FPI Magazine issue 32 by COSA Media

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The Financial Planner www.fpi.co.za Telephone: 086 1000 FPI (374) Tsholofelo Dihutso, CPRP Communications and Events Specialist tsholo@fpi.co.za Editorial enquiries: media@fpi.co.za Postal address: PO box 6493, Weltevredenpark, 1715 Street Address: 84 Sophia Street (Cnr 11th Avenue), Fairland, Johannesburg, 2170 Membership queries membership@fpi.co.za Published by COSA media www.comms.co.za Advertising: Michael Kaufmann michaelk@comms.co.za 021 555 3577 Michelle Baker michelle.baker@mediamarx.co.za

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.

Contents LETTER FROM FPI 4 FPI NEWS AND EVENTS

CLIENT ENGAGEMENT The centanarian challenge

ESTATE AND TRUST PLANNING Proposed alternatives to the usufruct

EMPLOYEE BENEFITS Implications of new retirement fund law

Academic paper review: Managing retirement capital

Financial services laws general amendment Act, 2013

HEALTHCARE Medical malpractice: how much cover is enough?

INVESTMENT Cold Turkey 30 Relevance of investment style in SA

PRACTICE MANAGEMENT Employee development essential in a new workplace

PROFILES Kim Potgieter, CFP速 - Chartered Wealth Solutions

Sydney Sekese, CFP速 - Old Mutual

REGULATION A tale of Twin Peaks

TAX PLANNING Understanding the fixed amount penalty

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Letter from FPI

YOU ARE THE BRAND! IT IS TIME TO STAND OUT.

s a respected practitioner, it’s more important than ever to distinguish yourself as the ultimate professional. It’s exciting times at FPI as we go into our second full year of implementing the new FPI strategy. We are pleased to report a few tangible achievements so far.

• FPI recognised by the South African Qualifications Authority (SAQA) as a professional body. • The CERTIFIED FINANCIAL PLANNER® designation or CFP® designation registered on the SAQA National Learners Record Database. • FPI achieved the highest ever rating (96 percent) in Financial Planning Standards Board’s (FPSB) conformity assessment to international certification best practise standards. • The highest year-on-year net growth in the number of CFP® professionals (9.1 percent). • We launched the largest consumer outreach effort in our history. Last year we received positive feedback from you regarding our new focus on redefining the value of FPI membership to you. In 2014, we continue on this path. We have some exciting new developments in store for you: • • • •

Renewed focus on member community development. The launch of a brand new user-friendly and resourceful website. The rollout of the ‘It starts with me’ programme. Expanded public awareness campaigns and so much more.

Our advocacy effort on behalf of you, our members, will receive a sharper focus. FPI must focus its advocacy and marketing efforts in making it clear to the industry at large, that FPI’s focus is on promoting the professionalism of our members only, rather than all financial planners and advisors working in the industry. As a quality financial planner working in South Africa, to build your reputation in a very competitive world means you must distinguish yourself as a CFP® professional and member of your professional body. FPI continually makes a stand for professional financial planners and we are doing this actively in the media, among consumers and in our advocacy efforts with policymakers, regulators, industry bodies and employers. In doing so, we are speaking on behalf of those financial planners who have made a tangible commitment to their professional status as financial planners by being a member of FPI. CFP® designation as a symbol of competence, trust and integrity among consumers In other professions, membership of a recognised professional body forms a mark of competence, trust and integrity for consumers. This is one of the roles performed by the Health Professions Council of South Africa (HPCSA) for the medical profession; the South African Institute of Chartered Accountants (SAICA); as well as the South African Institute of Professional Accountants (SAIPA) for the accountancy profession. In

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this sense, membership of a professional body (as opposed to a trade association) is the cornerstone of true professionalism. In financial planning, consumers working with a professional financial planner who is a member of a professional body, such as FPI, benefit from triple protection: 1. At the first level from the law and Financial Services Board’s (FSB) powers. 2. At a second level by the FAIS Ombud’s powers. 3. At a third level in the case of FPI, from our world-leading Code of Ethics and Professional Responsibility, independent disciplinary process and requirement of the highest competence standards. In order to address the trust gap that South African consumers generally have with financial advisors, we believe that all financial planners should make a commitment and sign up to a professional body. This is important to drive the professional standing of the industry as a whole and, as a consequence, it would form a significant step in fostering consumer trust and confidence in financial planning. This is the reason why we are taking a stand in our marketing and advocacy effort to exclusively promote CFP® professionals who have made this commitment. FPI cannot be the voice or advocate of those financial planners and advisors who choose not to subscribe to a professional framework of standards, ethics and conduct. FPI – The Professional Standard As a professional body, FPI’s role in setting education standards and providing members with quality initial and ongoing education in line with these standards has been, since our inception 33 years ago, and will remain, core to our strategy. Decision time As time progresses, I believe that this much will become clear: as a professional financial planner working in South Africa, to build your reputation in a post-Treating Customers Fairly (TCF) and Retail Distribution Review (RDR) world, you must distinguish yourself as a member of a professional body. This won’t be a nice-to-have; it will be part of your licence to trade and pivotal to the growth strategy of your business. This becomes your ‘professional passport’ that you carry with you regardless of where you practice in South Africa or throughout the world. If you are such a professional financial planner and already a member of FPI, make the most of the brand value of your designation in your own marketing approach. If you do not hold an FPI designation, now is the time to join your professional peers and achieve the respect you deserve. I am eager to hear your thoughts and suggestions on how best we can serve you and also how to grow the financial planning profession; contact me on ceo@fpi.co.za.

Godfrey Nti Chief Executive Officer

Budget Breakfast 2014:

Financial state of the nation 6

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FPI news The Financial Planning Institute (FPI) in partnership with the South African Institute of Tax Professionals (SAIT) held its yearly budget breakfast on 27 February, providing insight and commentary on the National Budget, which was tabled by Finance Minister Pravin Gordhan on 26 February. The event, sponsored by Stonehouse Capital and Sage VIP, took place at Gallagher Estate in Johannesburg, and was streamed live to delegates gathered at the Mount Nelson in Cape Town, Southern Sun Elangeni in Durban, Ilanga Estate in Bloemfontein, and the Beach Hotel in Port Elizabeth. The guest speakers and panellists included economist Mike Schussler, Prof Jackie Arendse, Ronald King, CFP®, Steven Friedman and Patrick Craven, who delved into the intricacies of the budget concerning tax, the economic environment, the socio-economic environment and the political environment. The speakers agreed that the budget was somewhat boring with no great surprises, as was expected in an election year and aimed at ensuring an element of stability. Schussler, director at economists.co.za, started by noting that Finance Minister Pravin Gordhan has done well in his five years as minister, but added that while many were underwhelmed by the 2014/15 budget, it showed a picture of an economy in tough times. “I think there is a ratings downgrading on the way,” added Schussler, highlighting that government debt was increasing and the gross debt to GDP ratio was on the way up – approaching 48.5 percent. Government debt was expected to level off at 44.3 percent of GDP in 2016/17; however, Schussler felt it could reach a level of 60 percent. Because interest rates are increasing, government will also pay more to service its debt. Focusing on tax, Wits University Professor Jackie Arendse drew attention to the minister’s attempts to stimulate small business in South Africa and noted that a cohesive effort would be required. The Davies Tax Committee review, with enquiries due to be completed in June, will guide government’s plans to reduce red tape and replace the current reduced tax-rate regime applicable to SMMEs (small, medium and micro enterprises) with an annual refundable tax compliant rebate. Arendse said that for individuals there were small changes across the

board, but nothing major. The most significant change on the taxation side was the proposed increase in the tax-free lifetime retirement lump sum amount from R315 000 to R500 000. Draft regulatory reforms in this regard were expected to be published soon. The Budget also stated that changes to the taxation of contributions to retirement funds in line with the Taxation Laws Amendment Act (2013) will provide additional relief to most retirement fund members and encourage them to save for retirement. The methodology for calculating the formula will be detailed by way of regulation in 2014. Arendse highlighted the increases in fuel levies effective 2 April 2014, and these include an 8c/l increase in the Road Accident Fund levy, and a 15c/l increase in the general fuel levy. She also noted the prospective environmental taxes on the table, and these include a biofuels production incentive, an acid mine drainage tax and the carbon tax, which was delayed for implementation until 2016. Schussler said that South Africans were likely to see more environmental taxes going forward, since the tax base was not increasing significantly, and the government could not simply continue to tax the few people in the existing tax pool more and more. Environmental taxes presented an additional tax revenue stream. Ronald King, CFP® and director at PSG Konsult, stated that there were no significant announcements in the Budget affecting financial planning. Besides the changes to the taxation of lump sums from retirement funds, there were minor changes to the act to rectify errors or unexpected consequences, and dates for previously announced changes were outlined. King noted that these included the fact that income protection policies are no longer tax deductible. He mentioned that a trust should not only be created solely for taxation purposes, but to protect assets and to ensure continuity. King added that South Africans leaned towards “reckless conservatism” and emphasised that the role of the financial planner was not about paying the least amount of tax, but about getting the most money in your client’s pocket. “Do not be recklessly conservative and focus only on saving tax, but rather ensure the best returns for your client to satisfy their needs,” concluded King. Budget 2014/5 Top take away: Increase on tax-free lump sum retirement amount from R315 000 to R500 000. Noticeably missing: No reference to changes in the taxation of trusts.

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FPI news

Financial Planning Week warrants South Africans a financially savvy 2014 To drive financial planning awareness and literacy, the Financial Planning Institute (FPI), along with the broader financial services industry, successfully ran the Financial Planning Week, from 25 to 29 November 2013 to introduce financial planning to consumers as a way of improving and managing their finances. The 2013 Financial Planning Week initiative was supported by over 50 CERTIFIED FINANCIAL PLANNER® professionals, who drove free consultations and financial literacy clinics for the public throughout the week. The initiative further received an overwhelmingly positive response from the public with over 750 consumers having attended the workshops.

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Activities and workshops were focused on educating consumers about financial wellness, financial planning for young families, understanding money matters, and financial planning for all abilities. Consumers received advice and assistance with writing down financial goals, drawing up a spending plan and budget, including children in the running of the household budget for a month, getting estates in order and creating or revising wills, and establishing emergency funds. The success of the 2013 Financial Planning Week initiative was entirely driven by all industry players from various corporates right through to independent financial planners, said Godfrey Nti, FPI CEO.

“By making the week a joint industry initiative, we’ve taken a giant leap in effectively driving financial literacy for all South African consumers.” added Nti. The Financial Planning Institute would like to thank all participants and the media partner – Personal Finance – for carrying the message on its media platforms and ensuring that all South Africans are well informed of our initiatives. Visit www.financialplanningweek.co.za for a full list of CERTIFIED FINANCIAL PLANNER® professionals and financial planning practices, who participated during Financial Planning Week.

