A tale of some money
Most of us don’t think twice about opening our wallet and handing over cash or plastic. Perhaps we think this is just a form of barter, you give me something and I will give you something back of equal value – and money is just one of those ‘things’ we can barter with. I suspect we think that all that money is backed by investments in the bank in one shape or form. Not so. In effect banks ‘create’ the money but it is ‘leveraged’ – in other words they don’t lend out R1 for every R1 they have in investment but much more than this. The degree to which they can leverage themselves (lend more than they hold) is controlled by their ‘capital requirements’ – an amount that has increased over recent years following the credit crisis fall-out. You’ve probably heard of QE or quantitative easing. This a monetary policy governments use when ‘normal’ monetary policy (interest rates) fail. Basically, with QE governments buy bonds from financial institutions to increase their liquidity in the hope they will lend out the money and get the ‘Money-Go-Round’ going again. In other words pushing it out of it’s inertia and give it some momentum so it can go around by itself. Unfortunately this has had limited success, mostly because the banks aren’t getting enough of a ‘margin’ (aka profit) because of historically low interest rates. Banks have also been inefficient and are now having to use technology to become more competitive – and have been haemorrhaging jobs as a result.
Let’s illustrate this “Money-Go-Round” with a short tale:
In a small dorp in Limpopo, a German tourist walks into the local B&B and puts R500 on the desk. “I want to look at your room upstairs and maybe I will stay here, Ja?”
“Sure,” answered the owner, Jacob, handing the tourist the key to the room.
The tourist heads upstairs and Jacob looks at the money on the desk. “What if he doesn’t stay?” he thought to himself – fleetingly – before picking up the money and heading to the liquor store next door and settling his long overdue account so his supply would start to flow again.
The Liquor store owner looked at Jacob and the money in surprise, but smiled his thanks and placed it in his pocket. Once Jacob was out of the door the liquor store owner walked across the street to pay the hairdresser’s account that his wife had clocked up on her last visit. She, in turn, closed up the shop, flicked the ‘back in 5’ sign and went to the petrol station and paid her account there.
Is a Financial Planner a professional? – you decide.
The adjective ‘Trusted Professional’ is popping up all over the place. I guess people think it adds some sort of gold seal of approval but very often it is nonsense. It is also not helpful to throw the baby out with the bathwater and besmirch every professional who isn’t a doctor or lawyer as neither trustworthy nor a professional. There is some debate as to whether Financial Advisory and Planning is a profession or not, so instead of tearing into the fray, let’s look at the history and description of professions and professionals.
Contrary to popular opinion, the ‘oldest profession’ (prostitution) is not really a profession at all … or is it? But I digress…
Historically (and now we are going back hundreds of years) there were only 3 recognised ‘learned’ professions, Divinity, Medicine and Law – and they persist today, albeit with some novel interpretations including the use of insecticide instead of holy water.
There appears to be a defined route that an occupation needs to take to get to the ‘profession’. According to Wikipedia (HERE) it goes like this:
- An occupation becomes a full-time occupation
- The establishment of a training school
- The establishment of a university school
- The establishment of a local association
- the establishment of a national association
- the introduction of codes of professional ethics
- the establishment of state licensing laws
Surveying was the next to join the list, followed by medicine, actuarial science, law, dentistry, civil engineering, logistics, architecture and accounting. By 1900 other professions had been added, most notably: pharmacy, veterinary medicine, psychology, nursing, teaching, librarianship, optometry and social work. As you can see all of these professions have followed the above pathway to professionalism.
Financial Planning and Advisory has followed that path too, so calling it a profession is correct. Of course, unless an individual goes through this process and gets qualified and certified be or she will remain a “Broker”, a noble occupation but not really a profession, just like a Bookkeeper is not considered a professional but a Charted Accountant is.
The things to do to protect your wealth in partnerships
We all know the stats on divorce, and how they have exploded over the last 40 years. Today, 50% of all marriages will end in divorce, but perhaps one of the unlikely consequences is the severe impact of this act on the wealth of the individuals.
So let’s look at this in a bit more detail:
Marital regime: Whether you marry in Community of Property or Ante Nuptial Contract ANC (with or without accrual) will impact on your final divorce settlement. Community of Property (COP) is a dated and dangerous concept for your wealth so please take off the rose coloured glasses, don’t be a cheapskate and get some sort of contract in place. If you’ve left it to late to change, you may need to consider a Trust (most importantly if one of the partners has their own business). Remember it isn’t just community of property, but also of loss – in other words, the bankruptcy of one spouse will destroy the assets of both spouses. If you cohabit and live as man and wife but are not ‘married’ in the formal sense then you are barely protected by any law. At the very least, all major assets must be co-owned (at deed level), consumption (true consumption, not savings or investment contributions) be split 50-50.
Abdication: More often than not, one of the partners in a relationship will defer to the other when it comes to finances and let them do what they think is best. This is not delegation, it is abdication and it is not smart. You should be involved in the annual meeting with your financial advisor, and have an understanding of all your entire wealth portfolio. There is no way around it, if it is all Greek to you then upskill by asking questions and doing your own research. It is not cool to be clueless, your wealth is at stake.
