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LETTER FROM THE FPI
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CLIENT ENGAGEMENT To RE or not to RE?
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To sell is human
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EMPLOYEE BENEFITS Divorce and pension interest
ESTATE AND TRUST PLANNING Fpi magazine, published by COSA Media, a division of COSA Communications (Pty) Ltd.
Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications. The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or pro-ducts or the reliance of any information contained in this publication.
FPM 07112013
Contents
The universal partnership at death
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Welcome development towards regulation of Muslim marriages still not enough?
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FPI NEWS AND EVENTS INVESTMENT
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CRISA in practice REITs – Defined and delivered Hedge fund compliance – getting it right
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Letter from the FPI The profession of financial planning
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n 1998, I landed in the financial services industry by accident. I was applying for what I thought would be an accounts clerk job (at that time I was studying to become a chartered accountant) and realised that I was actually a service clerk in one of the big insurance companies. As accidents go this was a happy one, I had found an industry that I could build my career in.
Many people I speak to have a similar story about how they become a financial advisor. Most started their careers as something else, from accountant to lawyers to dental technicians and waiters. So why do people become financial advisors? For me, it was knowing that a person’s life was saved because her spouse’s life cover could be used to pay the hospital deposit after a tragic shooting where he lost his life and she was severely injured. It was that incident which highlighted the value that financial products can add to a consumer’s life. There is a saying that financial products are sold, not bought. Research from Australia and Canada has shown that consumers who engage with financial advisors are twice as likely to save as those who do not. Advised clients also have a wider variety of financial products. If we believe that consumers of financial products are better off (and I do) and that financial products are sold and not bought, then we
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must conclude that professional financial advice adds value to the life of a consumer. It is therefore important to ensure that in any debate regarding advisor’s remuneration, it is not only the cost of advice that must be considered, but the value of the advice to the consumer. The outcome of the current retail distribution review debate should have the following outcomes: • A sustainable financial planning profession that can serve the South African public at large and not just a select few who can afford to pay for it. • A remuneration structure that will foster ongoing relationships and engagement between the advisor and client. “May you live in interesting times” is attributed to being an ancient Chinese curse. With Twin Peaks, Treating Customers Fairly (TCF) and Retail Distribution Review (RDR) looming, one cannot deny that our industry is going through what can only be described as interesting times.
David Kop,CFP
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Senior Manager Policy and Research at FPI
Client engagement
To RE or not to RE? By Christy van der Merwe
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Regulation and compliance is one of the biggest challenges in the financial services industry at present. While it has been costly and confusing, it is worth taking a step back to look at the bigger picture; what has been achieved, and what this has ultimately meant for your clients.
The financial services industry in South Africa is now at a point where the majority of people required to, have written and passed the Level 1 Regulatory Examinations (RE1). “We had a lift in the number of candidates writing the exams in May and June last year before the originally gazetted cut-off date of 30 June 2012, and again in March 2013 before the extended and ultimate cut-off date of 31 March 2013. We still have a regular flow of people writing, some of whom are people who had not passed by the cut-off date, but most of whom are new entrants into the industry,” says the Financial Planning Institute (FPI), one of the two examining bodies for the Regulatory Exams in South Africa.
Has it worked? When industry professionals are faced with the question of whether or not the regulation and compliance imposed on the financial services industry in recent years has achieved its intended goal, there are often thoughtful pauses. After some consideration, the responses are generally positive, although there is no denying that it has been a challenging journey, and clarity is required with regard to what happens next. “There is no doubt that the new legislation and the Regulatory Examinations have had a profound impact on the quality of advice being given to the public, and have also provided the public with clear and simple processes to follow in the event that they believe they have received poor advice. A new era of transparency, professionalism and client focus has been developing and all should benefit from this,” emphasises Chris Busschau, CFP®, head of the examination body at FPI.
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Client engagement
Act, and also that the advisor is fully aware of what the act entails,” reiterates Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA). He adds that the FIA is aware of the challenges its members face in staying up to date, and complying with, the ever-increasing regulatory load. Although compliance is costly, especially for smaller financial services practices, each initiative must be considered for the positive net effect it creates for both the financial services environment and consumers. “RE is proof that the country’s financial planners/advisors take both the regulator and the resulting regulatory intervention seriously, and that the country’s risk and financial advisors have consumers’ interests at heart. It is also an important component in the ongoing drive towards professional recognition for intermediaries,” Van Pletzen states. Altrisk CEO Michael Blain adds that time will tell whether the increased regulation is having the intended impact, but affirms that it has enforced a greater degree of discipline within the industry. “Savvy advisors will not see the regulation as a burden, but rather as good practice,” he adds.
Enforcement With regard to RE1, the FSB says that “regulatory action is being taken on an ongoing basis where persons have not applied for exemptions and do not meet the prescribed requirements”. Another issue raised was that while the FSB publishes monthly updates on licences for financial services providers (FSP); FSPs whose application for licences have been declined or approved; or when licences have been suspended, withdrawn or reinstated, there is not much comparative analysis or explanation of this data.
Speculation in the industry is that these RE2 exams may not happen. It is anticipated that the desired outcomes from RE2 could be achieved through a combination of Treating Customers Fairly (TCF) and Continuous Professional Development (CPD). As for RE1 and RE5, in its latest information circular to members, the FSB states that it will conduct a review of the RE1 exam and the RE5 exam prescribed for representatives. The FSB intends to investigate the possibility of combining the RE1 and RE5 exams into one cost effective and time efficient examination. This will result in a person who currently may be required to write both the RE1 and RE5 exams the option of writing one exam only. Beyond examinations, the degree of uncertainty regarding regulation and compliance does damage to the industry, making a career in financial services unattractive. Broker roadshows tend to highlight the amount of negativity in the industry as the regulator reconsiders whether to make advice fee based or to work on commission. The uncertainty means that people do not invest in their business and grow the skills base as they are not assured of the future. “With this uncertainty, the future young successes are not being recruited into the industry. There is a need for more positivity and pragmatism from all,” says Blain.
RE IN A NUTSHELL
The deadline for those already working in the industry as representatives to at least attempt to write the exam was 31 March 2013. Financial planners, advisors and intermediaries who have not attempted the exam by the cut-off date risk being debarred by the FSB. EXAMINING BODIES: Financial Planning Institute (FPI) and Moonstone. WHEN AND WHERE: Check the websites of the exam bodies for an exam schedule and fees. NUMBER OF PERSONS PASSED RE1: 12 034 (93 percent of people written) NUMBER OF PERSONS PASSED RE5: 65 272 (92 percent of representatives affected) (Source: FSB as at 8 September 2013)
Perhaps one way of tracking the effectiveness of regulation is to monitor the complaints to the Office of the Ombudsman for financial services providers. The website of the FAIS Ombud houses an overview of determinations, and the number of determinations for 2013/14 year was 20 in November, compared with 30 determinations for the full 2012/13 year. Charmaine Koch, professional development manager at the Insurance Institute of South Africa, notes that it is a good indication that there seems to be a steady decline in FAIS Ombud cases, and the frequency of certain types of complaints.
