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So you want to be an entrepreneur?

in Behavioural finance, Business Assurance, Financial Advisory, Financial Plan Leave a comment

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Hidden traps waiting for unsuspecting entrepreneurs

Entrepreneurs, especially if they haven’t been cursed with climbing the corporate ladder or an MBA, have some unique challenges when navigating the field of personal and small business risk and finance. Perhaps it’s that fearless spirit and boundless confidence that will guarantee your success, but “jump and build your wings on the way down” sometimes ends in a bloody mess at the bottom. A bit of homework on wing design and jumping with the right tools would have prevented that – and the same goes for that entrepreneurial venture you dream about.

Test your idea: Unless you’re buying a franchise, a new venture usually starts with an idea, and with a product (which could be a service of course). It is important to iron out at least some of the bugs before you sink too much money into the venture. Who is your target market? What are their expectations? How much are they prepared to pay for the product? What after sales service do they expect? How often will they buy your product? How can you retain their loyalty? Don’t let a poor product sink your venture before it even starts.

Everyone needs to ‘maak’ a plan: Seat of the pants ventures or bootstrapping your way through the early years probably works a charm in your early twenties when you don’t have obligations, not so much later on. One of the biggest mistakes entrepreneurs make is to buy into the fallacy that business plans, financial plans, marketing plans, business qualifications are all bureaucratic nonsense designed to kill your dreams. Dreams and visions are all very well, but unless you know what your “break-even” is for example – and when you might achieve that dream – then it can become a nightmare. The good news is that all this information is freely available on the net, in books and online courses. Do all that homework and put your plan together before you leave your day job. If you’re ‘between jobs’ then use the time to do this homework, but keep looking for a job, even if it as a temp, Uber driver or from your rented room while you rent out your house. Money to launch your venture is hard enough to come by without spending it doing the homework and learning basic business skills.

Who are your clients going to be and how are you going to get them? This is key to any venture’s success. If you’re starting a business very similar to your ‘day job’ tread carefully, if you cannibalise their clients or copy their products, you might spend a chunk of your change in court. Brushing up on social media marketing and building your potential network takes time and trail and error as you find out what works and what doesn’t. You can also use social media to test your product or use free tools like Survey Monkey

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Life Cover Hacks

in Disability, Dread Disease, Financial Advisory, Life cover Leave a comment
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Secrets from an insider

‘Life Cover’ is probably one of the major grudge purchases a working age adult will make, and once you start adding other benefits it can become really pricey. Here are some hints and tips so you can make sure you’re getting what you expect, without paying the earth now – or in the future.

‘Life Cover’ insurance is made up of 3 major components – Life, Disability and Dread Disease but is all classified as ‘life’ cover because the insurance company has to have a ‘life license’ to offer them.. There are a few ancillary benefits like funeral cover, retrenchment cover etc., but these are all still classified as ‘Life Cover’. This might sound like semantics but some gap covers have fallen foul of this definition and are having to remove ‘life’ benefits like cancer lump sums.

Actual ‘life cover’ – cover that pays out if you die, need not be for life. If you take it for a defined period (called ‘termed cover’) and not for life you will be able to save money. First prize is if you can increase this without underwriting at a later stage if you still need it.

At the very core Life cover should cover your debts, liabilities plus the cost of getting your children financially independent. If you have agreed to allow your life partner to be a financial dependant on you for life, then his/her costs for the rest of their life needs to be factored in too (and you may need cover ‘for life’.) If you don’t keep on increasing your debt (smart), life cover should decrease and not increase every year.

Life cover is pretty simple, either you’re dead or you aren’t. Dread disease is slightly more difficult but there are now global standards of severity. Disability is a nightmare – be very careful which provider you choose. (Use an Independent Financial advisor who can get you a variety of quotes from different providers).

It is possible, in fact often preferable, to use different providers for the different ‘life’ benefits so that you get the ‘best of breed’.

Life cover can be bought purely on cost, as long as there are no nasty surprises in small print (read the general and specific exclusions paragraph carefully before signing.) When getting comparative quotes ask for projected premium increases on level or age-rated premiums and compare them side by side or graph them. The differences will shock you. By all means get a quote from a call centre life company – their premiums are usually a good 20% above the lowest premium from one of the big providers (and almost always age rated). Someone has to pay for all those TV ads – don’t make it you. Always get a comparative quote if you’ve decided to DIY and read all the small print and graphically plot the premium increases.

If you’re lured by the ‘cash back’ promises of some Life companies be aware that this is not free. Get a quote before and after the ‘cash back’ and compare it to investing the money yourself. Remember, if you cancel the cover or have to claim you lose that benefit, if you’ve invested it you won’t.

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Trusted Professional – Another meaningless title?

in Financial Advisory Leave a comment
white-or-yellow

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:

  1. An occupation becomes a full-time occupation
  2. The establishment of a training school
  3. The establishment of a university school
  4. The establishment of a local association
  5. the establishment of a national association
  6. the introduction of codes of professional ethics
  7. 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.

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Fixed Income

in Behavioural finance, Financial Advisory, Investment, Retirement funding Leave a comment
fixed

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.
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Wealth equation Part 3 – Wealth

in Behavioural finance, Financial Advisory Leave a comment
cyclamen

Wealth – What is left

In this, the last part of the three part blog (You can read part 1 HERE, and part 2 HERE)on the wealth equation we are going to look at the one we are all most interest in, wealth. Just to recap, the equation goes like this : Wealth is what is left after you have consumed your income – Not higher grade maths, but if you can simplify something that is infinitely complex into a simple concept, there is a better chance that more people will understand, and, more importantly, make the small changes that can have a huge impact on their wealth.

To start off with let’s look at what wealth is, and what it isn’t. Your primary residence is not an asset. In time, it may reduce your consumption that comes from rent but you have to have a roof over your head in the long term. If push comes to shove in your retirement years, you can realise the capital and live off it for the rest of your life, but obviously a chunk of that is now going to go into rental. Your brand-new-every-three-years-car and holiday-home-that-is-hardly-ever-rented are also not assets or wealth. In part one and two we focussed on one thing – increasing the amount that is left after you have consumed your income – so that you can invest and grow your wealth. One question I often get is “Should I pay off my debt or invest the money?” The easy answer is pay off your debt. The even easier answer is, apart from your mortgage, don’t have any debt. Mortgages are usually the lowest interest rate you can get. What about cars I hear you shout… My answer? Read part 2. If you pick right the first time, and you look after it, a car should last ten years. That gives you 5-7 years to put that repayment into an investment when you have to replace it – and pay cash. Before you buy a car find out what the out-of-plan maintenance costs are like – the variety by brand might shock you into making a longer-term choice. With our slower investment market and high interest rates, putting excess money in a bond is the best ‘return on investment’ you are going to get. However… whether you should or not is going to depend on your personal financial behaviour. Far too often I have seen pensions being cashed out (and taxed) to pay off debt or go into the bond, only for the debt to rise up again quickly. Fess up to your financial behaviour – you don’t have to share it with anyone – but if you know how you behave you are well on the way to really growing your wealth.

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Treating Investment Customers Fairly?

in Financial Advisory, Investment Leave a comment
TCF
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).

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