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FPI news

More than 150 000 CFP® professionals worldwide –

we are a growing profession

Financial Planning Standards Board (FPSB), owner of the international CERTIFIED FINANCIAL PLANNER® certification programme, reported that the number of CFP® professionals worldwide grew to 153 376 at year-end 2013. This is up by almost 5 500 or 3.76 percent from year-end 2012.

Leaders of the pack For the second year running, FPSB’s member organisation in the US and the People’s Republic of China led the pack. The US increased its number of CFP® professionals by 1 886 last year and the People’s Republic of China by 1 782. FPSB’s member organisation in Japan was third, adding 627 CFP® professionals in its territory. These three territories, together with Australia and Canada, represent the five largest national populations and 82 percent of the world’s CFP® professionals.

Growth in other parts of the world Following the top three in terms of growth was FPSB’s member organisation in Brazil. It grew by nearly 40 percent in 2013, adding 356 CFP® professionals. Territories which have all added more than 100 CFP® professionals are: • South Africa • The Republic of Korea • Hong Kong • Indonesia • India

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How other territories have fared in 2013 Europe Growth in Europe was solid at 6.2 percent, with all of the FPSB’s seven member organisations adding CFP® professionals in that region. Europe ended the 2013 financial year with a total of 4 903 CFP® professionals. Asia-Pacific FPSB’s 12-member organisations in Asia-Pacific increased by more than 3 000 CFP® professionals (5.7 percent) bringing its total to 56 396. Asia-Pacific represents 37 percent of the global CFP® professional community. The Americas (US, Brazil and Canada) Home to 57 percent of the world’s CFP® professionals, the Americas increased by 2.3 percent bringing the total number of CFP® professionals to 87 504. South Africa FPSB’s member in South Africa added 178 people, growing the number of CFP® professionals in that territory to 4 513 by year-end 2013. New partnerships have emerged FPSB has partnered with the Union of Financial Planners in Israel (UFPI) to deliver an FPSB-administered CFP® exam. This was a first for the territory and, through the partnership, 61 CFP® professionals were certified. Having this kind of growth definitely assists in establishing financial planning as a global profession with the CFP® certification as its symbol of excellence.

YOU ADHERE TO THE

HIGHEST STANDARDS,

YOU PUT YOUR CLIENTS

INTERESTS FIRST

YOU ARE AN ACCOmPLISHED CFP

速

PROFESSIONAL

LET PEOPLE

KNOW The Financial Planner

Financial Planning Institute (FPI) and Financial Services Board (FSB) partner to drive consumer financial literacy The Financial Planning Institute (FPI) and the Financial Services Board (FSB) have signed a Memorandum of Understanding (MoU) to collaborate on various consumer financial literacy projects that both organisations will be running throughout the course of the year in 2014. The FSB and FPI’s collaboration is geared towards creating awareness on the rights and responsibilities of consumers, personal financial management, as well as the overall distribution of financial education; and to give credence to the Financial Services Board Act, of 1990. According to Lyndwill Clarke, FSB head of consumer education, the FSB provides consumers with programmes and information that will put them in a position to make informed financial decisions so households can avoid debt and focus on building wealth. “The partnership with FPI takes this approach one step further in that consumers will now not only be provided with information on how to conserve and preserve wealth, but also have access to expertise from FPI on how to nurture and grow it,” says Clarke. David Kop, CFP®, head: membership and corporate relations at FPI, adds: “We are indeed proud to join forces with the Financial

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Services Board in a bid to make life better for more and more South Africans by helping them achieve their financial life goals.” The partnership is a symbolic gesture to endorse the importance of financial planning to all South Africans and drive awareness around available financial planning counsel to consumers as a way of improving and managing their finances, as many people still have the wrong perception that financial planning is the exclusive domain of the wealthy. “In line with our vision to promote professional financial planning among all South Africans, we believe that this partnership is ideal to ensure that all our citizens are equipped with the specific financial knowledge, understanding and tools to transform their current situation into a self-sufficient and financially secure future. This is also a perfect platform for consumers to be introduced to a CERTIFIED FINANCIAL PLANNER® professional,” concludes Kop. With forthcoming industry financial education initiatives such as the Financial Planning Week and the FPI MYMONEY123™ programme, joint partnerships such as this empower the industry to take giant leaps in effectively driving the nation’s financial literacy and in assisting consumers to make sound financial decisions.

FPI news

Old CPD Policy vs the New CPD policy The new Continuous Professional Development Policy (CPD policy) that is currently under the Membership tab on www.fpi.co.za varies from the old CPD policy in that the following were changed: 1.

The reporting cycle is now a fixed period of a calendar year and no longer a fixed period of two years.

The following definitions are now included in the new CPD policy: • Assessment • Pro bono • Reporting cycle is now one calendar year as alluded to above • Structured and unstructured CPD definitions are deleted.

3. Members of FPI must now complete 35 CPD hours every reporting cycle of 12 months, of which five must be towards ethics and practice standards. 4.

Verifiable knowledge points in excess of the requirement for a specific cycle may now be applied to the next reporting cycle, limited to a maximum of one-third of required points. Members are required to complete a minimum number of hours of relevant CPD activities in a reporting cycle (being a calendar year), which may consist of a combination of verifiable and unverifiable CPD activities as opposed to structured and unstructured activities. The new policy also speaks to members belonging to other professional bodies while being a member of the FPI as well and that it remains such members’ duty to comply with the FPI’s CPD policy as well as any other professional body’s requirements as stipulated from time to time. The list of defined CPD activities is also updated to include more CPD activities. The biggest changes include: • Collapsing attendance of seminars, presentations, updates, workshops, conventions and conferences into one ‘Event participation’ category. Additional points can be claimed for successfully completed assessments. • Credit-bearing courses, including international courses, can be claimed, up to 50 percent of CPD requirement. • Professional exams, which include Regulatory Exams and other professional body exams, earn 10 points, limited to 50 percent of the CPD requirement. • Professional reading up to 50 percent of CPD requirement is claimable. • Pro bono activities of up to 50 percent of CPD requirement are claimable.

• The only category that is unverifiable is television and radio broadcasts, unless an assessment is linked to the broadcast. 8.

Point 10, page 10 of the CPD policy, now also refers to the exemptions of CPD requirements and not only the deferral of CPD requirements.

While reading the new CPD policy, members of FPI should note the importance of reading and understanding FPI’s Membership Regulations and the Code of Ethics and Professional Responsibility. Some of the documents that would also be worth understanding are: 1. The Financial Planner Competency Profile 2. Financial Planning Curriculum Framework 3. FPI Certification Standard.

What do the above documents relate to? The FPI Membership Regulations This document inter alia refers to the mandatory annual re-certification process of members’ professional membership which inevitably relates to the continuous and accurate recording of members’ CPD points. The Code of Ethics and Professional Responsibility This is the professional code of conduct that each certified member of FPI is bound to. Failure to adhere and comply with the code may result in disciplinary action being taken against the contravening party. The Financial Planner Competency Profile This is a document that outlines the topics against which an FPI member’s competence should be determined. Financial Planning Curriculum Framework This document describes the Financial Planning Curriculum learning outcomes. FPI Certification Standard This document speaks to the requirements a member must comply with in order to be awarded the CFP® designation or the FSA™ credentials for instance. The new CPD policy aims to guide and support the FPI members in obtaining the mandatory 35 CPD points/hours per reporting cycle which now consists of 12 months and no longer 24 months. Visit www.fpi.co.za to download the new policy or e-mail certification@fpi.co.za to request a copy.

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Continuous Professional Development

events

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).

March

Estate Planning

April Tax Workshop

May

Business Risk and Business Assurance

June

FPI Professionals Convention

July

Practice Standards and Practice Management

August

Retirement Planning

Financial Planning Institute announces new appointments The Financial Planning Institute of Southern Africa (FPI) is pleased to announce the following appointments: Ntai Phoofolo, CFP® as the chairperson-elect effective as of 1 July 2014, and David Kop, CFP® promoted to head: membership and corporate relations effective from 1 January 2014.

Postgraduate Diploma in Financial Planning, all from the University of the Free State. “I am highly delighted and honoured by my appointment and look forward to working alongside the chairperson as well as the FPI leadership team to further grow the status of the institution within the industry,” says Phoofolo.

Ntai Phoofolo, CFP®, who will officially assume his new role after the FPI 2014 Annual General Meeting in June, was elected to this position at a recent board meeting of the institute in early December 2013. Phoofolo joined the FPI Board of Directors in November 2012 and currently works at Standard Bank Private Clients as a wealth manager focusing on client wealth management by assisting with their financial planning needs and fulfilling their banking requirements.

Prem Govender, CFP®, FPI Chairperson comments, “On behalf of the FPI board members, we would like to congratulate Ntai and are delighted to have him on the board as the new incoming chairperson-elect. Having worked with him previously, we are well aware that he is more than capable to step into this role with pronounced valuable experience and, together with our board members, will be able to drive the FPI strategy rollout for the betterment of our industry.”

Phoofolo holds an LLB degree and LLM in international law from the University of the Free State. He further holds a Postgraduate Diploma in Financial Planning and an Advanced

David Kop, CFP®, who joined FPI in July 2013 as senior manager: policy and research, is promoted to head: membership and corporate relations. By joining the senior executive

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September

Financial Planning and Trusts

October

Employee Benefits

November

Annual Refresher Workshops leadership team, Kop will play a pivotal role in FPI’s strategic thrust of member development as well as employer and consumer outreach. Kop completed his BCom in Financial Management at the University of Johannesburg and a Postgraduate Diploma in Financial Planning Law from the University of the Free State in 2002. Godfrey Nti, FPI CEO comments, “I would like to congratulate both Ntai and David on their appointments. We look forward to continuing our work with both of them in building a recognised and respected financial planning profession. We have full confidence that they will do exceptionally well and that their valuable experience will be essential in helping the institute promote professional financial planning for all South Africans.”

David Kop, CFP®

Ntai Phoofolo, CFP®

Client engagement Kim Potgieter, CFP®, Director at Chartered Wealth Solutions

The Centanarian Chall Trends in ageing Should financial planners focus only on the financial security of their clients or do they have a broader role to play in advising clients on their general well-being? Kim Potgieter, CFP® professional and financial life planner, passionately subscribes to the latter view and was delighted to find her approach affirmed by the research findings of renowned Oxford professor, Sarah Harper.

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I recently attended an Acsis seminar entitled ‘Rethinking Global Ageing’, presented by Sarah Harper, professor in gerontology and director of the Oxford Institute of Population Ageing, Oxford Martin School. She shared some startling new findings regarding the social implications of demographic changes around the world. The world is facing a ticking time bomb, according to a UN report released in October 2012. Within a decade, the number of people over 60 will exceed one billion. For the first time in history, population growth is being driven by increasing longevity rather than by fertility rates: older people are living longer, younger people are having fewer children. The UN report estimates that one in nine people around the world are older than 60, and the number of older people worldwide is growing faster than any other age group. This increasing proportion of older people is a consequence of success – improved nutrition, sanitation, healthcare, education and economic well-being are contributing factors.