Although hearsay indicates that some financial advisors changed careers because they could not pass the exams, this has been a painful experience for a minority. The majority of advisors have a more comprehensive understanding of the way in which they should perform their roles. Many experienced and knowledgeable financial advisors have commented that they have lifted their advisory processes to far more professional levels, and that they now recognise the benefits flowing from being obliged to write the exams, adds Busschau. A very positive response came from René Nel, head of the Insurance Learning Academy, who says that RE1 has definitely improved the industry. She says that she has seen people learn a tremendous amount as they prepare for the exams, and has no doubt that financial advisors are better equipped to deal with their clients after it. “You can be assured that people who have prepared for and passed their RE1 know their stuff when it comes to the Financial Advisory and Intermediary Services (FAIS) Act, and consumers are getting better advice.” “Consumers who transact for financial services with assistance from professional financial planners can now do so safe in the knowledge that their risk or financial advisor regulated by the provisions in the FAIS
The other question being raised is whether or not adequate punishments are being levelled against law breakers. “I think a problem is that we haven’t seen enforcement of transgressors, so the crooks are not being adequately punished,” notes Blain.
FREE access to online legislation
Clarity required A major complaint regarding regulation and compliance is the degree of uncertainty that exists about what will be implemented and when. The industry has been bracing itself for the more product-specific Level 2 Regulatory Examinations (RE2), however, the FSB has stated that it has started a review process of RE2. Earlier in 2013, the FSB announced its decision to temporarily suspend the implementation of RE2 until it could finalise a review of the current development and delivery models of those exams. It is expected that this exemption will be in force for at least the next three years, to allow for development and implementation of a new model. “A focus group will be established shortly to consider different delivery models and the extent of the redevelopment of the applicable qualifying criteria. On completion of this, the FSB will publish, for comment, a discussion document that details the proposed new delivery model,” adds the FSB.
Wherever and whenever you want Just go to http://www.fpi.co.za/professional/ResourceCentre and select LexisNexis Online Service and use your normal FPI member login to access. Includes updated legislation as well as news and case citations relevant to financial planners. Just one of many value-added FPI member benefits.
RS248/13
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RS248-13_online_legislation_ad_130x175.indd 1
2013/11/18 7:58 AM 9 The Financial Planner
Client engagement
To Sell is Human In our personal lives we sell our partners on the idea of doing things for us. We sell to our children the value of going to school and behaving well. And we sell ourselves, a sales job we’re doing unconsciously almost all the time. There is a sales job underway in the tone we choose when asking a colleague for help. Even the way we look is a sales pitch in itself.
is a relic. In To Sell is Human he introduces the new ABCs of sales: Attunement, Buoyancy and Clarity. Attunement is the capacity to take on another person’s perspective, to understand his interests and to see the world from his point of view. For me this means always asking myself if the decisions I make are in the best interests of my clients. Jeff Bezos, the founder of Amazon.com, takes a similar approach. In all the important meetings he holds with his executives, he places an extra but empty chair at the table. It is there to remind everyone of the most important person in the room – the customer. Buoyancy is the capacity to stay afloat while navigating oceans of potential rejection. Every day we face potential rejection, and what we do before, during and after a rejection is vital if we are to maintain a positive attitude. Pink suggests writing a rejection letter to prepare for encounters which may end in “no way” from a client. His other suggestion regarding buoyancy has to do with self-talk. Instead of a statement: “I can do this!”, Pink’s theory is that a question: “Can I do this?”, helps to better prepare you. Unlike the statement, the question forces you to come up with reasons for doing something.
And finally, clarity is the capacity to make sense of murky situations, to curate information rather than merely access it, and to move from solving existing problems to finding hidden problems. What does this mean for financial planners? Simply, hard-sell is out. We need to move towards improving our engagement with clients, and it is as simple as improving our ability to listen. We need to get inside their heads, put ourselves in their shoes and really make a habit of getting to know what is important to them. You will be amazed at how much easier it becomes to move people when you get them. Finally, it is important to ask the right questions. One of my favourite lines of questioning involves using a scale. “On a scale of 1 to 10, how ready are you to retire?” Let your clients decide their own reasons for doing something. This will make the conversation between you and them more engaging, and will change the way we sell our products, ideas and ourselves. Visit Daniel Pink’s website www.danpink.com for articles, videos and interviews and to subscribe to his newsletter.
A book review by Kim Potgieter, CFP®
My quest to keep abreast of global trends is never-ending and involves reading as much as I can – books, magazines and online. This is also how I tap into the ideas of the great thinkers of our time. So much of what I do is inspired by other people, and I feel strongly about learning continually, that the pile of books next to my bed is mountainous. The only thing I love more than learning, is sharing worthwhile knowledge. Daniel Pink’s To Sell is Human is one those books I feel compelled to share. It explores the art and science of sales, and the truth about what it takes to move people. He draws on the social sciences, includes personal stories, research and observations, and arrives at fascinating conclusions that I found particularly interesting in the context of financial planning. As financial planners, we earn our income by convincing clients that they need our expertise – our technical knowledge to help them invest their money, for example, and our guidance so they can enjoy financial peace of mind. In fact, every day we spend a significant portion of our time persuading not only our clients, but our colleagues as well, to part with important resources like money, knowledge and time. For the most part we are selling without realising it, but selling is exactly what we do. And believe it or not, we engage in sales outside of the work environment, too. In our personal lives we sell our partners on the idea of doing things
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for us. We sell to our children the value of going to school and behaving well. And we sell ourselves, a sales job we’re doing unconsciously almost all the time. We sell ourselves, for example, the very moment we shake a new client’s hand. There is a sales job underway in the tone we choose when asking a colleague for help. Even the way we look is a sales pitch in itself. Every one of us is a salesman or woman, and the truth is, we’re almost constantly in the act of selling something to someone. Unfortunately, sales has developed a bad reputation over the years with words such as ‘deceitful’ and ‘pushy’ springing to mind. But the kind of sales we associate with these words is obsolete. In years past the problem was an imbalance of power caused by information asymmetry. When a transaction would take place the salesman would almost always have more information than the consumer. Ultimately, the consumer came off second best. Nowadays, however, the consumer is more empowered. In the Internet we have a wealth of information at our fingertips which significantly reduces the risk that we’ll get ripped off. And we have various methods of recourse available to us if we do. In outdated sales theory, we are taught the ABCs of sales: Always Be Closing. When buyers have more options, access to information and the means to talk back, says Pink, the steamroller approach
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Employee Benefits settlement agreement, if applicable). Section 7(8) of the Divorce Act, read together with section 37D(4) (a) of the Pension Funds Act, sets out certain conditions with which a divorce order must comply in order for the fund concerned to be able to give effect to a non-member spouse’s claim. These conditions can be summarised as follows: • • • •
Earlier this year, in the matter of Areias vs Momentum Retirement Annuity Fund and another [2013] JOL 30007 (PFA), the adjudicator had to consider whether a divorce order met the requirements as set out above. In this case, the complainant wanted to rely on a divorce order which entitled her to 50 percent of her former husband’s pension interest. However, the order did not name the fund and it didn’t refer to pension interest as defined in the Divorce Act. The settlement agreement simply referred to “policies which shall continue to be paid by the member until maturity date when the policies will be paid out in equal shares”. The adjudicator held that a court order is binding on a particular pension fund only if it mentions the fund by name, makes reference to pension interest and otherwise complies with the relevant sections of the Pension Funds Act and Divorce Act. The complaint was therefore dismissed.
