How to make the most of it
With Prime at 10.5%, and likely to rise further this year, your returns from cash (and bonds) are going to be better than they have ben for many years, and will almost certainly be less volatile than the stock market. So how do you take advantage of this – but not lock yourself into something for years?
- Maximise your interest tax deductions. Your annual tax certificates (IT3) will be coming in over the next few weeks – are you maximising your R30k annual deduction? If you are, look at tax free savings accounts (max R30k contribution pa).
- Use ‘cash’ and ‘bonds’ to moderate your portfolio if you need to preserve your capital in your investments. You may also want to moderate your portfolio and still get a decent return if the wild fluctuations of the stock market is making you ill.
- Pick a savings pocket that gives you decent interest for your emergency fund. Shop around – you might be surprised how much they vary. If you’re a frequent traveller having a Visa and a Mastercard might be prudent – in some countries you cannot rely on both being available all the time. Factor that into your choice of savings account.
- Kill as much debt as possible, starting with the most expensive – credit cards and personal loans. Interest rates on these products run over 18% – you’re not going to get that guaranteed returns anywhere else. Sure, you aren’t ‘getting’ interest but you’re saving having to pay it – and you don’t have to pay tax on it! Your bond is the last of the ones to throw money at, because it is the cheapest, but once the others are gone, a great place to ‘invest’ your money. Wealth is what is left when you have ‘consumed’ your income. It makes no sense to pat yourself on the back when you add interest to your income when it is consumed by interest you’re paying over the odds for on the other side of the equation. Focus on the bottom line, your wealth, not your income.
- If you absolutely have to move house, be very careful about the size of the bond you take on. Will you be able to afford it if the interest rates rise 3, 4, 5% ? Moving house frequently is one of the biggest wealth killers – examine your motivations really carefully. Maybe you need a few sessions with a shrink or coach and not a new house.
- New cars are another black hole that can suck the life out of your wealth – the same things apply to them as to houses. The biggest favour you can do your long-term wealth is to separate your ego from cars, houses and keeping up with the Joneses.
- Should you fix your bond? Tip – when financial institutions start offering to fix your interest rate ( always above the prevailing rate) you can bet your bottom dollar they are about to drop. Right now, that ship has sailed.
- If you’re retiring, consider taking out a ‘life’ annuity and not a ‘living annuity’. This is even more pertinent if you’re single and it doesn’t matter that the investment dies when you do. A ‘life’ annuity gives you certainty on your income that a ‘living’ annuity cannot. The interest rate that you ‘buy’ your life annuity at stays with you for life. Those pensioners who took out life annuities when interest rates were at 20%+ are laughing today. Factor in inflation though – it costs you more but rampant inflation can very quickly erode that fixed income.
Action: This is a good time to focus on the ‘asset allocation’ of your investments, maximise your tax deductions and mitigate some of the volatility in your portfolio if you need to preserve that capital in the short term.
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Author Dawn Ridler ©
Survive or even thrive during a downturn
The economy has been slowing down for over a year now, and the threat of a recession is a very real possibility. Post 2008 the economy has never really recovered to the extent we have come to expect in previous cycles. It is a new normal. When there is a long-term change in the environment you cannot keep spending or saving in the same way and expect the same results. If you haven’t started making those changes, here are some pointers:
Fire-proof your career. There are careers out there that are dying or shrinking, make sure yours isn’t one of them. For example, car salespeople, estate agents, recruiters, bank tellers even financial advisory. Over the last couple of decades some jobs, like secretaries, have changed enormously (who remembers typing pools?) Many jobs are now service/concierge orientated. If you need skills, now is the time to bite the bullet and get them. This might not be a degree like it was in the past. It might be English and communication skills, technology or sales skills like self-confidence. Today everyone is expected to ‘manage’ themselves, those are skills worth acquiring if you want to advance. Computers are never going to replace a skilled salesperson or manager.
When a financial planner looks at your risk (life/disability/dread disease) needs, he or she is supposed to take your group risk cover into consideration when making recommendations and in effect assume that you are adequately covered. This can be a dangerous assumption and leave you or your family badly exposed when it comes to claim time.
Life cover itself is fairly uncomplicated. Clearly you either are dead or you aren’t. Ditto funeral cover. If you’re really unlucky and have been killed at the wheel of a car when you’re drunk or by hitting your head on the bottom of a fountain after a (not so hilarious) night out with the boys then some of the insurers might baulk, but on the whole, life cover is life cover, wherever you go and however you get it. Just make sure that it isn’t ‘accident cover’ only. That is a cheap and nasty subset of life cover that only pays out if you’re in an accident, not if you have heart attack or any other less spectacular exit plan.