What to do when you’re on a fixed income. Preparing for the eventuality.
The phrase ‘fixed income’ strikes fear into the heart of anyone anticipating retirement. The last thing any of us want is for that income to run out before we do. Making sure that doesn’t happen takes years, and decent investment advice, but irrespective if it is at age 65, 70 or older the chances are new ‘active’ income is going to stop flowing in and you’re going to have to start using ‘passive’ income (from whatever source). Thriving when your income is fixed (in other words just keeping up with inflation) is often a challenge especially when some aspects of your expenses exceed inflation (like medical aid) and force you to cut back. There is a limit to how you can ‘sweat’ those assets without exposing them to significant risk, so often consumption has to give. This is the ‘harvest’ period of your wealth lifecycle that you have been preparing for all your life.
Fifty years ago retirees were not expected to live much beyond 10 years after retirement at age 65, today you can easily live another 30 years, and this brings a whole slew of additional pressures to your fixed income.
The wealth equation goes like this:- Income minus Consumption equals Wealth. At retirement we are probably not adding to the Wealth side of the equation, so it must be managed properly and sustainably because it is going to feed back into the income – a closing of the wealth ecosystem/lifecycle as it were.
Before we get onto the consumption side of the equation, make sure that the fixed income is going to be structured properly. Diversify! Have a number of pots of wealth on the go, flexible investments, stock portfolios producing dividends, pensions/annuities, rental portfolios etc. If the ‘fire’ goes out under one of those pots temporarily, you aren’t going to starve. None of the pots are fireproof, especially not your own company if, like most entrepreneurs, you’ve poured all your investment into that. Every entrepreneur needs to have either an exit strategy that realises the wealth you’ve poured into the asset, or a solid succession plan that can produce an active/ passive income by way of dividends, director’s and consultant fees.
Expect the unexpected: The polls in the USA got it seriously wrong – why? It is only a sample of the population and people lie! Few (sane?) people will publicly admit to endorsing the racism, bigotry and misogyny espoused by Trump but when it comes to the secrecy of the ballot box, it became obvious that there were millions of closet Trump supporters. This has ushered in a whole new world of uncertainty, just like the Brexit vote did, and just like Nenegate did here. It has taken us nearly a year to recover from Nenegate, and the UK is still shuddering. When it comes to your wealth – protect your risks, diversify every aspect of your wealth.
Populism is here to stay. The protest vote against the status quo in government is turning the tide everywhere, including here. Brexit is a good example (trust the Americans to one-up the Brits! This result is Brexit to the power 10). This outcome is a result of emotion and not reason. “We, the people” are sick to death of lobbyists, special interest groups, bloated government payrolls, erosion of real purchasing power and having to reskill into new jobs. The only voice that growing ‘disaffected’ group has, is to vote for something different, however nauseating that might be. The major threats? If you work for, or supply to, government- diversify and seriously reduce your risk exposure. Opportunities – Small business, the Health industry, Service industries, On Demand, Customisation.
It’s not cool to be clueless: Hillary’s email fiasco hit her hard and should be one of the biggest lessons anyone, of any age, needs to learn. If you refuse to climb on the technology bandwagon, and keep up with it you’re going to get hurt. As a retiree your banking costs will climb, but more onerous than that – you will open yourself up to being conned and taken advantage of. In your working life you will not be able to be as productive as someone who embraces technology – forced early retirement is calling! Most of the growing jobs and professions require a good understanding of technology. This is even more true of ‘passive’ income opportunities. Keep your work and home social media presence separate.
The personal financial implications of the ‘Gig’ and ‘On demand’ economy
The “gig” and on “demand economy” – typified by Uber and AirBnB is not a new fad that is going to fade into history, it is the birth of a new economic era, part of the wider technological revolution that has been slowly getting momentum since the eighties. You can ignore it, and be swallowed up by it, or embrace it and ride the wave and use it to increase your wealth – the choice is yours. This new era is going to impact every facet of your wealth ecosystem, from income through to retirement. The good news that you can ride the wave, take the good and ignore the bad, and you don’t have to be swallowed up by it.
This new era coincides with the rise in personal consumption and services as a proportion of our economy. In the USA consumption makes up 60% or more of the GDP, even in the New SA it is as high as 50% – especially when resources are as lacklustre as they are now. In order to consume, citizens need to be remunerated. For the last 40 years technology has helped us increase our productivity, without taking out too many jobs in the gross sense, but that is coming to an end. This isn’t the first time in history that this has happened – The Industrial Revolution changed occupations forever, but new occupations grew out of the change to fill in the gap. In the States, unemployment is almost at the ‘goldilocks’ full employment level. Anyone who doesn’t have a job doesn’t want one or is ‘unemployable’. There was an interesting and ground-breaking development in Switzerland that could well become the new normal in decades to come – the idea that every citizen of working age be paid a ‘guaranteed income’ by the government, whether or not they worked – so if you have the ambition to improve yourself not just ‘survive’, then you go out to work. Basically it will obliterate poverty but will not necessarily decrease inequality. That inequality will be required to produce the ‘guaranteed income’ of course.