Lize de la Harpe, Legal Advisor: Glacier by Sanlam
Divorce and pension interest
Divorce is often a bitter and costly exercise, and the last thing one wants is to go through the legal process only to be left with an unenforceable divorce order in so far as it relates to a share in pension interest.
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The order must specifically provide for the non-member spouse’s entitlement to a pension interest as defined in the Divorce Act. The order must set out a percentage of the member’s pension interest or a specific amount. The relevant fund which has to deduct the pension interest must be named or identifiable. The fund must be expressly ordered to endorse its records and make payment of the pension interest.
In the recent matter of Bowyer vs Personal Portfolio Preservation Fund, the adjudicator stated that the fund in question should not have complied with the divorce order because the order did not comply with the requirements as set out above. This matter clearly shows the adjudicator’s tendency to insist on strict compliance with the requirements of the said legislation before giving effect to a divorce order in terms of which pension interest or part thereof is allocated to a non-member spouse. Recent adjudicator decisions have again highlighted the importance of ensuring that divorce settlement agreements and accompanying orders are drafted strictly in line with the Pension Funds Act 24 of 1956, read together with the Divorce Act 70 of 1979. The aim of section 37A of the Pension Funds Act is to protect a member’s pension benefits from their creditors, and it expressly limits a fund’s ability to deduct amounts from a member’s pension interest. As a general rule, a fund may make a deduction from a member’s benefit only if such a deduction is allowed in terms of the Pension Funds Act, the Income Tax Act and the Maintenance Act. This general rule is, however, subject to the exceptions set out in section 37D. One of these exceptions relates to divorce. Section 37D(1)(d)(i) states that a registered fund may deduct any amount assigned to a nonmember spouse in terms of a divorce order granted in terms of section 7(8)(a) of the Divorce Act. When parties divorce, the court dissolving the marriage may make an order (i) directing the applicable fund to make an endorsement in its records about the non-member spouse’s entitlement to a portion of a pension interest and (ii) to pay such portion to the non-member spouse in accordance with their choice. All of this must be specifically claimed for in the summons (and accompanying
If the divorce order does not strictly meet the above conditions, it will not be in compliance with the Divorce Act read together with the Pension Funds Act, and will therefore not be enforceable against the fund. The fund in question has no discretion in this regard, since it is strictly bound by the Pension Funds Act. The recent adjudicator decisions in this regard (two of which are mentioned) make it very clear that funds and administrators must act with extreme caution when receiving a request for payment in terms of a divorce order and must ensure that payments are always made in terms of a valid court order. If your divorce order is found to be unenforceable against the fund in question, it does not mean that you lose your claim for the pension interest as awarded: you still have a claim, but you will have to claim against your ex-spouse. You therefore either have to go back to court to sue your ex-spouse for the value of the pension interest you are entitled to and hope he or she has the funds to make good your claim, or you have to approach the court that issued the divorce order and request an amendment in order to bring it in line with the provisions of the Divorce Act and the Pension Funds Act. Unfortunately, both options involve further legal costs. Even if your ex-spouse confirms that they have no problem with the deduction of the pension interest awarded to you, it won’t affect the unenforceability of the order against the fund.
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THE UNIVERSAL PARTNERSHIP AT DEATH Wessel Oosthuizen, CFP速
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South African statistics demonstrate a rising trend in cohabitation. Conservative statistics indicate that a very large number of people live in life partnerships in South Africa. Census figures over the last two decades clearly show that patterns of marriage and cohabitating without marriage are changing.
Many people believe that simply living together with another person for a continuous period of time establishes legal rights and duties between them. Some people even believe that the duration of the relationship creates legal protection while others think that having children together entitles the cohabitation relationship to legal protection. The result is that many people do not know that there is actually no legal recognition of life partnerships in case of the death of one of the partners. People in life partnerships by way of their ignorance tend therefore not to protect themselves from possible economic disaster until it is too late. Normally at the dissolution of a life partnership by way of death, the assets or any obligations are determined or distributed on the basis of an arrangement (if any) or cohabitation agreement that the parties compiled during the subsistence of their relationship. If there was no such arrangement or agreement in
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Estates and Trusts Planning contains no definition of ‘spouse’. Similarly the definition of ‘spouse’ is important to establish whether a ‘survivor’ has a claim against the estate of a deceased ‘spouse’ in terms of the Maintenance of Surviving Spouses Act. The terms ‘spouse’ or ‘surviving spouse’ are also not defined in the Maintenance of Surviving Spouse Act. This means that a life partner in a heterosexual relationship is not protected under the Intestate Succession Act and the Maintenance of Surviving Spouses Act and can therefore not inherit or claim from their life partner’s deceased estate in terms of statutory law. The concept of a universal partnership has from time to time been employed in South African law in order to improve the adverse consequences that ensued due to the lack of recognition accorded to long-term relationships. The universal partnership is a form of partnership that is most often encountered in a family law context. To understand the concept of universal partnership, it is important to know what is required for a partnership to exist. Stratford AJA confirmed in Rhodesia Railways and Others vs Commissioner of Taxes that South African law requires compliance with four essential requirements. First, that each of the partners brings something into the partnership, or binds himself to bring something into it, whether it be money, or his labour or skill. Secondly, the business should be carried on for the joint benefit of both parties. Thirdly, the object should be to make profit. Finally, the contract between the parties should be a legitimate contract.
place, the surviving life partner can be left financially ruined and destitute. Life partnerships have never been prohibited by South African law, but nor have they enjoyed any noteworthy recognition or protection by the law. This is precisely where the problem originates in case of the death of one of the life partners; there is no legislation protecting them. The South African courts have on occasion come to the assistance of couples in life partnerships by deciding that an express or tacit universal partnership exists between the couple. The problem with the universal partnership, although recognised, is that it is difficult to prove such a partnership particularly in case of death. Although draft legislation with regard to life partnerships, in the form of the Domestic Partnership Bill, has been on the table since 2008 nothing material happened during the past five years to finalise this, leaving life partners isolated.
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The common law dictates that when a partnership comes to an end, the assets are divided between the partners in accordance with any express agreement to this effect. If there is no agreement, they share in accordance with their respective contributions unless their contributions were equal or unless it is impossible to determine whether one has contributed more than the other, in which case the partnership assets are divided equally.