Dread disease on Group Risk cover is less common, but where you do find it is usually a ‘severity based’ product paying out a percentage of (what is normally) only one year’s salary. In other words at stage one cancer, (when most cancers are detected) your payout will range from 0-5%-25%. Dread disease cover is an increasingly important part of medical risk cover (see my blog HERE) but is expensive and falls a way down on your list of priorities.
Group Disability cover is the biggest concern. Ninety percent of the group Disability cover, especially permanent disability cover, is appalling and quite frankly not worth the policy paper it is written on. Why? As per usual, it is in the small print. Do yourself a favour, ask for the full Group policy document before downgrading your personal cover in favour of group cover.
Look for wording like “…if, in the opinion of x provider” (what happened to objective international standards?).
The problem with Vested interests
It’s a sad day when treating customers fairly has to be legislated and regulated, is it a reflection of a new self-centred millennium problem – or fixing a long term problem? So-called old-fashioned values, where the consumer was king is not just retro, it is antique and probably disappeared in the haze of MJ that was the sixties. In insurance and investment the legacy products are still hanging around like the smell of chicken manure in early spring. You know the ones I mean…
- Pre-2007 Retirement Annuities and endowments with 30% termination penalties.
- Post-2007 Retirement annuities and endowments with 15% penalties thanks to ‘upfront’ commission paid to brokers.
- ‘Graveyard’ endowments with terms of 50 or more years that only mature when a client is in the 80’s and penalise up to 30% if you stop before then.
- Dated group or personal disability products that will only pay-out if you’re virtually on life-support.
It is quite clear that, in many respects, the insurance industry is paying lip-service to ‘treating customers fairly’. This extends to brokers that continue to sell those products that, no doubt in time, will fall foul of this legislation. Why do they continue to sell these products? Follow the money…
The Retail Distribution Review is proposed legislation that is going to change the face of how brokers, financial advisors and planners are remunerated. In order to prevent a repetition of the above customer abuse though there is a very real threat that the baby will be thrown out with the bathwater and everyone will suffer. Over time there is going to be a transition to a fee for advice and/or implementation, like every other profession. This is only going to happen over time, probably a way longer period than expected as the profession is dragged kicking and screaming into fee-based model.
With risk (‘Life’) products the biggest problem is the link between premium size and remuneration. It takes the same amount of time to draw up a financial recommendation for a R300 policy as it does for one that is R10,000 but the commission is hugely different. In non fee-based practices (99% in RSA) the time spent on advice to small clients is offset against the fees of the bigger clients and the broker/advisor/planner can earn a living. The reality is that smaller clients are unlikely to pay for advice, even at the low rate, and so are going be pushed into the ‘low or no’ environment.
Are the bigger clients going to pony up the R60k or more for a plan to compensate for lost commission? It had better be a damn good plan. The top range for a financial pan, done by an experienced CFP, with no expectation of future commission or fees is R30,000. R15,000 is more the norm but only high nett worth individuals are going this route.
It is likely that commissions are going to be phased out first from investment products, with fees only paid on an ‘as-and-when’ basis in the way LISP platforms have always done it. Let me give an example of the impact this will have on a broker currently using insurance platforms for a large RA. On a 10 year R50,000 pm RA, the upfront commission would be about R133,000 with another R1,450 per month paid against each contribution. On a LISP platform, if the advisor takes upfront fees of 1% (many don’t) he or she would Get R500 a month. The assets under management fees will grow with the fund. It will take 6 years for the broker just to make up the initial fee paid on an investment platform, 8 if you add the high monthly contribution fee on the insurance platform. Is it any wonder brokers are defending the old remuneration model tooth and nail?
This vested interest is hurting clients, and they probably aren’t even aware of it. Not only are they paying outrageous fees, but to add insult to injury they are stuck in the investment for at least 5 years or pay a 5-6 figure penalty (in the case above).
Does it have to be either/or?
