’ to get the blood boiling, and a great way to dissipate that is to blame someone else. The best way to stop this emotion impacting our wealth, and relationships with your advisors is with knowledge. I don’t respond well to anger, and one of the main reasons I blog so extensively is so that my clients don’t get nasty surprises or have unrealistic expectations.
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