An unmarried cohabitee who wants to inherit in terms of the Intestate Succession Act or who wants to claim maintenance in terms of the Maintenance of Surviving Spouses Act will have to prove firstly that there was a tacit universal partnership that meets the requirements. Secondly, such a person will have to prove exactly what their contribution towards the partnership was. Subsequently even if able to prove a tacit universal partnership, the executor would have difficulty in determining the extent of the contributions to the universal partnership and what percentage (quantum) can be awarded.
In my opinion an executor is not allowed by operation of law and/or his office to establish whether a universal partnership existed nor the quantum and division of such a universal partnership, for the purpose of considering a claim against the estate. Only a court of law has the competency to decide whether a universal partnership existed, leaving the surviving partner the only option of instituting court action which can be expensive with no guarantee of success. More and more people are living together without getting married but despite this reality, the Domestic Partnership Bill, which will offer some protection, has not been finalised by Parliament. This is a worldwide trend and therefore requires urgent attention; as without it, South Africans will find themselves disadvantaged and out of touch with rights that become entrenched abroad.
A universal partnership effectively implies that community of property is created between the life partners. Latest case law (Butters vs Mncora (181/2011) [2012] ZASCA 29) puts beyond doubt that a universal partnership between people in a permanent relationship can be used to claim a percentage of the communal estate. However, the question remains whether it is applicable when one of the partners in a life partnership dies. Although the Constitutional Court in Volks NO vs Robinson [(2005 (5) BCLR 446 CC)] failed to infer the existence of a reciprocal duty of support, the court expressed no objection to the possibility of cohabitants regulating certain aspects of their relationship by agreement.
The handling of life partnerships by our legislature and courts is in stark contrast with any other form of marriage or long-term relationship; for example same-sex permanent relationships or relationships in terms of the tenets of a religion or custom.
The argument that cohabitation contracts are contrary to public policy per se is therefore no longer valid. In the Supreme Court of Appeal judgment in McDonald vs Young (290/10 [2011] ZASCA, the view that there is no legal duty of support on unmarried cohabitants was upheld. In this case it was also considered whether Young assumed a contractual duty of support towards McDonald.
The Intestate Succession Act designates the deceased’s surviving spouse as an intestate heir but despite the very important position of a deceased’s surviving spouse with regard to inheritance from the deceased’s estate, the act
The judge concluded that it is trite that a tacit contract is established by conduct and in order to establish such a tacit contract, the conduct of the parties must be such that it justifies
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an inference that there was consensus between them. In the end, the court could not conclude from all the relevant proven facts and circumstances that a tacit contract, in terms of which the one party undertook to financially maintain the other, for as long as he needed such maintenance, came into existence.
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WELCOME DEVELOPMENT TOWARDS REGULATION OF MUSLIM MARRIAGES STILL NOT ENOUGH?
Muslim marriages, not solemnised by registered marriage officers in terms of current marriage law, are not recognised by civil law; and as such they are not regulated by the Divorce Act, denying separating spouses their rights contained in and protection afforded by the act. By Gerrie Vosser, FISA member and Manager of Trust and Fiduciary Services, IPMG
A decision delivered by the Western Cape High Court in the case Faro vs Bingham NO and Others (4466/2013) [2013] ZAWCHC 159 on 25 October 2013 confirmed some of the progress made since 2004 in respect of recognising surviving partner(s) in monogamous and polygamous Muslim marriages respectively as a ‘spouse’ in terms of the Intestate Succession Act and as a ‘survivor’ of the Maintenance of Surviving Spouses Act, thus permitting claims as beneficiary against a deceased estate. In this particular case, the initial ruling by the Master of the High Court, finding the applicant to not have been married to the deceased at the time of his death, was set aside by the court and the replacement executor instructed to provide for her claim as spouse and survivor in the liquidation and distribution account. This was good news, at last, for a widow left destitute in a case typified by the presiding judge as highlighting “the vulnerability of women in Muslim marriages”. However, it is clear that not only is the statutory situation regarding the issues of
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Muslim marriages still far from satisfactory, but is in fact aggravated by yet more statutory limitations. Some of these issues and limitations are briefly examined in this article.
Lack of statutory provisions dealing with marriages by Islamic rites Muslim marriages, not solemnised by registered marriage officers in terms of current marriage law, are not recognised by civil law; and as such they are not regulated by the Divorce Act, denying separating spouses their rights contained in and protection afforded by the act. Conversely, surviving spouses of unrecognised Muslim marriages dissolved in terms of Islamic rites are denied recognition as (no longer being) a surviving spouse for purposes of the Intestate Succession Act and the Maintenance of Surviving Spouses Act, leaving them clearly vulnerable. The court further ruled that the vulnerability of women
in Islamic marriages arises primarily from the ease and relative informality with which such unions may be dissolved at the instance of the husband. Legislation to regulate the solemnisation and dissolution of Islamic marriages in a manner consistent with the Constitution has been dealt with as long ago as July 2000 in a paper issued by the SA Law Reform Commission, and later in the drafting of the Muslim Marriages Bill. Despite this bill being mentioned in a number of court cases, especially in the Constitutional Court case Women’s Legal Centre Trust vs President of the Republic of South Africa and Others in 2009, it is unclear what progress has been made to enact the proposed legislation. Delays since 2009 in this regard resulted in a warning by the presiding judge in the Faro case: “There may come a time when, owing to continued lethargy or paralysis on the part of the executive promoters of legislation in this field, a court will need to intervene.” Deeming it desirable that some further opportunity should be allowed for the process to follow its course, the court ordered the Minister of Justice and Constitutional Development to file an affidavit by 15 July 2014 setting out the progress made in respect of the enactment of the Muslim Marriages Bill of 2011 and/or any similar legislation. This decision is to be welcomed.
Failure by the Master of the High Court as pater familias On the official website of the Department of Justice and Constitutional Development, the Master is acknowledged, as part of its statutory role “to protect the financial interests of heirs”, to “still be the pater familias (father of the family) of widows and those incapable of managing their own affairs”. However, as was again illustrated in the Faro vs Bingham NO and Others case, the Master in practice did not or could not successfully fulfil this very important protective role. In short, the
Master found the applicant not to be the spouse of the deceased and, whereas spouses are exempt from having to render security, insisted on her providing security as the appointed executrix, only to remove her as executrix on her subsequent failure to do so. The case also showed the repercussions of her being disqualified both as surviving spouse and beneficiary in the estate to be even more severe. Yet, based on the evidence before it, the court had no problem in overturning the Master’s ruling but then only after the aggrieved widow had to go to all the trouble and considerable expense to seek recourse in court. How could this have happened? What prevented the Master from acquiring and acting on the same evidence, preventing all the seemingly unnecessary hardship, delays and involvement of expensive resources that arguably, could have been put to better use? As bemoaned in many court cases dealing with issues not only pertaining to the Administration of Estates Act, but also the Companies Act and Insolvency Act, the Master as a creature of statute has been endowed with neither the proper legislative authority nor the means to determine disputed facts and thus deal with conflicting allegations. It inter alia cannot lead nor accept oral evidence. Yet, it has to and does make decisions, often resulting in adverse consequences in stark contrast to its role as pater familias. In Fey NO and Whiteford NO vs Serfontein and Others, the Judge of Appeal said: “The Master’s office, from the nature of things, is illequipped to determine disputed facts. The recognised procedure for settling disputed facts is by trial action. A court is the obvious tribunal for the determination of such disputed matters. Grave injustice may be done to a litigant who is denied the ordinary procedure adopted in investigating the truth of conflicting allegations.” The disconcerting reality is that although parties aggrieved by the Master’s decisions may approach the court, only a small minority has the means to avail itself of such relief. It is fair to allege that those most in need of the courts’ help can least afford it. Isn’t it time for the legislator or our courts to address these well-known statutory limitations?