ARNOLD Married with children. Main breadwinner. Loves his job.

hallenge The implicit warning is that the world will have to start planning now for the impact of a rapidly ageing population.

Health challenges While respiratory illness was a major killer of older men in the 19th century, very few deaths now result from this disease owing to advances in medicine. The same applies to infections, so this is good news for retirees. However, the costs associated with killing these illnesses are going to continue increasing. The incidence of cancer has risen as a result of lifestyle factors such as poor diet, lack of exercise, alcohol abuse and smoking. US life expectancy is lower than expected, says Professor Harper, given their economic wellness; obesity is certainly one of the villains here. â&#x20AC;&#x153;We have a consistently increasing number of unhealthy and obese people entering old age who are dependent on drugs and medication to manage their ailments. They are not willing to make lifestyle changes but rather turn to medication,â&#x20AC;? warns Professor Harper. From a broader perspective, Harper says the increase in the total amount of ill health and disability in the population will exert pressure to increase total healthcare spending. The change in the type of ailments will also present challenges to those providing care for the aged.

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Client engagement

Where does the financial planner come in? The key challenge of this demographic shift is for society to adapt to the changes. “Of vital importance,” says Professor Harper, is “the capacity of individuals and households to make relevant adjustments to savings behaviour, labour productivity, family intergenerational transfers and investments in their own human capital, and the capacity of institutions to make the relevant adjustments to enable these individual and household adjustments.” As a crucial part of this adaptation, financial planners must be prepared and prepare their clients: not just to ensure they will be financially secure for longer, but also to be as healthy as possible – physically, emotionally and mentally – before and during the retirement years. For this to happen, financial planners must fulfil their mandate. Only by having the more personal, and often difficult, conversations, can an appropriate plan be created that includes all the elements of a client’s life. A knowledge of the client’s health challenges or emotional health or exercising habits allows the planner to make provision where needed.

Gender differences in longevity Professor Harper’s research confirms the fact that generally women will outlive men. At Chartered Wealth Solutions, we always include

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2013/11/18 7:58 AM

both husband and wife in our planning meetings. This is both so that we can develop an holistic and comprehensive financial plan, and can establish a relationship with the spouse who will most likely outlive her husband. Women’s immune systems, says Harper, are better at fighting off viruses and bacteria (apparently, the man-flu myth is true – men really do feel worse when they are sick). In terms of hormonal activity, the female hormone is protective, while the male hormone is not, and may even enhance morbidity and mortality. According to Korean research, cites Professor Harper, eunuchs lived on average 20 years longer than their more ‘masculine’ counterparts.

Societal challenges

...THE TERMINATED No one expected the wave of retrenchments.

Will we all enjoy the benefits of longevity or will it only be for a few? The sad news is that there will be more inequalities. There is evidence of differential longevity: the retiree who had a low income and unhealthier lifestyle has an average life expectancy of 12 years after age 65; their wealthier and healthier counterparts had a life expectancy of 23 years. There is further evidence that the trend of an ageing population is leading to a division between government responsibility (public money) to keep the general population out of ill health and poverty, and individual responsibility (private money) to raise personal standards of living and quality of life. What does this mean for the financial planner? Healthy living across the span of your life clearly makes an impact in old age, and education at an early age in crucial. Lifestyle choices easily finds its place in a conversation between a client and their planner. Will advances in life expectancy be matched by advances in healthy life expectancy? Various studies show that that healthy life expectancy is increasing; a good thing, says Professor Harper, as we will have to keep people contributing to labour and the economy. The dependency-ratio myth is weakened as healthy and productive people approach retirement age (which is shifting all the time). We encourage those approaching retirement to continue working as long as they can, healthallowing. They can create a new career or work part-time or volunteer, but they must continue to experience a sense of purpose and usefulness. This has a tremendous impact on their health and well-being. As a financial life planner, I derive enormous satisfaction from spending time with clients and exploring ways in which they can live healthy, holistic and happy lives following retirement. Research has shown that the well-being of the older generation contributes significantly to the well-being of the population as a whole … and the financial planner has a crucial role to play in making the centenarian challenge a positive one.

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Estate and Trusts Planning Dr Eben Nel, High Court Advocate and Fiduciary Advisor at PSG Trust

Proposed alternatives to the usufruct Fiduciary Institute of South Africa member, High Court Advocate and Fiduciary Advisor at PSG Trust, Dr Eben Nel, proposes that a discretionary living trust should be considered as an alternative to estate planning structures such as the usufruct, which can often unearth numerous challenges.

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The usufruct became a popular mechanism for transferring assets, especially fixed property, to an heir, but at the same time creating a right on the use, or produce of the property in favour of another person, known as the usufructuary. The usufructuary can be regarded as a legatee rather than an heir. There is a distinction between a fiduciary interest, which represents a vested right in the body of the fideicommissary property, and a usufructuary interest. As the usufructuary is entitled to both the use and enjoyment of the property, as well as the fruits thereof, they may let the asset to a third party. A variety of practical and tax-related problems relating to the usufruct have, however, developed over time. A favourite application is where the testator determines in his will that his farm will be inherited by his son, who will continue with the farming operations, with a usufructuary right in favour of the testatorâ&#x20AC;&#x2122;s wife, to ensure that she will have a roof over her head and will benefit from the profits of the farm as an income. However, at the death of his mother, the son will be liable for estate duty on the value of the usufruct, which is added to his bare dominium. In practice, the son may not have the taxable amount available or may not be in a position to raise the funds. This may result in his selling the farm or other assets to facilitate the taxes payable, which was never the intention of the testator.

...IS BACK Arnold was prepared. He had Altrisk’s new Retrenchment benefit that pays a lumpsum of up to five times his monthly salary in case of retrenchment. Which gave him the financial security he needed while he was unemployed.

The testator may bequest a unit in a sectional title scheme to his daughter, subject to a lifelong usufruct to his girlfriend, who has no income and, after two years of nonpayment of any levies, disappeared. In terms of the Sectional Titles Act 95 of 1986, the owner of the unit is liable for all levies. Section 1(a) defines the owner as “the person registered as owner or holder thereof”. It can be argued that a usufructuary who holds the property and enjoys the fruits thereof for the rest of her life, is a holder for these purposes. Alternatively the owner of the bare dominium, the daughter, may be forced by the body corporate to pay the levies although she had no enjoyment of the property and, as long as the usufructuary resides there, she cannot rent it out to defray the levies. If she refuses or is unable to pay the levies, she may ultimately lose the property and the usufructuary may even end up on the street. In terms of the Deeds Registries Act 47 of 1937, the duration of a usufruct is limited to the lifetime of the person in whose favour it was created. In practice, however, a contingent usufructuary right may be registered, which means that the right is dependent on a future event, like a remarriage or emigration.

Tell those like Arnold about Altrisk’s Retrenchment beneﬁt. Because everyone needs a chance to make a comeback. For more information speak to your Altrisk broker consultant or go to www.altrisk.co.za

We’re your type

A usufruct may be created in favour of more than one person at the same time, but more than one usufruct cannot exist concurrently over the same property. Although a second usufruct can therefore not be registered over property, a contingent usufruct may indeed be registered. The potential challenges relating to the usufruct include estate duty and transfer duty realities, the limitations created by the Subdivision of Agricultural Land Act 70 of 1970, capital gains tax and the limitations regarding the use of property with a usufruct as security for a bond to be registered. We submit that a discretionary living trust should often be considered as an alternative to estate planning structures such as the usufruct, the fideicommissum, usus, habitatio, modus and the testamentary trust. The trust as an alternative can be structured to provide for a number of beneficiaries and even to separate income and capital beneficiaries. For example, if the testator bequeathed an asset to a discretionary trust with one party as the capital beneficiary and another party as the income beneficiary, a similar result can be achieved as with the usufruct. When the income beneficiary dies, the result will be that the capital beneficiary will remain as the only beneficiary, both income and capital. As no vesting of capital has taken place in case of a discretionary trust, no transfer of ownership is realised and no tax or other considerations are relevant.

Altrisk is a division of Hollard Life Assurance, an authorised ﬁnancial services provider (FSP 17697).

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Employee Benefits

Implications of new

retirement fund law should be considered New legislation to be enforced from March 2015, which will affect retirement funds, could make non-payment of retirement fund contributions by employers a criminal offence. Penalties for non-compliance will include fines of up to R10 million and the possibility of imprisonment of up to 10 years. The revised Financial Services Laws Amendment Act of 2013 stipulates that “every director who is regularly involved in the management of the company’s overall financial affairs” will now be personally liable for the payment of fund contributions. Retirement funds are required to request employers to identify such persons, failing which all the directors will be personally liable. In the case of a closed corporation (CC), liability will rest with the members who are regularly involved in the CC’s financial affairs; and in other firms, with members of the governing body who are involved in the firm’s finances. Umbrella Fund principal officer, Kobus Hanekom, comments that while the amendment should be welcomed, it may constitute a significant business risk for employers. “In the past, non-payment of employer contributions was, to a large extent, merely regarded as a breach of contract. Deducting contributions from members’ salaries and failing to transfer them to a fund was considered theft, but it wasn’t easy to hold the employer or a director liable in their personal capacity and recover the losses suffered by the fund members. All the implications of the legislation have not yet been fully considered. If inability to pay will constitute a legal excuse, under what circumstances will they be excused? We may speculate, but ultimately we’ll have to wait and see how our courts will interpret these rules.” According to Hanekom, creative solutions are required by retirement funds to assist employers in managing the business risk posed by the new legislation. In response, the Umbrella Fund has amended its rules and introduced a temporary suspension of participation arrangement for its members. Fund rules previously only allowed for employers to terminate participation in the fund.

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“This is a final and drastic measure, especially if the employer believes the cash flow concerns are of a temporary nature. We also understand that smaller employers are more often exposed to temporary periods of cash flow constraint, and creative ways must be found to assist them,” says Hanekom. If retirement fund contributions in respect of any month remain outstanding on the 15th of the second month following that month, the employer’s participation in the fund will be suspended in terms of the fund’s rules. The fund will communicate the temporary suspension to the employer, who will then have the option of either immediate termination if a financial recovery is unlikely, or a six-month suspension if the employer believes it will recover financially. It is important to note, however, that if an employer is in arrears, group risk benefits such as death and disability cover may cease. Should a claim arise during this time, the fund will not be in a position to pay the insured benefits and members may sue the employer for any damages suffered. An unapproved policy will thus have to be secured during the suspension period. “We introduced this new option to protect our members from loss, but also to assist employers to adjust to and navigate the new risks. Temporary suspension will, however, still have a significant impact on members, and it will need to be managed very carefully,” Hanekom concludes.