In case you hadn’t noticed, there is a noisy revolution going on in the investment environment and it’s all about ‘robo advisors’ taking over from flesh-and-blood advisors (the origin of the phrase pound of flesh). As with all dastardly plans this started in the States (JK). Robo advisors are nothing more than computer programs, strings of ‘algos’ that take the information you feed them and spit out a recommendation and lods of followup reports, and very kindly, don’t charge you for it – providing you use their platform of course. Why on earth would you want to do that? Fees of course. Cutting out the middleman is the quickest way to dump a bunch of fees.The robo advisor revolution is just a small part of the rebellion against bloated advisory and investment fees – and it is coming to South Africa. Post 2008 that wunch of bankers, investment bankers, have not been popular. They were responsible for lumping hoards of bad debt into one pretty little package, getting it rated A+ and flogging it to the unsuspecting public by way of sub-prime loans. Fees that exceeded the meagre returns the market was offering stuck in the craw of the investing public and led to this revolution.
The first signs of this change was the rapid replacement of traditional Unit Trusts (called Mutual Funds in the States) by ETFs (Exchange Traded funds) and ‘trackers’. This started off with ‘retail investors’ (we, the people…) buying these directly, and they are now popping up on traditional investment platforms. If you aren’t sure what these are you can read my blogs HERE and HERE. This is ‘passive’ investing. Investment done by a cold-blooded computer, supervised by an even colder blooded asset manager. This is way less work than an asset manager doing it all by himself – an ‘active’ asset manager. Most of the costs associated with ETFs and trackers are admin, software or buy-and-sell costs. Obviously with active asset managers you have to add payments on the Ferrari and beach house in Clifton. There is also yet another layer of active asset managers who take pre-existing unit trusts (that they aren’t smart enough to make themselves) and make another unit trust (layers upon layers of fees). If you see FOF or Fund of Funds tacked onto a unit trust take a look at the fees – then run.
Having eroded the fee base of asset managers, fees paid to financial advisors was the obvious next target. To be fair, all robo advisors did was take the same information that inexperienced or lazy financial advisors used to stick into a computer program to churn out your investment recommendation without another thought and turned it into a DIY model. The catch is that if you want to use the robo-advisor you usually have to invest on the robo-advisor platform – and those are usually traditional unit trusts and feeding those ‘active’ fees to asset managers (but, to be fair, as economies of scale kick in those fees are also coming down.)
Petrol Price – why you need to understand it
Unless you’re in the financial services industry understanding basic economics is either as boring as hell or irrelevant. What control do you have over it anyway? Most of the time this exactly so, information overload is as dangerous as being clueless (it can lead to overconfidence and poor decisions). Occasionally though there are macroeconomic changes that you need to understand the basics of so that you can make better investment and long term decisions. While we might be a commodity and resource producing nation here in the good old RSA, one resource we don’t have in any meaningful quantity is oil and gas. It all has to be imported.
Problem 1 – for us in RSA – oil/petrol etc has to be imported in dollars. That has 2 implications. Firstly on our balance of payments – the equivalent of government’s credit card. Here’s a shocker – we are in debt, rather badly. To add insult to injury that isn’t good debt but has been spent on the equivalent of the groceries. Secondly our plummeting rand depreciation makes every barrel of oil we import more expensive.
Problem 2: Oil/petrol/diesel/gas is used in every industry, every home, every vehicle in the country. The price of oil impacts the ‘cost of doing business’ right across the board. Taxi rides or commutes for workers. Cost of delivering food. Cost of processing food. Cost of running stores, businesses, government departments. Keeping the lights on, pumping water. This impacts on inflation.
Problem 3: Inflation hurts our investments and puts pressure on the Reserve Bank to increase our interest rates. Higher interest rates hits the disposable income of middle class South Africans – the engine of the 60% of our GDP that comes from consumer expenditure. It also results in a rise in credit defaults, hurting business. In the past inflation was a result of excessive demand (by us, the consumer) – spend, spend, spend. This usually happened at the top of an economic recovery. Raising interest rates ‘cooled’ the economy.
Problem 4: Recovery? What recovery? What happens when you increase interest rates when you aren’t at the top of a recovery, but just shy of a recession? It ‘cools’ the already chilly economy to freezing point. That is the not-so-pretty picture we are looking at right now. Just before Nenegate the SARB (Reserve Bank) tried a little experiment – they thought they could ‘frontrun’ the American FED by increasing our rates before they did and so prevent Rand depreciation. Did it work? Resoundingly – for 48 hours.
There is absolutely no doubt about it, if the oil price wasn’t at 11 year lows in dollar terms we would be in a whole pile of pain and well into a recession. Will it last? The only way to answer that is to look at the dynamics of the international oil price and producers.