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Continuous Professional Development
The Financial Planning Institute (FPI) is proud to announce a new partnership agreement with Sasfin and Standard Bank Financial Consultancy which is aimed at co-operating to train and develop financial planners and advisors within these institutions into CERTIFIED FINANCIAL PLANNER® professionals.
events
2014
For further information on the below events, please e-mail events@fpi.co.za or contact the FPI events team on 086 1000 FPI (374).
February t Breakfas t e g d u B l Nationa rship with SAIT) e tn r (in pa
June nual FPI An tion en Conv
Ma rch
Business Business Risk and Assuran ce
July Practice Standards and Practice Management
May Estate Planning
August Retireme nt Planning
The FPI Corporate Partner™ agreement was established by FPI to provide a framework for working with large corporations such as Sasfin, Standard Bank Financial Consultancy and similar organisations in the industry to help raise the competency levels of their financial planners and advisors and ultimately providing them with an enhanced pathway to the coveted CFP® designation. The CFP® designation is widely respected as the symbol of excellence in financial planning – the highest professional qualification that can be awarded to a financial planner or advisor.
Financia l Plan and Tru ning sts
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The Financial Planner
October Employee Benefits
Nove mber Annu al Re Work fresher shop s
pleased to be among the first companies in South Africa to align ourselves with FPI in this manner.” This appointment recognises Sasfin as a professional financial planning business supporting the highest standards and allows Sasfin to use the FPI Corporate Partner™ branding. “It also means that we can align our training and development plans to the CFP® certification standards and use the FPI’s Continuous Professional Development (CPD) programme. “We are also pleased at the opportunity to support the FPI Mentorship Programme and its pro bono initiatives. The institute aims to improve the quality and accessibility of professional financial planning in South Africa and to ensure that its members maintain the highest ethical standards. As an FPI Corporate Partner™, Sasfin fully endorses the FPI’s Code of Ethics and Professional Responsibility,” she adds.
Godfrey Nti, FPI CEO adds, “FPI is committed to up-skilling financial advisors into ultimately becoming CFP® professionals, in a bid to improve on access to top quality financial planning and advice offered to South Africans. We believe that the FPI Corporate PartnerTM agreement provides an excellent framework for FPI to work together with larger corporations such as Sasfin and Standard Bank Financial Consultancy in achieving this shared objective.”
Angela Mhlanga, CA (SA), head of Standard Bank Financial Consultancy comments, “Our partnership with the Financial Planning Institute (FPI) is in line with our strategy and commitment to providing our clients with highly qualified financial planning professionals. Another vital point that informed our decision to collaborate with FPI, a highly respected independent professional body, was to ensure that there’s continuous skills progression for financial planners within our ranks in order to uphold professional standards.
Natasja Norval Hart, CFP®, head of Sasfin Financial Planning Gauteng, comments, “Sasfin prides itself on being at the forefront of professional planning for its clients and we are tremendously
“We are looking forward to working with FPI, to further promote the importance of financial planning to consumers and in getting our professionals to the highest recognised certification level.”
New appointments made to the FPI board of directors Financial Planning Institute, the leading independent professional body for financial planners in Southern Africa, is pleased to announce the appointment of Warren Wheatley, CFP® and Denver Fortuin, CFP® to the FPI board of directors for a two-year term. These appointments were made to fill two vacancies which arose as a result of the term for Bongani Sithole and Ben Raseroka coming to an end on 10 June 2013. Warren Wheatley, CFP®, CA (SA)
Septemb er
FPI news
FPI proud to announce new partnerships with Sasfin and Standard Bank Financial Consultancy
Denver Fortuin, CFP® Fortuin is a CFP® professional and currently employed as the executive director of risk and compliance at UNISA. He previously served as the chief operating officer at Absa Insurance and Financial Advisors and as the head of risk management and compliance at Alexander Forbes Financial Services. He holds a masters in business leadership, a BIuris degree, an advanced postgraduate diploma in financial planning, a diploma in compliance management and a postgraduate diploma in business management. He is a member of the Institute of Directors and the Compliance Institute of Southern Africa.
Warren is a CFP® professional and a chartered accountant. He is currently the group chief investment officer of TSS Capital, a division of TSS Investment Holdings, a boutique investment and corporate advisory firm. Wheatley started his career as an articled clerk with BC Hall and Company and concluded his professional training with Alexander Forbes Financial Services. His career progressed for eight years at Alexander Forbes where he served various roles within the institutional consulting and actuarial business. He holds a BCom (Hons) (Acc) CTA and three postgraduate diplomas in auditing, financial law and corporate finance.
Warren Wheatley, CFP®, CA (SA)
Denver Fortuin, CFP®
The Financial Planner
21
INVESTMENTS
CRISA in practice
PART 2
CRISA or the Code for Responsible Investment in South Africa has seen increased uptake among investment managers over the past year. We take a look at sustainability, the associated costs of complying with CRISA and international developments.
Neesa Moodley-Isaacs, Financial writer
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Field adds that Fedgroup believes that ESG should be the responsibility of the product provider and should not be a cost to the investors. “We support the King Code, especially with regard to the Code of Conduct. It is important that conflicts of interest are proactively managed and avoided. We have specifically separated our directors from our trustees for this reason.”
The cost of CRISA
Benn agrees. “The adoption of CRISA certainly raises the costs of doing business. Investment into processes, human resources and information systems is required in order to monitor and manage compliance with the code. Increased disclosure is only a small part of the CRISA-related cost structure. Best practice proxy voting systems, record-keeping systems and independent RI research are far more significant than disclosure costs. Additional human resources are also virtually unavoidable,” he explains.
He explains that this would typically mean a fund manager would have to evaluate the sustainability of a company focusing on its strategy and processes regarding the environment, social responsibility and governance (ESG factors). Managers are also encouraged to actively engage non-compliant companies to improve their day-to-day business practices, thereby improving their long-term sustainability. In theory, companies focused on sustainable business practices have better long-term returns.