Employee Benefits

Transfer of death benefits to unclaimed benefit preservation funds Rozanne Unterslak, Principal Officer at Liberty Sponsored Funds

Death benefits payable in terms of Section 37C of the Pension Fund Act were originally excluded from the definition of ‘unclaimed benefit’ as defined in Section 1 of the Pension Fund Act. The inclusion was introduced with the Financial Services Laws General Amendment Bill. With the promulgation of this bill into an act on 16 January 2014, the definition of ‘unclaimed benefit’ now includes: “A death benefit payable to a beneficiary under section 37C not paid within 24 months from the date on which the fund became aware of the death of the member, or such longer period as may be reasonably justified by the board of the fund in writing.” Note the emphasis regarding the starting point of the 24-month period during which the benefit is payable but remains unclaimed. The implication is that death benefits that fall within the abovementioned

definition can now be transferred to unclaimed benefit preservation funds in terms of section 14(8) of the act in conjunction with FSB Directive 6, whereas, previously death benefits were excluded from this provision. This act comes into operation on a date determined by the minister by notice in the Government Gazette, the date of which has not yet been gazetted. Fund administrators particularly welcome this move which eliminates an anomaly that prevented many essentially defunct funds from being deregistered with the Financial Services Board. There could also be a significant saving in the costs associated with maintaining such funds. It is a moot point as to whether unclaimed benefit funds will be any more successful in tracing beneficiaries but at least there is a statutory requirement for the unclaimed benefit fund trustees to try.

FISA making its mark Since its formation six years ago, FISA has built a strong reputation: • • • •

Members know we are actively promoting their interests The public are choosing to deal only with FISA members Awareness of fiduciary matters has grown through the media The authorities are consulting us on industry issues

FISA membership is open to fiduciary practitioners, financial planners, lawyers, accountants and any professional who meets our membership criteria. FISA has signed a Memorandum of Understanding with the FPI, allowing each other’s members to earn CPD points for various activities and events. For the first time, FISA members can attend the FPI conference at the FPI member rate.

Join us today! www.fidsa.org.za

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Academic paper review

Alan McCulloch, CFP®

Managing retirement capital

Two very interesting academic papers, co-authored by Prof. Niel Krige and Duncan Palmer and originally published in the Journal of Economic and Financial Sciences Vol. 6 No. 1 in June 2012, provide much food for thought for financial planners seeking ways and means to manage retirement capital in times where annuitant mortality rates are declining.

Real age-adjusted life expectancy In this paper, the reader is introduced to a concept that the authors designate as real age-adjusted life expectancy and lays out a basis from which it is possible to model the deviation from expected average mortality that an individual may exhibit when taking into account factors such as: • Gender • Residing province • Income • HIV status • Ethnic background • Weight • Exercise • Family illness history • Stress • Substance abuse • Diet The authors rightly underline the point that published mortality tables are inherently based on averages, but the actual life expectancy experienced by an individual will be either below or above the average line. A more accurate forecast of the potential years of life remaining to an individual contemplating retirement can have a significant impact on the way in which retirement capital is to be invested for longer or shorter periods as the case may be. The real age concept can be summarised in the notion that

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somebody can be physically younger or older than their calendar age influenced by the factors above. Using a specially designed grid and giving statistically derived additional/less years of life according to the impact of the influencing factors, the result is a revised individual prediction of life expectancy. Three (fictitious) examples are given. Person X, is a white male in the LSM 10 group living in the Western Cape who has a degree, with private medical aid and a large portion of disposable income. No Aids test has been taken. He is health conscious, exercises regularly, eats healthily and is carrying no extra weight. There is a small history of illness in the family: prostate cancer and minor heart disease. Staying away from the corporate world, stress is kept to a minimum and he doesn’t smoke. Currently aged 60, Person X is predicted to expect another 27 years of life to age 87. Person Y is a black working professional female in the LSM 7 group living in Limpopo, has a degree and is the sole income in the home. She has been HIV tested (result: negative) and is in good physical shape due to 30 minutes of exercise each day and a healthy diet; she does not smoke or have a highly stressful job. There is no trace of family illness. Currently just over age 61, Person Y will enjoy another 11 years of life to age 72.

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The financial survival probability of living annuitants In the second paper by the two authors, the real age methodology is incorporated into a fresh study into living annuities, reexamining the question of how long a given amount of capital will be able to fund a living annuitant assuming that the following five parameters are known: • Expected retirement duration (i.e. years between date of retirement and date of death) • Return on investment • Inflation • Annual withdrawal amount • Initial capital amount available. The authors developed a model to graphically illustrate the relationship between these parameters and show how changes to retirement duration and withdrawal rates change the financial survival probability (SP), which they define as “the probability of having enough capital to maintain a desired withdrawal rate for the expected retirement duration”. A pension model was developed which enables living annuitants to calculate their financial SP for a given withdrawal rate, risk profile and expected retirement duration. This model was based on Monte Carlo simulation with Cholesky factorisation in order to calculate returns of various portfolios. Portfolios were classified as high, medium and low risk.

Person Z is an Indian male in the LSM 8 group living in Johannesburg. A self-made successful businessman, he has little financial concern but high stress is a factor. He exercises infrequently, doesn’t eat particularly healthily, and is five kilograms overweight as a result. His HIV test returned negative. Smoking is a family trait, though he quit a number of years ago. There are no traces of family illness. Currently aged just over 55, Person Z could expect to survive for another 12 years to age 67. In their conclusion, the authors make two points: • The survival ages of 87, 72 and 67 are noticeably at variance with average 50-year life expectancy for South Africans in general. • The model can play an invaluable part in retirement planning as retirement duration determines the asset classes and corresponding weights in which the retirement funds should be invested. Persons with the longest life expectancy may have to invest in a higher risk portfolio to ensure that sufficient funds are available until date of death. Conversely it would be dangerous to base retirement planning solely on the results from the model in the case of the person with a life expectancy of 67 years. In this case he/she should err on the conservative side by assuming a significantly longer period after retirement.

Millions of calculations and simulations were performed using a high level computer language designed for numerical computations and the important conclusions reached were as follows: • If a high withdrawal rate and a long retirement period are required, then the financial SP of a high-risk portfolio exceeds the financial SP of a low-risk portfolio. In this case, the annuitant has to accept higher risks in order to achieve higher returns. • Conversely, if a low withdrawal rate and a relatively short retirement period are required, then a low-risk portfolio offers a higher financial SP. However, in this case the financial SP is significantly higher than in the former case, as expected. • A common cross-over point exists where it is immaterial whether a low-risk portfolio or a high-risk portfolio is selected. This cross-over point is a financial SP of 70 percent. As the financial SP desired drops below 70 percent, the retiree should invest in a high-risk portfolio, irrespective of retirement duration and withdrawal rate. The converse is true for higher financial SPs. • The volatility of expected returns of the three risk-profiled portfolios has a significant impact on the probability of money death (MD). If a withdrawal rate of 2.5 percent is assumed, the probability of MD is 12.50, 17.75 and 20.80 percent respectively in the case of the low-, medium- and high-risk portfolios. The nature of these conclusions are possibly instinctive to financial planners but it is comforting to have research proving the point. Interested financial planners active in the living annuity market could benefit greatly by a detailed study of these papers. The papers are available under the ‘Resource Centre’ tab in the ‘Professionals’ section of the FPI website www.fpi.co.za or e-mail technical@fpi.co.za to request a copy.

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Financial Services Laws General Amendment Act, 2013

The commencement date for the Financial Services Laws General Amendment Act, 2013, was 28 February 2014. “The act aims to ensure South Africa has a sounder and better-regulated financial services industry which promotes financial stability by strengthening the financial sector regulatory framework and enhancing the supervisory powers of the regulators.” Ian Haigh, CFP®

The 13 financial sector laws amended in the act include: • Financial Services Board Act, 1990 • Inspection of Financial Institutions Act, 1998 • Financial Institutions (Protection of Funds) Act, 2001 • Short-term and Long-term Insurance Acts, 1998 • Pension Funds Act, 1956 • Collective Investment Schemes Control Act, 2002; • Co-operative Banks Act, 2007; • Financial Services Laws General Amendment Act, 2008 • Financial Markets Act, 2012 • Credit Rating Services Act, 2012 • Financial Advisory and Intermediary Services Act, 2002 • South African Reserve Bank Act, 1989 • Medical Schemes Act, 1998.

Most provisions in the act will commence on 28 February 2014; however, the following sections will be implemented as follows: Amendments to the Pension Funds Act, 1956 (Act No. 24 of 1956) Section 5 of the act amends section 4 of the Pension Funds Act (PFA) will come into operation on 30 May 2014. Section 31 of the act amends section 31 of the PFA will come into operation on 29 August 2014.

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Amendments to the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) Section 186(d) effects amendments to section 12 of the FAIS Act, by removing the requirement that the Registrar must consult with the advisory committee prior to debarring representatives of an authorised financial service provider. This section will come into operation on 30 May 2014.

The following amendments will come into operation on a date to be determined in a subsequent notice to be published in the Government Gazette. Amendments to the Financial Services Board Act, 1990 (Act No. 97 of 1990) Section 61 of the act inserts a new section 18 into the FSB Act. Amendments to the Long-term Insurance Act, 1998 (Act No. 52 of 1998) Section 95 of the act amends section 49 of the LTIA, which deals with the limitation of intermediary remuneration. Amendments to the Short-term Insurance Act, 1998 (Act No. 53 of 1998)

Employee Benefits Section 109 of the act effects amendments to certain definitions in section 1 of the STIA. Section 114(d) amends section 8 of the STIA, through the deletion of subsection 5, which prohibited the charging by an intermediary for, inter alia, any fee which is payable by the policyholder. Section 135 of the act substitutes section 48 of the STIA, to provide for limitations on remuneration. Amendments to the Medical Schemes Act, 1998 (Act No. 131 of 1998) In terms of section 264 and the schedule to the act, the definition of ‘business of a medical scheme’ in section 1 of the MSA is amended, to clarify the definition.

Some of the key amendments to the PFA include: • Definition of ‘fund return’ effective retrospectively from 1 December 2001. • Unclaimed benefits now include: • Death benefit not paid within 24 months from date fund became aware of death or longer period reasonably justified by trustees. • Unclaimed divorce allocation paid within 24 months date and a cash/transfer election made by former spouse, or if no election made, date on which election period expires. • Divorce benefits now include: • Moslem marriages • Divorced pensioner • Divorced deferred pensioner. • Unapproved death benefits may be transferred to a beneficiary fund. • Deduction of expenses from benefit even when no contributions are made for member. • Fund may pay benefit to third party bank account if member/ beneficiary provides sufficient proof they unable to open a bank account. • If there are sound administrative reasons why an exact allocation of a fund return cannot be effected, trustees may use a reasonable approximation, made in such a manner as may be prescribed by the FSB.

