So you thought you read the small print…
Just when you thought it was safe to sign a form without reading the reams and reams of fine print… along comes some new ways you get shafted. Here are some of the things to look out for, or ask your banker or advisor (in writing!)
Surety: You know that endowment you signed over (ceded) to the bank yonks ago, even 25 years ago? You know, the one for your little first home, long since sold… You’d have thought that because the ‘debt’ is no longer there, then the endowment ends too, right? Not so fast. If you’ve been a nice loyal customer and still have a bank account with the bank, maybe even the business has too – then it is highly likely that the surety will be retained for ANY debt or liability out there. My recommendation? If you have ceded ANY kind of policy for a debt or liability, get it removed as soon as the debt is over. If the bank refuses? Move! It is much easier than it used to be, any good bank will make sure your debits are changed themselves, saving you the hassle.
Cession: If you are required to cede a life policy, speak to your advisor first. A partial cession or a fragmented product might be a better alternative to signing over millions more than you need to. Another reason to be be cautious when you do this is that it will dramatically reduce the short term liquidity for your beneficiaries – because the ‘financial institution’ will take their sweet time to settle the debt, then give the remnants to the estate – adding insult to injury – now adding to the executor’s fees. Once ceded, it can be very difficult to get back.
DIY your investment portfolio
While it is great to have someone who keeps an eye on all your investments, that isn’t always possible. Here are some basic pointers on how I go about looking after my client’s investments that you can use yourself:
- Summarise. Have a one page summary of all investments, with contract numbers, inputs, outputs and current value. This should be the first page of your investment file for quick and easy access, not just by you, but by your family or executor ( your ‘redfile’ http://kerenga.com/financial_stress/ will give you some ideas on this). A financial advisor should be able to get you a database printout for investments on insurance platforms if you’re looking for a shortcut or think you might be missing some. Need fund fact sheets to suss out your investments? I find this webpage very useful http://www.fundsdata.co.za/Index/fundsalphasublist0toa.htm.
Asset classes made simple
You have probably heard investment gurus and investors talk about ‘asset classes’ as if everyone was born knowing what they are. They are really important in determining how ‘risky’ your portfolio is, and what kind of short term and long term returns you can expect – and really it’s not difficult at all. If you learn anything about your investments before abdicating their performance to your advisor, this is it.
The ‘risk’ we are talking about here is more emotional than physical – but obviously the one can lead to the other. ‘Volatility’ is probably a better adjective. In other words how much the investment bounces around the ‘average’ or ‘mean’.
Cash is the least volatile, and only moves when the interest rate moves. It is considered the ‘safest’ investment – but that is more applicable to bank savings accounts (protected by the Banking Act) – than money market unit trusts (governed by the FSB) – as anyone who had exposure to African Bank will be well aware of.
Magnificent slipper orchid, photo taken at the 21st World orchid Show, Johannesburg 2014
Specialist/generalist – which one works for you?
We have all got so used to increasing specialisation in our lives, sometimes we don’t even question when it’s a good idea when it’s not – how about when it comes to your finances? I don’t want my plumber to do the electrical stuff in my house – but I would like my landscape architect and architect to work together, or be the same person. But that’s just me. In the medical field, medical specialists also make sense for specialist conditions – but the first stop is usually your GP.
So how does this translate to financial advisory?
There are some fields in financial advisory where specialisation is an absolute necessity – specifically asset management. Whether that is a stock broker, or the asset manager for a collective investment, you need someone who is keeping their eye on the ball. Yes, you can effectively run your own stock portfolio, but if you want to do any form of ‘hedging’ you are probably going to need collective investments, run by an asset manager. If you decide you want to invest in a ‘fund of funds’ – in other words a collective investment made up of other collective investments – then watch your Total Expense ratio, you will be paying asset manager fees on asset manager fees. It would be cheaper to ‘mimic’ that portfolio by buying up the mix of collective investments in your own investment, and balancing them periodically – your financial advisor can help you with that.
Financial advisors can still be excellent at investment without becoming a specialist, but they will usually only get involved with Collective investments – in other words leave the highest level of asset management to someone else. Not all brokers are comfortable with investments, with good reason. They can be extremely volatile, and clients can get very upset if they lose money, as a result they might be inclined to be too conservative for your long term needs, and use a couple of traditional unit trusts that have served well in the past.
An executor on your estate ‘only’ gets 3.99% of the value of the property – hell that’s only fair for a long and difficult job! Right?
They get 3.99% on ‘property’ and not ‘deemed property’ – that’s usually life policies –unless you have put ‘the estate’ or ‘in terms of my will’ on the policy – then it goes to the estate and becomes ‘property’. So assuming you’ve put real beneficiaries into your life policies, then the executor uses other sources of cash to wind up the estate.
Married in community of property? The entire estate – husband and wife is aggregated into one big fat ‘property’ on death – but you knew that right? What you might not know is that the entire estate is now subject to the ‘executor’s fee! Twice as nice Tuesday! To add insult to injury, when the second spouse dies, they do it all over again – on the full estate!
But 3.99% is chicken feed for an arduous job, so let’s give them a break! Let’s look at an example. Spouse has a R10m property in her name, that’s it – apart from a bit of cash and a car. She leaves it to her hubby (section 4q, no estate duty). On her death, what does the executor have to do? Lodge with the master. Call the accountant to wind up the income tax. Call the conveyancer to transfer the house (the conveyancer does the rest). Close her bank account. Draw up a liquidation and distribution report (from a template – might take an hour). His/her fee? R399 000. Mmmmm…
Who are they fooling?
The complexity of Financial advisory never ceases to amaze me. As an Independent Financial Advisor, it is one thing to keep up with all the different unit trusts/collective investments on a daily basis (like most advisors I have several dozen of the 1000 odd available that I watch carefully), but the small print is often exhausting. Regulations keep changing, and just when you thought you had it waxed, a clever tax consultant finds another wrinkle in the amendment (see tomorrow’s blog on retirement fund amendment and estate duty). When it comes to keeping up with all the life products, benefits and bells and whistles the providers keep adding and taking away to their product – if I get confused, how on earth can anyone who isn’t in the industry keep up?