Equity analysts evaluate every aspect of the company [being invested in] including its strategy, business practices, financial metrics and the risks associated with conducting its business. This work includes a full and comprehensive assessment of the sustainability of the company which, in turn, informs its valuation. “At Cadiz, we supplement this detailed analytical work by purchasing independent research reports on the ESG practices of most of the companies in our investment universe. These reports evaluate company practices individually as well as against global best practice. This ensures an unbiased assessment of the sustainability of companies within the investment universe,” Benn says. Carron Howard, a portfolio manager at Cadiz Asset Management, says while CRISA and Regulation 28 of the Pension Funds Act formally encourage institutional investors to integrate the sustainability issues reflected in ESG into their
John Field, the chief executive of Fedgroup, agrees, saying the code is the basis for sound investment which is essential good business practice. “The impact is limited and probably not as great as it should be. Companies that engage in good business practice are already following these guidelines, while those with poor business practices have not been forced to change their ways,” he says.
Paul Stewart, the head of asset management at Grindrod Asset Management, says there will definitely be a cost impact as more asset managers observe the principles of CRISA. “Obviously costs will increase in the future as a full-time person will need to become responsible for implementing and screening the securities that do not meet the standards as required,” he says.
“In the normal course of business, fund managers report periodically to clients on the investments they have made but this is typically done after the fact. No explicit obligation is placed on a fund manager to inform clients prior to any particular investment being made unless a client has requested this. CRISA does not seek to actively limit the investment universe. Instead, CRISA places a burden of responsible investing on managers,” says Kurt Benn, the head of equities at Cadiz Asset Management.
Sustainability assessment
investment decisions, these considerations are not new in the context of the investment decision-making process. “Investors have always assessed these and have generally been cognisant of quantifying how much they impact the risk premium associated with a company or industry within which it operates. This would ultimately feed into the decision whether to invest or not. However, what these regulations do encourage is that investors engage more actively in identifying, managing and mitigating the risks encapsulated in ESG,” she clarifies.
Regulation 28 for retirement funds According to Regulation 28, which took effect in July 2011, a retirement fund may not invest more than 75 per cent of its portfolio in equities, whether inside or outside South Africa, and there are limits on the number of shares a fund can hold in a single company, depending on the company’s size. There are several more such restrictions related to the investments made by retirement funds and these are intended to ensure that investors are not exposed to more risk than necessary and to limit the mismanagement of retirement funds. For example, if a company is worth R20 billion or more, a retirement fund may not invest more than 15 percent of its portfolio in that company. A retirement fund may invest up to 10 percent of its assets in commodities. The full 10 percent may be in gold, but there is a limit of five for other commodities.
Companies can also apply to be exempted from appointing such a committee on one of two grounds. “One is that they already have a board committee fulfilling the functions of a social and ethics committee. The other is when a social and ethics committee is not reasonably necessary in the public interest by virtue of the company’s negligible socio-economic footprint, which would have to be proven to the Companies Tribunal,” she says. For the rest, all companies with 500 or more public interest points in the past two years must comply by appointing a social and ethics committee comprising at least three members. The chairman must be a non-executive director who has not served as an executive director for the past three years. The other two members can either be other directors or prescribed officers as defined in the Companies Act. “Generally speaking, it is best not to appoint prescribed officers as they may not vote where the committee has decision-making powers. This would leave only one voting member, the chairman, which is not good practice and would mean that all social and ethics matters would have to be channelled to the board for approval,” Van der Westhuizen points out. An important point that companies should not overlook is that the chairman of the social and ethics committee must attend the company’s AGM to answer questions. Just as important is the committee’s right to unrestricted access to information – it can directly approach any employee or director without going through an intermediary.
Around the world
Sensible risk management
In 2006, the United Nations launched the Principles for Responsible Investment initiative, which immediately signed up 20 mainstream institutional asset owners representing $2 trillion (R19 trillion). A year later, the initiative had more than 180 leading institutional signatories from all around the globe. Today, nearly 1 200 asset owners, investment managers and professional service partners have signed the United Nations-backed Principles for Responsible Investment and are starting to disclose their ESG performance.
None of the mandates run by Grindrod currently have the CRISA principles embedded in them. However, Stewart points out that all the securities Grindrod selects must, apart from having strong financials, display an element of being good corporate citizens, as this is just a very sensible risk management approach. “Allowing holdings in the shares of bad corporate citizens that have perpetual downside risk to their share price is unnecessarily bad business and we try to avoid this risk,” he says.
Last year alone, more than 11 percent of investments under professional management in the United States were selected for companies’ financial performance and their social and environmental responsibility. That means $3.74 trillion (R35.7 trillion) of the $33.3 trillion in investments was scanned for environmental, social and governance criteria (known as ESG), according to a November report by the United States Forum for Sustainable and Responsible Investment (US SIF).
Ethics committees
Lisa Woll, the chief executive of US SIF, says sustainable investment is growing because investors and other stakeholders recognise its ability to deliver returns and influence corporate behaviour. “Investors have persuaded publicly held companies to disclose their risk from climate change, adopt sustainable forestry practices, check runaway executive pay, and address labour and human rights conditions in their supply chains. Many consumers already think about the sustainability of the products they buy, their commutes and what they eat. It’s natural to extend that logic to their investment portfolios,” she says.
Since 1 May 2012, social and ethics committees have been mandatory for all listed and State-owned companies, as well as all other companies that, for two of the past five years, have scored 500 or more public interest points in terms of the Companies Act. The exception is when a company is a subsidiary of a holding company that has a properly constituted social and ethics committee to oversee the group’s entire socio-economic footprint, says Larey van der Westhuizen, director at Statucor.
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23
INVESTMENTS
REITs –
Defined and delivered
Local listed property market now in line with global standards How to qualify for REIT status? A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs remit at least 90 percent of their taxable income to their shareholders, which then pay taxes on these distributions. As with other business, excluding partnerships, a REIT cannot pass any tax losses through to its investors.
Wim Prinsloo, Portfolio Construction, REITWAY Global
Janet Lightbody, Business Development, REITWAY Global
On 1 May 2013, the SA listed property sector was brought into line with international standards when the JSE launched the Real Estate Investment Trust (REIT) sector. A Real Estate Investment Trust (REIT) is a company that owns, and in most cases, manages income-producing commercial real estate such as offices, apartments, warehouses, hospitals, malls, hotels, and in some instances, even timberlands. REITs will eventually replace property unit trusts (PUT) and property loan stock companies (PLS), in order to simplify taxation and enhance fund governance. REITs were created by the US Congress in the 1960s to give average investors access to investments in large-scale, commercial properties through the purchase of equity. Today, REITs are listed on 25 international stock exchanges and have similar rules and structures, providing investors with confidence to invest in property in foreign markets. The largest REIT market is the US, with a market capitalisation of roughly $632 126 billion. Other large markets include the UK,
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REITs were created by the US Congress in the 1960s to give average investors access to investments in large-scale, commercial properties through the purchase of equity.