• Personal liability for non-payment of contributions extended to certain individuals within the employer. • Reserve and surplus accounts may be established only if provided for in the rules. A separate account must be established for each specific category of contingency. • Collective investment schemes added to list of other investments allowed to hold investments on behalf of retirement funds. • Funds may not, without prior approval of the FSB, directly/ indirectly hold shares/any other financial interest in another entity which results in exercising control over that other entity. • FSB can refuse to register consolidated rules if differ from existing rules. FSB rule amendment query must be answered by fund within 180 days. • FSB allowed to withdraw approved section 14 transfer where legislative amendments resulted in prejudice to members. • Whistle-blowing has been addressed in following areas: • Trustee appointment ends other than voluntary or end of term of office. Must provide reasons to FSB. • Any material issue that may seriously prejudice financial viability of fund/members. • Whistle-blowing protection for certain stakeholders. • Delegation of duties if in rules of fund. • Court may absolve individual trustee of joint/several liability if trustee acted independently, honestly, reasonably and having regard to all circumstances where it would be fair to excuse a trustee. • Principal officer must be appointed within a period prescribed by the FSB. • Fund may appoint a deputy principal officer. • If a fund is valuation exempt, there is no need to appoint a valuator. • Certain requirements of an administrator. • FSB will issue notices on FSB website unless PFA specifically prescribes that notices must be issued via Government Gazette. • FSB can prescribe requirements that trustees must comply with when communicating information to members/ beneficiaries. • FSB can declare specific practices/methods of an administrator/person as unacceptable, irregular or undesirable and can take steps to halt practice/method. • The following persons can now lodge a complaint with the pension fund adjudicator: spouse, former spouse, member and former member. • Liability for certain acts against the adjudicator amended to a fine not exceeding R1 million or imprisonment not exceeding one year or both. For more details, please refer to the act.

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Medical malpractice how much cover is enough? By Hanna Barry, RiskSA Magazine An increase in the number of claims and size of awards for medical malpractice has left insurers running for the hills. Partly fuelled by legislative changes impacting the Road Accident Fund (RAF), which has subsequently led attorneys to look for alternative revenue streams in the medico-legal and personal injury arenas, the increase in the number and cost of claims points to an increasing awareness among patients of their rights and preparedness by attorneys to litigate such cases on a contingency basis.

After a series of operations that left Keri Mel O’Loughlin brain damaged, the Medical Protection Society (MPS) paid a settlement of R25 million to O’Loughlin and her family in June 2013 on behalf of a Mossel Bay neurosurgeon. This was the highest payout ever made for a medical malpractice claim in South Africa.

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“Our experience is that the cost of claims has been especially high in obstetrics, but less so in the gynaecology part of an obstetrician and gynaecologist’s practice. Neonatology and spinal surgery are also areas where claims costs have been significant,” says Dr Graeme Howarth, head of medical services in Africa for the MPS. The MPS is a mutual, not for profit membership organisation that provides benefits to members, which include access to support with legal and ethical problems that arise from professional practice, as well as financial protection against damages claimed for by patients. The MPS currently has more than 30 000 healthcare professionals in South Africa and over 280 000 members worldwide.

Paying their bills A quick glance at the changes in the cost of MPS membership fees between 2008 and 2013 paints a worrying picture. For example, the 2008 subscription rate for obstetrics was R97 100, which jumped to R254 230 in 2013. Since the MPS is not an insurer, all benefits of membership are discretionary and subscription rates are set to ensure provision for the support of members needs now and in the future. Commercial insurance policies elicit similarly high, if not higher, fees. “The risks that are posed for high end medical practitioners mean, for example, an obstetrician should be paying around R500 000 in

healthcare professional indemnity insurance premiums annually,” says Donald Dinnie, head of dispute resolution and litigation at Norton Rose Fulbright. Dinnie notes that an award on a properly structured liability claim for a baby that contracts cerebral palsy after birth could easily be in the region of R20 million. In the case of N vs Dr E, the Supreme Court of Appeal (SCA) ordered that an award exceeding R12 million be paid to N’s family, after N suffered a massive brain injury during birth at the hands of the respondent, Dr E. Seven months after his birth, N’s mother discovered that her very difficult baby was severely cerebral palsied. The respondent conceded that N’s condition was the result of his negligence. A number of local and international experts testified in a trial marathon that lasted over 12 months, where the amount of damages that N should receive was the only concern, since negligence had already been established. The main issue was the extent to which N’s life expectancy had been reduced by the injury, as this determined the period for calculation of his loss of income and future medical expenses. It was eventually decided that his life expectancy was a further 30 years. Claims on damages suffered to children or young people generally elicit higher payments, since compensation takes into account expected longevity, loss of income and the cost of ongoing medical care. Malpractice claims would also take into account, for example, the cost of indemnity in a foreign currency. If a British citizen were injured in a South African hospital while on holiday, the payout would be significantly higher than for a similar individual who was a South African citizen, since damages would be calculated in Pounds. Ultimately, in each instance, a court must decide what amount would indemnify the claimant against losses suffered. It is also true that things go wrong in the context of medical care and this is not always as a result of negligence. “In some cases, no one can be legitimately blamed. But malpractice claims are at times prompted by the deeply emotional and personal link between a patient and any perceived negligent medical complication,” says Dinnie. “Negligent medical outcomes causing financial loss do have to be compensated. The nature of medicine is, however, that complications do arise without fault on the part of medical practitioners. Attorneys in this field need to manage the expectations of their clients,” he stresses. Dinnie notes that while there are a handful of excellent plaintiff lawyers who have specialist skills and years of experience doing medico-legal work, many of the newer entrants pursue malpractice claims without fully understanding the merits of each case or carefully considering the appropriate award. This leads to a greater number of speculative medical malpractice cases, where a case is pursued against the incorrect party or an unrealistically high award is demanded. In most of these cases, notes Dinnie, awards are not made to plaintiffs. In fact, he says that actual awards on damages are few and far between in South Africa and there are very few liability judgments made in the medico-legal space. “More often than not, parties negotiate and settle outside of court,” he says. While this avoids costly litigation, these amounts are nothing to be sniffed at and remain an area of concern for insurers.

is,” Dinnie highlights. Formerly a major player in the medical malpractice insurance market, Stalker Hutchison Admiral (SHA), underwritten by Santam, has withdrawn capacity, although not exited completely. Dinnie notes that insurers like ACE, Hollard and Camargue have to some extent filled this gap. He says that General and Professional Liability Acceptances (GPLA) is reintroducing capacity. “There is certainly opportunity for knowledgeable insurers to make money in the local market. It depends on how you go about writing the business and the risk management you provide to clients. For example, if clients respond appropriately at the complaints stage, claims or potential claims could go away, as very often patients just want further understanding of the treatment or procedure and why they responded as they did,” he points out. Similarly, Dr Howarth notes that most claims arise not because of substandard care, but because of a failure in communication between the doctor and patient. “All doctors should always regard concern for the best interests or well-being of their patients as their primary professional duty. They can do this by making sure they keep good records, communicate effectively with patients and stick to their areas of competence,” he says. Settling claims upfront can be a double-edged sword, particularly when insurers begin to spend money on making claims go away when these claims are not meritorious. “Insurers may elect to pay illegitimate claims due to the commercial realities of litigation. But the danger here is the message it sends to malpractice attorneys, who may then view such an insurer as an easy target,” Dinnie warns. Under Section 46 of the National Health Act, private health establishments are required to maintain “cover sufficient to indemnify a user for damages that he or she might suffer as a consequence of a wrongful act by any member of its staff or by any of its employees”. There are no sanctions in the legislation if a healthcare establishment does not have adequate professional indemnity (PI) cover, but presumably when hospital licences are annually renewed, this is considered. In addition, Dinnie points out that hospital management could be held liable for not ensuring that their institution had adequate PI cover, giving rise to claims on directors and officers and highlighting the need for D&O insurance in this context. As it stands currently, doctors are not required by law to have PI insurance, although the Health Professions Council of South Africa (HPCSA) has promised to issue draft legislation in this regard. “There are a number of doctors who do not have PI insurance, nor are they members of the MPS and are therefore significantly exposed in terms of potential claims. In addition, if there were to be legitimate claims, these doctors would have no money to provide indemnity to their patients.” Intermediaries must ensure that their clients who are healthcare professionals have proper indemnity in place. Not only is it vitally important for their patients’ protection, but also the protection of their own families, practices and careers, should they find themselves faced with a R10 million malpractice claim.

Where has all the capacity gone? The South African insurance market has lost its appetite for medical malpractice risk, particularly in the areas of orthopaedics and obstetrics. This is especially true in the case of major hospital groups that offer a full medical service to patients. “One hospital could quite easily suffer a R30 million loss if it has three infant cases that are settled at R10 million each. When you consider that a major hospital group might have more than 100 hospitals in it, you come to understand how significant its exposure

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Cold turkey Gavin Wood, Chief Investment Officer at Kagiso Asset Management

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We have entered 2014, a mere five years since the financial world was in free-fall as a result of the US subprime mortgage market imploding and the unwinding of the preceding credit-fuelled excesses.

Five years on and most markets are at all-time (or at least multiyear) highs, marking a massive rise in asset prices from the March 2009 bottom. Uncertainty about the risks that the future holds in markets, as priced by the VIX Index (currently around 13 percent) is at a near-record low. Optimism priced into markets is very high.

Interventions in markets While there has been unprecedented government intervention in the global economy to stave off the crisis and its after-effects (from bailouts to fiscal stimulus and from open-ended Eurozone protection measures to Abenomics), nothing looms larger in markets than the actions of the US Federal Reserve. The Fed’s policy rate has been kept at practically zero for over five years and it has indicated an intention to keep it there for a few years more. Not content with merely anchoring short-term rates at zero, it has targeted long-term borrowing costs by purchasing bonds in the market with newly created Dollars, thereby reducing the stock of these bonds in private hands and forcing down yields. The Fed has more than quadrupled its assets over this period to more than US$4 trillion currently – roughly 25 percent of US GDP and more than the GDP of Germany, the world’s fourth-largest economy. The intention behind this grand monetary experiment is to spur on US economic activity through lowering borrowing costs for firms and consumers, weakening the Dollar and encouraging expenditure via the ‘wealth effect’. However, the real economic impact of this easy money appears to have been limited as growth is lacklustre and unemployment is stubbornly high. It has not stoked inflation as many had predicted; US inflation is now around 1.2 percent, from 1.1 percent five years ago. The impact on financial markets and asset prices, however, has been immense: record low bond yields, record high equity prices and remarkably low volatility – steady, trending ‘green on the screen’.

