You need to find out what you don’t know
Partially as a result from pressure from the regulatory bodies like FAIS, and partially as a result of the evolution of Financial advisory into a profession as opposed to a brokerage, clients can now choose what sort of ‘advice’ they want to receive, and whether or not they want or need a relationship or merely need an ‘order-taker’. Even within the ‘Financial Advisory’ basket there will be a wide range of experience and qualifications that you can choose from, as well as the choice between a ‘linked’ agent (only one provider) or an IFA – Independent Financial Advisor. Many advisors today have professional qualifications, like a ‘Certified Financial Planner (R) ‘ designation, that is similar to other professionals like Chartered Accountants and requires an extensive examination process in order to be accepted.
If you feel that you don’t need financial advice, I am not going to try and persuade you otherwise ( in this blog anyway). There are loads of things I do myself. I am not going to call out a repair person when my washing machine won’t empty, I know it’s probably a sock or something blocking the outlet. I replaced my broken garage remote receiver for R100, saving myself a R650 callout fee for doing 2 minutes work (and probably having them tell me my motor was also broken).There are so many tools and resources out there on the web, that it is more than possible for you to competently look after your finances, if you’re prepared to do the homework and aren’t in a hurry.
Step one: You need to find out what you don’t know. This is moving from being ‘unconsciously incompetent’ (when you don’t know that something exists, so you can’t possibly be incompetent) to finding out what you don’t know (so you are now conscious that you’re incompetent). If you try and do all your own finances when you’re in either of these boxes, it will end in tears.
Step Two: Learning what you need to know, slowly becoming consciously competent in order to DIY. This isn’t going to take five minutes. Insurance providers can take someone straight out of matric to qualified to give ‘life’ advice in 3 months (full-time study) but that really just covers the basics and those advisors have to be under supervision for two years. So here’s a study list:
Medical aid: Don’t bother, and the providers probably won’t let you. The commission is so minuscule that unless the broker specialises in big corporate medical aid schemes, they are probably going to look after you as a service because they manage your investments or life portfolio. You only ever need a broker to help you change plans annually and if a claim goes pear-shaped and it needs to be escalated to an Ombud. Changing medical aids is a mission, you have to be seriously annoyed to go down that route. Investigating which plan within your medical aid to use just needs a few hours reading, and some calculations of your current use.
Short-term insurance: The direct and call-centre providers (the ‘DIY’ providers) have made massive inroads into this market, usually on the promise of ‘bonuses’ for not claiming.You might get a paragraph on your needs so that they can tick the box to comply with the FAIS act, but not much else. These bonuses are deliberately only paid every 4-5 years. They are ‘golden handcuffs’, you aren’t going to want to move in case you lose the bonus. You’re also likely to ‘self insure’ some claims so as to protect your bonus. In South Africa, the likelihood of not claiming on anything for 4-5 years is small. Now that you’re stuck for 4 years, you might just find that your annual increases start hurtling out of control, and the cover was never cheap to begin off with. Don’t be sucked in by ‘cheaper’, it is likely to be ‘cheap and nasty’. Ask for a detailed line by line comparison with your existing cover. Don’t just look at the bottom line, what are you giving up? Compare excesses, exclusions (especially on geysers and water damage, how they replace (especially jewelry), ‘averaging’, security requirements, payout on jewelry not in a safe when stolen. A broker will give you this line by line comparison.
Life cover: Before you get on the phone and buy some life cover direct these are the sort of things you need to know:
- What your life needs are: your debt plus the ‘present value’ cost of caring for your dependants (you can work this out on a financial calculator).
- Funeral needs: Is there liquidity available or does this need to be provided for? Should it be separate or will the provider give an early payout.
- Temporary disability needs : Salary replacement after tax, waiting periods, in-claim increases,claim criteria, term (24/36 months?), occupational loading
- Permanent disability : Salary replacement or the discounted cash flow of all future paychecks to retirement. How additional income is treated (passive and active income), claims criteria, effect of occupation and ability to do nominated occupation on claims. Lump sum requirement. What a termed policy means. Retirement age and its effect on premiums.
- Dread disease – if you have medical aid, this is a want and not a need.
- If affordability is an issue, what is the most important and why. Where do you cut and where not.
- Your existing/proposed and group benefits need to be considered. If you’re over-insured on disability, the excess will be confiscated.
- What premium pattern are you going to use – level or age rated, and what are the long term implications of this.
- What annual increase are you going to put in place, and how does this impact the premium over time. With some providers a 5% annual increase in the benefit results in a 7.5% increase in premium, compounded over time.
- What are the general exclusions, and what specific loadings or exclusion might be imposed on you.
- As an individual, not working with a broker, you may not be able to get comparative, commission-free quotes from the top providers.
- Who you should make a beneficiary and why. The difference between ‘property’ and ‘deemed property’ in your estate.
- If there are any ‘investments’ linked to the life product – what is the small print? How can you lose it? Would it stand alone as a good investment? – project the value through to retirement, mimic it with an ordinary investment, moderately invested.