France and Australia. Although growing from $6.11 billion1 in 2003 to over $30 billion in 2013, the local property market is still relatively small compared to these major global markets.
Chart 1: Market capitalisation of SA listed property market vs. major global REIT markets.
The more important requirements to qualify as a REIT, which form part of the characteristics of the asset class, include: • •
At least 75 percent of assets must be allocated to real estate. At least 90 percent of a company’s taxable income has to be distributed to its shareholders. • At least 75 percent of gross income must be earned from rents or mortgages. • No more than 25 percent can be invested in taxable REIT subsidiaries. Local REITs are currently required to distribute only 75 percent of their taxable income to shareholders, as opposed to the 90 percent requirement for global REITs. In addition, the property portfolio of local REITs must be larger than R300 million, with a loan to total assets ratio of no more than 60 percent.
The beginning: PUTs and PLSs A property unit trust (PUT) is a collective investment scheme in property and is governed by the Collective Investment Schemes Act and the FSB. PUTs have tax certainty and the income distributed to unit holders is not taxed in the PUT. It retains its nature and is taxed in the hands of the unit holder according to their tax status. The PUT industry dates back to 1969 when two trusts were established and listed on the JSE in order to provide investment grade property to investors. The intention was to provide individuals and pension funds with access to an asset class which they lacked inclination or expertise to manage themselves. A property loan stock (PLS) is a company which has a share linked to a variable rate debenture. PLSs have fewer restrictions than PUTs; gearing
is unlimited and investments in other companies are allowed. However, PLSs are not regulated by the FSB and do not have tax certainty.
The advantages of REIT ownership One of the key advantages of REIT ownership is that it allows for diversification on a geographic and sector basis. The requirement to distribute at least 90 percent of taxable income to investors translate into higher income in the hands of investors. As REITs are publicly traded on global stock exchanges, they offer investors liquidity which is not associated with direct property investment. The REIT structure offer various tax advantages to companies, including favourable taxation of distributions and no capital gains tax when property is sold. Most importantly, REITs have outperformed the leading stock markets (Dow Jones, S&P 500) for the past 20 years to end September 2013.
Implications of SA listed property companies converting to REIT status South African listed property companies now have the option to convert from PLSs and PUTs to REITs and thus align themselves with global property peers. In the following section, we highlight the key implications of REIT conversion that need to be taken into account by local investors.
The creation of a homogenous asset class Under South African REIT legislation, 75 percent of a property company’s profits must be distributed to shareholders (this differs from global REIT legislation that requires 90 percent to be distributed). PLSs and PUTs are allowed more flexibility in terms of deciding on the portion of their profits to be distributed to shareholders and the portion that will be reinvested in the company. The fact that 75 percent of REIT profits must be distributed to shareholders has created a homogenous asset class that produces a high level of current income to investors.
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development company with a solid track record and exciting prospects, largely due to its portfolio including landmark assets like the Waterfall development in Midrand which promises to be the next Sandton City. With the company currently focusing on reinvesting its profits into new developments, it will not pay any dividends in the near term and not qualify as a REIT. In its current guise, Attacq is a capital growth investment and not a high income investment. Its share price will be more affected by fundamentals that are related to its growth prospects, whereas traditional REITs like Growthpoint are highly correlated to bond yields due to their stronger income focus.
The role of REITs in a diversified portfolio REITs benefit from tax advantages REITs are allowed to deduct all distributions to shareholders as an expense for income tax purposes. This results in lower income tax payable and will increase the net asset value of the REIT over time. REITs also have the added advantage of being exempt from capital gains tax when it sells its property at a profit. Conversely, property companies incorporated PLSs incur deferred tax liabilities when property values increase over time, with the deferred tax liability being realised upon selling of the property. The net asset value of a property loan stock is effectively decreased by this liability, but REITs do not carry the same burden.
Real estate has historically been viewed as an important diversifier – as an asset class it typically responds differently from the way either stocks or bonds do. Studies of long-term asset class returns in the US2 have found that REITs are a good diversifier in a traditional stock and bond portfolio, as illustrated in the following table: Table 1: REITs performance in portfolios (1990-2004).
50% stocks, 50% bonds
40% stocks, 40% bonds, 20% REITs
Annualised return
9.60%
10.34%
Annualised std. dev.
7.87%
7.62%
Sharpe ratio
0.67%
0.79%
Portfolio:
A larger investor base Offshore investors who are familiar with REITs could potentially be attracted by the local REIT market that is now aligned with global best practice and standards. Local REITs also qualify to be included in large offshore index-tracking funds invested in specific REIT indices. A more globally integrated REIT market should increase the liquidity of local property shares. This will benefit investors whom in the past experienced liquidity issues when investing in the local property market. Although converting to REIT status can attract new global investors, it is important to recognise that our REITs will be evaluated in a global context based on fundamental factors like cash flow, expected growth rates and dividend yields.
Attacq: To REIT or not? There has been tremendous interest from investors in the listing of Atterbury Acquisitions (Attacq) on the main bourse of the JSE. It’s one of the biggest property funds to list on the JSE with an initial market capitalisation of R8.5 billion while very few new listings have ever come to the market at more than R2 billion. Furthermore, Attacq is a property
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A simple baseline portfolio with a 50 percent weighting in stocks and a 50 percent weighting in bonds produced a Sharpe ratio of 0.67. When the allocation towards stocks and bonds are reduced by 10 percent each and assigned to REITs, the Sharpe ratio increases from 0.67 to 0.79. This is in large part due the low correlation between REITs and stocks (0.35), and the even lower correlation between REITs and bonds (0.18). In addition to its diversification benefits, REITs have performed exceptionally as a stand-alone asset class. During the 10-year period ending September 2013, US REITs outperformed US equities by 1.44 percent per annum and US bonds by just over three percent per annum. With South African investors increasingly investing their money offshore, the global REIT market is an attractive but underestimated proposition. Its superior long-term performance, combined with its risk-reducing diversification benefits, prove that REITs should form an essential part of the local investor’s diversified portfolio. 1. At an exchange rate of R10/$. 2. Source: Managing Investment Portfolios: A Dynamic Process, Third Edition, CFA Institute
INVESTMENTS Gerry Grispos, Compliance Officer, Compli-Serve SA
Hedge fund compliance – getting it right
Currently hedge fund managers are prohibited from the solicitation of their hedge funds to the public. Investors need to approach the hedge fund manager and enquire about the funds before the manager can divulge the details of such funds. Full risk disclosure needs to be made to the investor; particularly the risks associated with investing in hedge funds (the risk that loss can be substantial if financial instruments in the fund are geared.) Under FAIS (Financial Advisory and Intermediary Services Act) and FICA (Financial Intelligence Act), a hedge fund manager needs to comply with myriad regulations all aimed at investor protection and anti-money laundering (risk management, IT management, financial soundness, correct licence categories, client identification and verification). One of the biggest issues facing hedge fund managers, from a financial soundness point of view, is the requirement by FAIS that assets exceed liabilities by at least R3 million and 13 weeks of annual expenditure needs to be kept in a separate account in cash or near cash. This is particularly onerous for the smaller hedge fund managers.