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Eminent financial institutions, such as Lehman Brothers, AIG and Bear Stearns went down in what has become known as the Great Financial Crisis. Market participants were panicking, fearing economic collapse, and selling their assets for whatever price they could get. It was the best buying opportunity of this generation.

been bought, but to a lesser extent and resources shares have been sold down slightly. The total returns from these asset classes (2008 – 2013) are shown on the same graph, disaggregated into the contribution to total returns from income distributions (company dividends, bond coupons), from earnings growth and from re-rating. Re-rating is the improvement in the price of an asset relative to its recent earnings (or yield for bonds). It can be understood to represent some combination of, firstly, increased optimism regarding the prospects for the asset; and, secondly, the asset’s price simply implying lower future returns (becoming more expensive). The largest targets for foreign buying have clearly produced the best returns, with a significant portion of the returns coming from re-rating in both cases. Industrial shares have also grown earnings rapidly (to what we view as unsustainable levels in many cases), some benefiting from a strong consumer cycle and some from the weakening currency last year. Resource shares, sold by foreigners, have barely produced any return over these six years, due to the significant (six percent per annum) de-rating they have experienced, despite growing earnings and paying dividends.

Looking forward Prospectively we believe that, in a world of slowing stimulus and gradually improving economic activity in developed economies, industrial shares and government bonds are particularly vulnerable to foreign selling, given their significant foreign ownership. There is a risk of considerable capital loss in these asset classes as they revert back towards more realistic valuations, and perhaps overshoot due to foreign selling. Resources shares, and to a lesser extent financials, appear inexpensive to us (as do many smaller industrials), and are significantly less vulnerable to foreign selling.

Graph 1: Foreign portfolio flows funding SA’s deficts

The impact on SA asset prices South Africa has been a particularly welcoming destination for the world’s excess liquidity during this period. Our economy in general overspends each year, as evidenced by a persistently high current account deficit, currently over six percent of GDP. This has primarily been funded by material portfolio flows into our large, liquid and well-regulated bond and equity markets. Our government has been hungry for funds from abroad, with its fiscal deficit running at around five percent of GDP. These dynamics are illustrated in the Graph 1.

Graph 2: Disaggregated returns and changes in foreign holdings

Foreign equity investors have been attracted by our well-managed companies, strong corporate governance, economic growth (slowing now) and access to exciting growth prospects of African countries to our north. Foreign bond investors have been attracted by our ‘high’ yields and well-managed fiscus. Graph 2 shows how these foreign investors have particularly bought up South African industrial shares and government bonds over the period. They now hold an all-time record of around 50 percent of industrials and 38 percent of bonds, importantly at a time when these markets are at their peak sizes. Financial shares have also

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Relevance of invest style in South Africa

Geoff Blount, CEO of Cannon Asset Managers.

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Many consultants and wealth managers proclaim that the South African market is too small for investment style to be relevant and, therefore, it does not matter. This sentiment is typical at the end of an extended growth style run and the investment industry displays collective amnesia.

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growth). However, this outperformance does not occur in a straight line but is cyclical. In graph 2, we show the same data as graph 1, but plot the MSCI value index over the MSCI growth index. When the green line is rising, it means that value is outperforming growth, and vice versa. We also show the average starting and ending PE for periods when value and growth outperform. Graph 2 is fascinating on a number of levels: • It indicates the incredible cyclicality of value and growth as styles. • It shows that we are in the longest growth phase the SA market has on record, and while not the deepest, the cumulative effect of its length and depth make it the most powerful growth market SA has seen since the style indices were created. • It indicates that the market PE (as shown at every peak and trough of the cycle) typically: • Expands when growth outperforms (the market gets more expensive relative to its earnings). • Contracts when value outperforms (the market as a whole gets cheaper over these periods). • As an aside, given the market’s current 18.1 PE, for the present growth cycle to continue, history would indicate that the market PE has to keep rising. • The cyclicality of style begs the question, why not ‘style time’? The reality is that it is incredibly hard to get right and no manager has ever shown the ability to do so successfully. The compromise is normally to become a GARP manager, where the focus is on buying stocks that are neither extreme growth nor extreme value.

tment frica

Towards the end of the 1990s, there were only two value managers left in SA, and many growth managers, with the general observation that style doesn’t matter. History seems to be repeating itself. We are currently experiencing an extended growth cycle and there are now, to our mind, only three value managers left in South Africa. Once again, the general observation is that style is irrelevant in our market. Why this phenomena, and what is going on? There are many investment styles, ranging from top-down, bottom-up, momentum, GARP (growth at a reasonable price), value and growth. It is the last two that I will focus on as they are the most relevant.

Given the current cycle, it is no wonder most value managers have either: • Gone out of business; • Capitulated and style drifted; • Say value on the label but don’t put it in the portfolio. True-to-style value managers could, simply, not have outperformed in the recent past. Conversely, the current managers that have recently performed well could not have delivered the performance they did without significant exposure to growth shares. Whenever growth reaches its zenith, investors find reasons why this time it is different and the old rules of investing no longer apply. But over time, where do the best opportunities in the market lie? We have recently completed a research project where we applied the original Fama and French analysis on style in the US, to South Africa. They showed that, over the long run, value, and in particular, small

Graph 1: MSCI SA value vs MSCI SA growth vs MSCI South Africa

Cannon believes that in any market where price differentiation occurs, style exists. Take the extreme market of two stocks only, one on a PE of 20x and the other on a PE of 10x. The market will have an average PE of 15x, but one stock is priced with high future expectations and the other low. There is value and growth in this market. Another argument trotted out against style in South Africa is that there are insufficient value opportunities on the JSE. This is more a comment on the size of the manager making the statement and their limited investable universe, rather than the value opportunity set. Simply put, most managers are too large to be value managers in SA, a topic which we address below. If value and growth exists in South Africa, can this be measured? The answer is: yes. In graph 1, we have plotted MSCI style indices and the market for South Africa. What is very clear from this graph is that, over time, value outperforms growth, as well as the market (which incidentally also outperforms

Source: Cannon Asset Managers, MSCI South Africa, Value and Growth Indices (2014)

The Financial Planner

Graph 2: MSCI SA value relative to MSCI SA growth (Market PE shown at each point of inflection).

Source: Cannon Asset Managers, MSCI South Africa Value and Growth Indices

value outperforms both the market as well as growth. Graph 3 shows this analysis for South Africa, which indicates the average annual real longterm returns for large, mid and small value, GARP and growth styles in South Africa from 1990 to 2013. We have the added dimension of showing the amount of capital (market cap) in each strategy by the size of the circle. The square blocks show the behaviour of the market from a style perspective for 2013, which was not dissimilar to 2012, and they show that recent performance is anomalous to the long term average.

to investors and represents investment risk, not opportunity. Appetite for these stocks has driven them from expensive to very expensive and fuelled the growth bubble we are in. This investor obsession with large cap industrials has created many opportunities elsewhere in the market, especially in small caps. To elaborate, the Top 40 index (large caps) saw its collective earnings fall 8 percent last year, but amazingly, its PE rose 24 percent. To repeat, large cap earnings were down, yet the market was willing to pay substantially more for those shares. That can be contrasted with the elephant in the room, namely small cap shares, which grew their earnings by 20 percent but the market pushed their PEs down by two percent. Many large asset managers, who are simply too big to buy smaller shares on the market, were protected by their forced exposure to large cap shares but when the cycle turns, they may be unable to access these opportunities. A final observation to be made is that if, as an investor, you do decide that you want exposure to any one style, then you have to ensure that you are getting that style. Just because a manager puts value on the label or in a descriptor of a fund or their process, does not mean it is actually in the portfolio. There is a clear argument regarding the merits of investing with a value bias. Should you decide to follow this route, ensure that you select your asset manager wisely.

Graph 3: MSCI SA value relative to MSCI SA growth

Graph 3 is hugely instructive as it not only breaks the market into three styles, but it also shows the influence of size. •

• •

•

The first observation is that growth investing in any size bucket (large, mid- and small-cap shares) underperforms the market over time, yet 48 percent of the equity market, and hence investor capital, typically sits in this bucket. No wonder so many investors can’t beat the market over time. In reality, growth does not grow. But in periods where it outperforms, as shown for last year in the pink square, it is easy to be seduced by the great stories and wonderful prospects of growth stocks. Thirty percent of investor capital sits in GARP, which does demonstrate a small advantage over the market. Only 21.6 percent of investor capital sits in value. By definition, value investing is a minority sport but it does outperform the total market and growth style by 2.8 percent and 4.4% per annum respectively. Small cap value outperforms the market by a staggering 8.6 percent per annum.

And if you were going to use a blend of active and passive (or beta) as a long-term investor, the active tilts should be in favour of mid- and small-cap value shares. So what has been driving this market behaviour and recently rewarding growth investing? Investor appetite for large-cap industrials has pushed valuations to all-time records (even higher than before the crash of 2008) as shown by their cyclically adjusted price earnings (CAPE) ratio. Non-large cap industrials, resources and financials are nowhere near the stratospheric valuations of large-cap industrials. Examples of excessively exuberant sectors include healthcare, cash retailers (until recently), and Rand hedge industrials. In fact, a staggering 11 percent of last year’s 18 percent market rise was from index heavyweights Naspers, Richemont and SABMiller. If you owned all other 157 companies that make up the index, your return was just seven percent. And why is the large-cap industrial CAPE so critical? If history is any guide, this sector looks very dangerous

The Financial Planner

Source: Cannon Asset Managers (2014) proprietary data archive; analysis from Fama and French (1992 & 1993); Index Fund Advisors (2010)

What is value and growth? Value stocks are typically those shares which are unpopular presently and are generally facing some nearer term headwind. The market has taken a dim view of their earnings growth prospects and, as a result, they characteristically sit on low PEs, low PBs and high DYs. They often have poor momentum (price has been falling) and are emotionally uncomfortable to own. But earnings also normally recover faster than the market expects, with investors being rewarded both in a PE re-rating as well as the earnings recovery. Group Five would be a value stock that has started to perform. Growth shares typically enjoy a valuation premium to the market and sit on high PEs, high PBs and low DYs. The market is willing to pay up for these shares, as investors believe they will have high earnings growth in the future to justify their expensiveness. They enjoy strong momentum and are emotionally easy to own as they are popular recent winners. They are often accompanied by a great story and blue sky. The poster boy growth shares at the moment are Curro, SABMiller and Naspers.

PRACTICE MANAGEMENT

Employee development essential in a new workplace

Irwin van Stavel, Managing Executive and Senior Partner at performance agency LRMG

Employees who feel their employers are not investing in their continuous professional development are more likely to think about leaving to pursue better opportunities than those who are given this opportunity. So, why are some companies dragging their feet and refusing to invest enough in their employee development programmes? Irwin van Stavel, managing executive and senior partner at performance agency LRMG, says in some cases, it comes down to an insecurity most managers don’t want to acknowledge: the fear that an employee may become overqualified, outgrow his job and leave the company to pursue a better position elsewhere before a promotion is available. “This fear isn’t completely baseless either. Young high achievers job hop frequently to earn a higher salary and, on average, leave their jobs after only 28 months. Research also shows that Generation Ys will have 10 different jobs by the age of 38,” he adds. Yet, withholding professional development from employees is not the right response to this fear; it’s a self-fulfilling prophecy, Van Stavel stresses. “Fact is, employees seek professional development to achieve successful careers, and when companies don’t invest in this development, employees leave.”

