Investments and Risk – When should you review?

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Don’t just stand there – Do something

When it comes to personal finances there are times to take action, and plenty of other times just to let it be. This applies across the entire spectrum of personal finance, from medical aid or life cover to your retirement and investment.
Your personal portfolio can really be split in two, the risk portion and the investment portion. The risk portion, the grudge purchase, includes things like medical aid, short term insurance and life/disability/dread disease insurance. It’s important that you have a professional determine what you need, objectively, after looking at your lifestyle, commitments, obligations and goals. This report should be completely separated from an action or implementation plan. This ‘needs analysis’ is a regulatory requirement for all advisors and brokers, but can be by-passed by a ‘single needs analysis’ – a one pager where you sign away your right to a needs analysis. Unless you’re a ‘big’ client, the most you can hope for is a ‘robo-advisor’ free report. If you go through a call centre, it might be one paragraph if you’re lucky. If you want something customised and tailored to your needs, you are probably going to have to pay for it. The industry is changing. Fee based or partially fee-based advisors are going to become the norm. In the same way you don’t expect to see your doctor or lawyer for free, you won’t be able to expect free advice from planning professionals. The needs analysis will identify exactly what risk cover you need, implementing the plan is now just a matter of choosing the right risk provider at the right price. Not all risk providers are created equal so if you’re dealing with a ‘tied agent’ (only allowed to implement policies with one provider) then get some comparative quotes. The easiest way to do this is to have the first quote to send to other providers so that they can do a like-for-like comparison. Independent advisors should do this automatically, and the results and reasons for their recommendation in their record of advice. It isn’t easy for someone not in the industry to do a proper comparison, but the professional who did your ‘needs analysis’ should be able to do it for you. Once the plan is in place and implemented, you only need review it with your advisor once a year. Don’t be quick to be sucked in with another broker’s promises of ‘cheaper, better’. Make them prove it with a full comparison report, focussing on the differences in the benefits not just the price, with at least 3 quotes from different providers. In most cases, it’s a case of ‘just stand there’.

Once you have covered the risk you need, the rest of your financial planning budget should go to investment. The first thing to do is to have an ‘investment needs analysis’ (which usually come bundled with the risk needs analysis). A robo-advisor report will give you the amount of money you need to save to achieve a goals, but investment advice goes way beyond this. Many risk brokers avoid giving in-depth investment advice because it requires a completely different skill set and daily researching of the market, the economy, the stock exchange, platforms, regulations, tax consequences, asset allocation, house views, due diligence on collective investments recommended and a lot more. Giving investment advice also comes with a real risk of a very irate client when things don’t go as planned. In the life/risk arena, brokers only rarely have to deal with claims and 99% of the time everything goes smoothly, the client is paid out and they are the ‘hero’. Not so with investment. If the market ‘corrects’ downwards and the client gets upset because their expectations have not been met, things can get very unpleasant. A large part of an investment advisor’s role is to educate their client, and this is a lifelong commitment – and will go a long way o meeting their expectations. Short, medium and long term investments have to be invested differently, and the advisor needs to communicate how and why. High fees for poor performance can significantly erode your potential return, those fees must be clearly shown, and your reports show performance after fees (best shown as an ‘Internal Rate of return’ – ask for it by name).
Like risk, the financial needs analysis needs to be objective and free from any implementation bias. An objective analysis should include all forms of investment platforms including savings and call accounts (where a broker is not going to get any commission) and might also include stock portfolios and ETFs, where again they might get limited or no commission. One of the things to be aware of when your advisor is implementing your investment plan is to find out whether an insurance or LISP platform is being used. If an insurance platform is being proposed, ask for quotes on the LISP platform. All the big insurers have one. Liberty has Stanlib, Sanlam has Glacier, Old Mutual has Fairburn Capital, Momentum has Momentum Wealth. There are also standalone LISPs like Investec, Alan Grey and Coronation. Investments on insurance platforms usually come with nasty ‘early termination’ penalties as a result of the lumpsum upfront commissions paid to brokers (in other words, commission for the life of the policy, or 27 years, paid on day 1). LISP platforms pay commission as-and-when – a premium is paid (monthly, quarterly, annually) only then is upfront commission paid. Having said that, even on LISP platforms be aware of large ‘upfront’ commission. This is capped at 3.5%. Most professionals will waive this for clients, or charge a maximum 1%, preferring to take the up to 1% ongoing fee on the asset, in exchange for ongoing advice. Yes, this can amount to a substantial sum on a large investment, but you’re paying for that ongoing insight and expertise which requires hundreds of hours of study and research every year. If your advisor is not giving you that feedback and insight frequently, you can change the broker (who will now get the ongoing commission) and get someone who does. If the portfolio has been properly constructed, long term investments only need reviewing once a year. Looking at it every day can be really stressful. It is going to go up and down. There is no investment reward for no risk. In the long term though, the investment is going to grow well above inflation, and that’s what you want. A professional advisor will communicate the state of the economy with you frequently and will contract you directly if he or she feels like a ‘fund switch’ is appropriate. This only really needs to be done once every 3 or 4 years, and then usually to ‘rebalance’ your portfolio. (Rebalancing a portfolio is required in retirement funds so that they conform with pension fund regulations which limits exposure to the stock exchange.) Medium and short term investments might need to be monitored more closely, especially if there is exposure to the stock-exchange. If preservation of capital is important, then medium term investments should be ‘locked in’ once the goal has been reached, you do this by using ‘conservative’ funds that have a high cash or bond component.

Actions: By age 40 you should have a decent,objective and customised risk and investment needs analysis. This gives you 25 years to potential retirement to implement a solid plan and ensure the risk of you dying or being disabled before then is properly covered. Contact us if you’d like a quote.

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Author Dawn Ridler  

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