Pending legislation National Treasury has issued a press release: ‘The Regulation of Hedge Funds in South Africa’. This deals with a proposed framework under which hedge funds can operate. It is proposing two types of funds: retail funds for individual investors, and restricted funds for qualified or informed investors, who would include high net worth individuals and institutions. If the proposals become law, retail funds will fall under the Collective Investment Schemes Controls Act while restricted funds will continue as normal but with specific new requirements. Managers of these restricted funds will still not be allowed to solicit for business from the public. There are a number of restrictions under CISCA, such as liquidity requirements and asset class restrictions that compliance officers will need to understand and ensure client compliance thereof. Right now we must wait until the release from National Treasury is promulgated into law. In the meantime, we need to continue to follow the current legislation and to ensure that hedge fund managers comply with such legislation.
QUALITY EDUCATION FOR FINANCIAL PLANNING
The compliance challenge is to clearly identify the legal structure and the flow of funds. The easiest way to do this is to have the client draw up a corporate organogram illustrating all companies within the group showing where the various funds are housed and how investor funds flow in and out. In the case of hedge funds, a compliance audit entails more than looking at the fund itself. It is a specialised field, and compliance officers face several problems, of which understanding the legal structure in which the fund is housed, is the largest. The second problem is to understand the product itself, and the third is to understand the multitude of regulations affecting hedge funds, both current and pending. Understanding the legal structure, underlying holdings and strategies employed, in addition to regulation regarding the marketing of these products is also critical to financial advisors, as the risks surrounding hedge funds are compounded by these complexities.
Understand the legal structure It’s impossible to perform a compliance audit of the actual fund without first understanding the legal structure in which the fund
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Understand the fund Once the structure is understood, a compliance officer needs to understand how the actual hedge fund operates. What strategy is the hedge fund manager using: long, short, long and short? What asset classes are being used in the fund: equities, bonds, cash, property, derivatives? Compliance officers need to understand how the fund they are auditing is managed and whether the hedge fund manager’s licence actually covers all the instruments being traded.
Understand the regulatory framework Currently an important challenge for compliance officers is the lack of clear legislation and guidelines. While the existing FSB board notices do provide some guidance, current legislation is seen as restrictive, or not favouring hedge fund investment.
The School of Financial Planning and Insurance at Milpark Education offers a complete career path for financial planners and advisers from NQF level 4 to NQF level 8. You can be on your way to becoming a CERTIFIED FINANCIAL PLANNER® professional, the designation that is the symbol of excellence in financial planning!
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CatalystFINPLAN1 20131118
resides. How does the money come into the company and end up in the fund? What financial instrument is ultimately held by the investor as proof of ownership?
CONTACT: 021 673 9100 (CTN), 011 718 4000 (JHB), 031 266 0444 (DBN) For assistance with registration, contact Student Services on 086 999 0001 - studentservices@milpark.ac.za Milpark Education (Pty) Ltd is registered with the Department of Higher Education and Training (DHET) as a Private Higher Education Institution (No 2007/HE07/003).
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PRACTICE MANAGEMENT
How important is the annual review?
Stand out. Be extraordinary www.fpi.co.za
FINANCIAL SERVICES
The annual review is the most vital component in the financial planning process. While it is required by law, it is also an opportunity to nurture client relationships and reflect the value you offer your clients through your services.
ADVISOR™ / FSA™ designation A new designation introduced by the Financial
Mimi Pienaar, Head of Business Development at Masthead
Planning Institute (FPI), which represents another level of professionalism in the financial services industry.
From a client’s perspective, the trust placed in the business is confirmed while, from a business perspective, further advice opportunities may be identified due to changes in circumstances. Regulation prescribes that clients must receive a written statement of their portfolio each year; this can be presented during the annual review. This yearly meeting also offers an easy way to confirm that you are keeping your clients appropriately informed in the Treating Customers Fairly (TCF) environment. Another benefit of an annual review is the regular interaction that strengthens client relationships and thereby increases their loyalty. You have the opportunity to check that the plans you have created for your clients are still doing what they were designed to do. As this is done, satisfied clients will refer your services to others and your business reputation will grow. So what should an annual review include? Besides presenting clients with a portfolio schedule, which is a snapshot of their portfolio and its performance for the year, several other points should be included on your agenda for a comprehensive annual financial planning review. Ensure clients’ contact and personal details are up to date The financial advice for a single person with no dependants differs from that of a married person with dependants. A change in career, family size, earning ability, health or other factor may impact on retirement planning capabilities and should be taken into account.
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Update clients’ balance sheet Check whether clients’ assets and liabilities are accurately reflected. These will affect the content of the advice that is relevant to your clients, such as their level of cover and the tax implications of particular investments. If substantial debt has been incurred or reduced, the level of life cover, disability or income protection should be reviewed. Budget Clients should create and maintain a budget so their income and expenses can be reviewed at least annually. Income and expenses should be projected for the following year. Your clients may include anticipated changes in their budget, such as a salary raise, instalments for a vehicle purchase or the additional expenses incurred during the birth of a baby. Savings and retirement planning Both pre- and post-retirement planning is essential. Both stages need to be reviewed, taking into account any changes in circumstances during the preceding year. Ensure clients’ financial plans remain in line with their long-term goals. If an adjustment is necessary, either the end goals or the current investment arrangements can be changed. As changes may entail investment risk, review your clients’ risk tolerance and the time horizon for each investment goal. Your clients should still be comfortable with the volatility of both the market and the investment, as well as the amount of time before the money is required. Disability and estate provision Your clients’ income-earning ability is one
of their most valuable assets and should be adequately protected. It is important to determine whether your clients and their dependants would be financially stable if the breadwinner was unable to earn income through impairment or disability. By conducting an estate duty analysis, you can identify the requirements to settle your clients’ estate. Additional life cover would provide liquid investments to cover estate duty.
The designation effectively enables individual financial advisors to once again differentiate themselves as well as provide trusted expert advice to consumers.
Estate planning Your clients’ wills should be assessed annually to ensure they remain relevant to their circumstances.
One step to the top!
Medical aid Check if your clients’ medical aid schemes are still appropriate. Should any beneficiaries or dependants be added or removed from cover? You will need to help your clients select the most suitable option for their circumstances. The annual review is an opportune time to ensure promises made during the initial meeting are delivered upon. Keeping up to date with changing circumstances provides new opportunities for giving advice, ensures your clients’ goals continue to be met and enhances relationships. After all, good financial advice is a combination of personal assistance, ideas and options, technical ability and client centricity. By providing ongoing financial advice, tailored to suit your clients’ personal and financial circumstances, they should remain your clients for life. From a business perspective, client retention equals business growth and value.
Find out more at
www.fpi.co.za email: membership@fpimail.co.za or contact: 086 1000 FPI (374)
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