The true cost of disengaged employees The real cost of insufficient continuous professional development equates to unmotivated and disengaged employees. Citing Gallup’s 2013 ‘State of the American Workplace’ report, Van Stavel points out that 70 percent of American workers are ‘not engaged’ or ‘actively disengaged’. That’s a scary thought. “While statistics for the South African market are not readily available at this point, having dealt with numerous organisations of varying size around the country, we believe this

statistic is even worse in South Africa,” says Guy Martin, founder and managing director of Bluprints. The impact of disengagement on productivity can also be devastating for a business. When employees are less engaged in their work, they require more supervision, make more mistakes and cost their companies more money. “On the other hand, employees who know their employers not only value them, but also invest in their future, become more engaged and motivated at work,” says Van Stavel. Engaged employees see higher productivity, higher profitability and higher customer satisfaction ratings. They also make fewer mistakes. Perhaps surprising to some is that engagement levels play a bigger role in employee satisfaction than corporate perks like vacation days and flexi time. “Most employees feel satisfied and engaged when they’re encouraged and equipped to contribute to the company’s overarching mission. This mission must, of course, be well communicated, focused around a greater purpose, and go beyond the shareholders’ value. Employees want to feel like strategic partners. When they are given the necessary educational tools to participate, they become more motivated to help the organisation work towards its goals – and will stay longer at the company.”

Make your training worthwhile Employee training is often viewed as tedious, dull and time-consuming – not exactly a recipe for employee satisfaction. So, how do you develop a training programme that your employees will enjoy and actually find valuable? Van Stavel maintains that the key to effective employee development lies in thinking beyond traditional training, putting the infrastructure for learning in place, rewarding ongoing education and getting out of the way so employees can teach themselves. 1. Understand employees’ learning styles People learn in different ways. There are visual learners, auditory learners or kinaesthetic (tactile) learners. Others learn best on their own or in small groups with other people. For

example, an employee may decide to read training materials on his smartphone riding the Gautrain, instead of on his computer at work. “The more flexibility offered to your employees for their training, the better,” Van Stavel says. 2. Play to employees’ strengths According to Gallup, building employees’ strengths is a far more effective approach than trying to improve their weaknesses. “The benefits of the strength-based approach range from better relationships with managers and increased productivity at work, to decreased stress levels, fewer sick days and fewer instances of developing a chronic disease.” 3. Don’t waste their time During a learning intervention, people sometimes feel the opportunity cost for learning is greater than the benefit of the lesson learnt. Van Stavel suggests staying mindful of this as a manager. “Don’t create a five-hour sales meeting that could occur in three 30-minute increments, or require people to read a full book on a topic when they could grasp the concepts from brief summaries.” 4. Let them take charge of learning Employees are also adults who are fully capable of teaching themselves what they are motivated to learn as long as they have access to the right resources and experts. A good leader has a teacher mentality and motivates his team to learn. After providing the right learning assets and opportunities (on an ongoing basis), these leaders step back and they allow the employees to build their own development plans, apply their lessons and collaborate with others. “The fastest way to capture the hearts and minds of employees is to make them feel valued and, thus, motivated in their jobs. While it may seem counterintuitive to train employees to advance beyond their current roles, investing in employee development will increase their loyalty to the company, help them stay longer and allow the employee to build bench strength at the same time. As a result, you’ll have a highly engaged team of productive employees working to advance the company as a whole,” Van Stavel concludes.

The Financial Planner

Kim Potgieter, CFPÂŽ of Chartered Wealth Solutions, told us how lessons about money enabled her to empower her clients to get the most life out of their money.

Living a

life of value 36

The Financial Planner

What childhood experience influenced your growth as a CFPÂŽ professional? My father used money to bully my mother. He controlled the finances and she had to ask for money when she needed it. Having witnessed the power he exercised over her, I was determined that I would never place myself in the position of being so financially dependent on another person in such a disempowering way. It also gave me early insight into the fact that money is about much more than the cash in your pocket or purse. We have emotional ties to money that can strengthen or diminish us, and it has become my lifeâ&#x20AC;&#x2122;s work to assist people in finding freedom through understanding their relationship with money. So, what is your relationship with money? Money is energy; I believe we either attract or repel it. I have always had enough money, but I have also seen people who have not had

What is your advice to young people who job-hop in pursuit of better money? Money will never give you that pure satisfaction of making a difference in others’ lives. Money will never be enough if you don’t have that sense of purpose. Consider what you are really trying to achieve in your life and money will take care of itself. Can you give us a brief summary of your career highlights? At the age of 22, I wrote a letter to Di Turpin in which I stated that I wanted to change financial planning — bear in mind that at the time I did not know what financial planning was. I was studying psychology then and followed this by opening a catering business. However, I also spent the next 10 years educating myself in financial planning. I realised I did not want to be a psychologist, though this knowledge became invaluable later. At the age of 35, I pursued the CFP® designation at the recommendation of Andrew Bradley, who was with Acsis then. My psychology background has been vital. I view my client as a person, not a financial transaction. I cannot advise them about investment without knowing who they are. I get to explore their dreams, goals, principles and their history with money. Then they can be helped to have a good relationship with money. If they don’t understand their first money memory and their relationship with it, they will simply repeat ingrained habits – habits that may have negative consequences for them, for example, creating debt. Why is a CFP® designation important? Initially, I had to acknowledge that without a designation, I could not expect financial planners to give me any credibility when I entered the profession, especially because I am an entrepreneur and like to introduce fresh ideas. We are a profession. Without that designation, how can we expect the public to see us as that? We are one of the most important careers in society. We consult a doctor when we are ill; we engage the services of a lawyer when we face legal challenges; we need a financial planner’s expertise when we want to create a workable financial plan. A financial planner needs the requisite knowledge in order to derive the greatest benefit from a financial plan for their client. What is your main focus when talking to clients? Since our clients are retirees or pre-retirees, it is very important that I assist them with the transition into retirement and with the financial changes given that they will no longer be earning. There are younger clients who are seeking the same quality of service we give our current clients, and that is why we have started Chartered Risk Solutions – this part of the business services clients from 20 years and older. You hold a different conversation with retirees than you do with clients still building their careers and families. Retirement can be a scary thing. How do you help your clients? As I mentioned, we have an holistic view of the client. As one of only two qualified financial life planners in South Africa, I always emphasise the importance of having significant conversations with

profile

enough. How do you repel or attract money? Often, we don’t think we are worthy of it. People may not want themselves to have money, perhaps viewing it as evil or fearing they will be materialistic; but, these same people often have such conflict with money, recognising their dependence on it and sometimes according it more power than it deserves. So, it is also about where you place money in your life – it must not become your boss. I don’t work for money; I am in this career because I love what I am doing, and I happen to make money doing it.

clients and this often reveals their anxieties about retirement. We have developed a website as a resource for all South Africans (not only our clients) to help them have a healthy approach to retirement: www.retiresuccessfully.co.za. We have experts on health like Dr Wayne Derman; on personal development like Colleen Joy-Page; and Alan Hosking on work and retirement, each contributing regular articles. We also e-mail weekly titbits and short messages that encourage people to live balanced lives and to have fun. Through these media channels, we have developed a community of people who aim to make retirement meaningful. You are a director and shareholder of Chartered Wealth Solutions and its affiliated businesses. What important decisions have you made as a leader? I think being a thought leader is very important. You must be out there looking for new ways to do things if you want to lead others. I am always learning; I spend every year visiting other businesses and travelling overseas, seeking new lessons about either financial planning or marketing or social trends. This kind of input and constant desire to increase knowledge makes your business future-fit. What important traits should every leader possess? I firmly believe that we are all leaders. Undoubtedly, to be authentic and truly yourself is the most important thing. I am not a stereotypical financial planner, but we each bring a different dynamic to make each other stronger. I may be a leader now but there is so much more to learn. I find that every day my staff or clients teach me something. How do you deal with people who don’t trust you or undermine you? I can’t really say that I have experienced that. Women make great financial planners because of their intuition and I have found male financial planners to be welcoming. I have started a mentoring forum, Women in Finance, where women meet twice a year. Generally, women have yet to learn to help each other – only because they have had to be so busy trying to be successful. We can mentor each other. At Chartered Wealth Solutions, we are hiring people straight out of university, to mentor and train them. We have huge hope for them. There are few organisations where they can go where they don’t have to sell. Here, they work under our seasoned financial planners to learn the right way and then we offer them positions at Chartered Wealth Solutions or Chartered Risk Solutions. Do you embed your personal values in the company? I think it is difficult not to do so when you own a company: you eat, sleep and drink your business. So my values resonate with the company’s energy. We have a lot of passion here. Surely it is soul-destroying to work in a company where your values are not reflected in the company culture. Can you share something of your personal life with us? My oldest son, Ryan, 21, plays for the Lions Rugby team. We travel a lot with my younger son of 12 and my daughter who is eight. Cooking is my passion; I love food and the energy of a whole group of people together laughing and sharing friendship. My friends love to eat at my house. Your philosophy? To know and be true to yourself. Spend your life finding where can you add the most value by being yourself and then do just that.

The Financial Planner

Adopting values to

climb the corpo Sydney Sekese, CFPÂŽ, Senior Investment Specialist at Old Mutual, talks about his childhood values and how they have enabled growth in his career.

Tell us about how you were raised and the childhood experiences that led you to becoming a successful investment specialist. I feel fortunate and attribute my success to a good foundation at home. I come from humble beginnings having grown up in a structured household with good values. My parents inculcated a culture of hard work. They believed that education was key and certainly imparted those ideals to my siblings and me. My brother is a CEO of one of SAâ&#x20AC;&#x2122;s leading accounting firms, and my sister is an auditor at SARS. Tell us about your journey to success. Every day I realise that I want to be successful. It is a never-ending aspiration; it is a continuous objective. Reaching the level of success that I have now was not an easy road. During the foundation years of my career, I was at a crossroads and decided to leap into something unexpected. After some serious introspection which I feel saved me from myself, I was able to make a significant move. As a BSc graduate with maths and statistics as majors and an intention of becoming an actuary, I realised that my personality was not compatible with my initial career choice so I branched into financial planning. Looking back I realise that most of my career moves, such as moving from one employer to another, were not driven by money but rather growth. Growth in terms of purposeful steps in getting a better sense of fulfilment in my job. During the formative years of my career as a broker consultant, I felt that the role heavily relied on the favour of advisors to get access to the client therefore I resigned from this role. This meant removing that additional layer you need to go through in getting closer to the client. How do you simplify and help grasp the concept of investment planning to your clients? My approach for advising clients always starts with the end in mind by assisting them to map out their financial goals and work backwards to what needs to be done at present to reach short-, medium- and long-term goals. I derive a sense of fulfilment when the plans come to fruition.

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profile

orate ladder What are the big issues that you will be discussing with your clients this year?

Sometimes you may also find clients not fully accepting the value of your services by pushing you into a corner to reduce your fees.

The biggest theme is the emerging market versus developed markets. Since the global economic crisis, bonds have become a less popular asset class due to tapering.

Who is your mentor?

Part of the benefits of having a CFP® professional manage your portfolio means that they will be savvy enough to build in protection mechanisms. The client need not panic and pull out of investments at untimely stages of the economic cycle. What motivated you to pursue the CFP® designation? Attaining the CFP® designation has been an honour. I feel a sense of accomplishment in successfully passing the rigorous training. Secondly, I perceive myself as a professional with a designation that holds the same stature as a doctor, a lawyer or a CA (SA). The major advantage of the CFP® designation is the sense of trust that exists or is formed with the client. As a professional you understand that you have the client’s interest at heart and are less revenue driven. I also appreciate that our profession refers to a scientific six-step process which cancels out thumb sucking. As a leader, how has your career contributed to your personal development? I have come to realise that even though organisations have a profit objective, people are key in ensuring that you meet those objectives. Over the years, I have learnt that respecting people and empowering them can take you to a higher level. In your opinion, what are the most important traits a leader should possess? • Listening is important. I am an active listener as I enjoy tapping into other people’s intelligence. • Leading by example. You need to live by attributes you expect. • Optimism in spite of challenges. This is one of my major strengths and I am learning to be resilient. I have a lot of gratitude for big and small achievements and positive thinking can be powerful. My dad used to say: you are what you think you are. I tend not to take destructive criticism personally. I also don’t wallow in regrets but prefer to look forward. What challenges have you experienced at work that you are grateful for? The greatest challenge is clients who request favourable treatment which is contrary to legislation or company rules. I have learnt to be frank and not succumb to bribes. This is when your personal upbringing and values come into play, especially when confronted with such requests. In line with that you have to weigh revenue against integrity. One is forced to bite the bullet and lose the business.

My dad; I bounce things off him and trust his guidance. He is also my pillar of strength. One of the lessons he has instilled is to read and be informed. My challenge is that most of the time I only read two paragraphs and get bored (laughs). So I have a library of books with two highlighted paragraphs on each. I have an appreciation for short and concise articles, don’t give me a thesis or a novel. That being said, I am clearly not following his advice. Even my mum enjoys reading the Sunday Times. On a serious note … reading maketh the man. Tell us about the volunteer work you do in building the financial planning profession. I am a member of the FPI Investment Industry Sector Group. What we do is assist our members maintain competency in the field by relaying information through different channels (the Financial Planner magazine, contributing to the knowledge of Continuous Professional Development (CPD) events, eCPD courses, online technical tools, etc.) on an ongoing basis. Last year and in previous years I participated in the FPI Financial Planning Week. I spent time in media educating the public about investment planning and promoting the campaign. I contribute articles to consumer publications. By this I hope to empower the ordinary man on the street by educating them in simple terms about what investment planning is and the benefits of financial planning. Any advice for young professionals? I think you need to have realistic expectations. Reaching a highlevel position in record time may not always be an achievable goal. You must have a short- and long-term career plan. I also think being content with what you have while striving for more helps you focus. Sometimes young professionals seek instant gratification at all costs.

Both the CFP® professionals’ interviews were conducted by Mandisa Magwaza, Value Proposition Consultant at the Financial Planning Institute. Want to share feedback on the profiles? Interested in being featured on our next issue? Write to us at marketing@fpi.co.za

The Financial Planner

By Hanna Barry, RiskSA Magazine

A tale of

Twin Peaks Further clarity on the National Treasury’s Twin Peaks system of financial regulation was finally forthcoming in December, when the draft Financial Sector Regulation Bill was released.

While South Africa follows Australia and the Netherlands in its adoption of a Twin Peaks approach, in a recent interview with The Financial Planner, Professor Karel van Hulle, former head of pensions and insurance for the European Union Commission, warned that centralising the regulation of banks and insurers ignores the fundamental differences in the two sectors. “Banks are specialists in the asset side, while insurers are specialists in liability. The sectors face fundamentally different risks and require separate regulation,” he said. Known to many as the godfather of Solvency II, Professor van Hulle warned, “Market conduct decisions impact solvency. For example, you can make life insurance products so safe for the customer that they are unprofitable for insurers. These two arms need to work in synergy.” Van Hulle disagreed with the views of Lesetja Kganyago, deputy governor of the South African Reserve Bank (SARB), who suggested that because of the interconnection between the banking and insurance sectors in South Africa, the prudential regulation of both sectors should be centralised. “The interaction between banks and insurers in South Africa is considerable. Out of the top four banks, three are also insurance companies and in the case of one, the bank is owned by the insurance company,” he explained.

The Financial Planner

Ombuds strengthened, TCF legislated According to a report released by the Group of Thirty (G30), a number of other jurisdictions are engaged in debates over adopting this type of approach. These include France, Italy, Spain and the United States. South Africa’s draft Financial Sector Regulation Bill, released last year and for which the public comment window was extended to 7 March, is the first in a series of bills that give effect to Cabinet’s decision to implement a Twin Peaks model of financial regulation in South Africa. It follows two policy papers that respond to lessons learnt in the 2008 global financial crisis: ‘A Safer Financial Sector to serve South Africa Better’, released with the 2011 Budget; and a ‘Roadmap for Implementing Twin Peaks Reforms‘, released on 1 February 2013. The draft bill notes that ombuds will be strengthened under Twin Peaks, while the Financial Services Board’s (FSB) Treating Customers Fairly (TCF) initiative will be legislated as part of the rollout of the new regulatory regime. In a statement, Treasury notes that the ombud system is a powerful redress mechanism in the hands of consumers. Through changes to the Financial Services Ombud Schemes (FSOS)

regulation Act, the bill seeks to strengthen the ombud system by putting measures in place to enhance public awareness of the system and require that all financial institutions be members of an ombud scheme. It also broadens the mandate and role of the FSOS Council to, among others, approve the appointment or removal of an ombud. In the second phase of Twin Peaks reforms, which is envisaged as a multi-year process, existing sectoral legislation will be gradually amended or replaced with laws that more appropriately align with the Twin Peaks framework. For example, a comprehensive market conduct framework will be legislated, which will give legal effect to TCF and will ensure a consistent approach to governing the conduct of financial institutions across the financial sector. The draft bill covers the first phase of the implementation of Twin Peaks, which involves the establishment of two new regulatory authorities, namely, a new prudential authority within the Reserve Bank and a new market conduct authority. The prudential authority will be responsible for overseeing the safety and financial soundness of banks, insurers and financial conglomerates. The role of the market conduct authority will be to protect customers of financial services firms and improve the way financial service providers conduct their business. This authority will also be responsible for ensuring the integrity and efficiency of financial markets and promoting effective financial consumer education. According to an article published in Business Day in December, the market conduct authority will no longer have a system of registrars, instead having three or four commissioners. FSB CEO, Dube Tshidi, told the national daily that when the bill becomes law, his position and those of other executive committee members would cease to exist, but they would become eligible for the positions of commissioners or deputy commissioners.

Further objectives of the bill In addition to creating the two regulators and strengthening financial stability, the bill provides a legal framework to enhance co-ordination and co-operation between regulators. In particular, a Memorandum of Understanding (MoU) is provided for between the prudential and market conduct authorities to ensure alignment. A Financial Stability Oversight Committee (FSOC), chaired by the governor of the Reserve Bank, gives the Reserve Bank primary responsibility to oversee financial stability. The FSOC will ensure a co-ordinated and immediate response to risks to the stability of the financial system, while a Council of Financial Regulators (CFR) will co-ordinate all regulators, standard-setters and other agencies with a mandate over financial institutions on issues like financial stability, market conduct, competition, legislation and enforcement. The CFR will include regulators that don’t report to the Minister of Finance, such as the National Credit Regulator, Council for Medical Schemes, Competition Commission and National Consumer Commission. A financial services tribunal, described as a “shared enforcement mechanism”, is aimed at encouraging compliance with all aspects of the new regulatory regime. The bill enhances existing regulatory and enforcement action powers of the regulators, such as suspension or withdrawal of licences and approvals, orders to take or cease particular actions and debarments, as well as providing for a robust appeal mechanism. A crisis management and resolution framework provides authorities with the appropriate tools and powers to limit the kind of financial contagion illustrated by the global financial crisis. The bill provides for resolution powers and identifies the Reserve Bank as the resolution authority in South Africa. Where taxpayers’ money is at risk, the Minister of Finance could take crisis management decisions. Treasury hopes to enact the legislation by 2014, expecting it to become fully functional by 2015.

The Financial Planner

Tax planning

Understanding the

fixed amount penalty The Tax Administration Laws Act 28 of 2011, which came into effect in October 2012, is a fascinating and farreaching piece of tax legislation that affects all taxpayers and tax practitioners, explains LexisNexis tax consultant Michael Stein.

Chapter 15 of the act deals with administrative non-compliance penalties, which can take the form of either fixed amount penalties or percentage-based penalties. Both relate to the failure to comply with administrative requirements of a tax act, and this was felt to be one of the most sweeping changes introduced through the amendments. The part dealing with the fixed amount penalties provides that if the South African Revenue Service (SARS) is satisfied that there has been non-compliance by a person, it must impose the appropriate penalty in accordance with the table in the act. The table provides for a penalty the amount of which depends upon the taxable income of the offender in the preceding year and escalates on a monthly basis. Non-compliance is failure to comply with an obligation that is imposed by, or under, a tax act and is listed in a public notice issued by the Commissioner, other than matters that are punishable by other penalties. The fixed amount penalty imposed by the table in section 211 varies from R250 to R16 000 per month and depends on the amount of an assessed loss or taxable income for the preceding year. The amount of the penalty will increase automatically by the same amount for each month that the person fails to remedy the non-compliance. The only public notice issued by the Commissioner under this provision to date was issued on 1 October 2012 as GN 790 in

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Government Gazette 35733. It lists only one instance of noncompliance, that is, failure by a natural person to submit an income tax return as and when required under the Income Tax Act for years of assessment commencing on, or after, 1 March 2006 when that person has two or more outstanding returns for those years of assessment. This means that only individuals may be liable to the fixed amount penalty and then only for the failure to submit the annual income tax return when required. So, as the law now stands this penalty does not apply to other taxpayers, such as companies and trusts, Stein notes. Barry Ger, senior manager of corporate tax at KPMG, notes that generally, the new penalty regime has been praised as being more objective, easier to understand and less prone to arbitrary exercise of discretion by SARS officials that bedevilled the old system. Nonetheless, Ger adds, one of the significant criticisms levelled against the new system is that it opens the door to the risk of overlapping penalties. Although the restructured penalty regime is more transparent than the old system, it packs a considerable punch. Tax consultants would be best advised to ensure their clients tax affairs are well in order if they wish to escape the penalty application.

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