The Financial Planner |

The Financial Planner www.fpi.co.za Telephone: 086 1000 FPI (374) Tsholofelo Dihutso, CPRP Communications and Events Specialist tsholo@fpimail.co.za Editorial enquiries: Carien Daffue carien@fpimail.co.za Postal address: PO box 6493, Weltevredenpark, 1715 Street Address: Palms Office Court, Block A, Ground Floor, Kudu Avenue Allen’s Nek, Gauteng, South Africa

Contents

Membership Queries membership@fpimail.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

CLIENT ENGAGEMENT Be the master of your client engagement

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Your first money memory

EMPLOYEE BENEFITS No room for urban legends in employee benefits

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ESTATE AND TRUST PLANNING An international dilemma

Fpi magazine, published by COSA Media, a division of COSA Communications (Pty) Ltd.

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FPI NEWS HEALTHCARE The practical implementation of PMBs

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.

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INVESTMENT 26

RDR a reality check Potential dangers of projections

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Responsible investing

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PRACTICE MANAGEMENT Protection of Personal Information Bill – adapting your systems and processes accordingly

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Another word for life

TRUSTS How pretty is the bow around your affairs?

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RISK Should family health be part of the risk planning process?

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Letter from the FPI TO MAKE A DIFFERENCE

“Do more than belong: participate. Do more than care: help. Do more than believe: practise.

Do more than be fair: be kind. Do more than forgive: forget. Do more than dream: work.” – William Arthur Ward

W

ith the start of the new millennium, I left the education sector (or so I thought) and entered the financial services industry. It was quite a drastic career move for me back then. The change from being a lecturer in electronic engineering to becoming a consultant for Old Mutual confused many of my colleagues. For me, however, it was the best decision I’d ever made and since then I have had the most amazing time of my life.

Soon after my entrance into this industry, I was given the opportunity to become a learning facilitator and back into education I went.

For many years I had the privilege of training hundreds of financial advisors in six of the nine provinces. That was where my engagement with FPI started.

When I officially joined FPI on 1 October 2009, I had no idea how much I would learn in the years to come, neither did I know how much satisfaction I would get by serving the financial planning profession.

For the last four years I have dedicated my time and energy to raising the profile of professional financial planners in South Africa and, more specifically, those who are members of the FPI. It has been an honour to serve the profession through an institution like the FPI.

I have had the absolute pleasure of meeting the most wonderful people who support real professionalism in the industry. Whether these people worked as financial planners, educators, product providers, policy makers or other, they all support a better industry that is trusted by consumers. FPI believes that our members who have completed the pathway to CFP® certification are truly the most competent and experienced to serve the financial planning needs of all South Africans. Our initial and ongoing certification requirements are justifiably onerous and FPI will stay ahead of the game by setting the professional standard like we’ve been doing over more than three decades.

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Life has its cycles and I believe we are all here to make a difference; sometimes big, sometimes small. Our interaction with others is either for a reason, a season or for a lifetime. A new season has presented itself which is straight from above; however, this unfortunately signifies the end of a season for me at FPI. I will be leaving FPI at the end of September and will continue living out my passion in another organisation.

RF Kennedy once said: “Few will have the greatness to bend history itself, but each of us can work to change a small portion of events. It is from numberless diverse acts of courage and belief that human history is shaped. Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centres of energy and daring those ripples build a current which can sweep down the mightiest walls of oppression and resistance.”

I truly believe that CFP® professionals and those on the pathway to CFP® certification can improve the lives of others. May you all see the value you can add to people’s futures as a professional financial planner in South Africa, awarded with the symbol of excellence in financial planning, the CFP® mark. Believe in and continue to support the FPI vision: Financial planning for all.

We can make a difference!

With these words I greet you for the last time as a servant of the financial planning profession and employee of the Financial Planning Institute of Southern Africa.

Anthony Campher, CFP

®

you are the only one in the world not having fun.

The only one stuck wrestling with Pythagoras and Newton’s Law of ‘Where Will I Ever Use This In Real Life?’ while everyone else is out there.

You try to focus, add, multiply but the only real maths that’s happening is your attention being divided by the sound of laughter and soccer balls. It’s called distraction. And it’s the enemy. That is why, for the last 39 years we’ve ignored it. We pay no attention to trends, hype or popular opinion and stick to our tried and tested investment philosophy. And it has worked very well for our clients.

Call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za

Allan Gray Proprietary Limited is an authorised financial services provider.

kingjames 27511

W e’ve all been there. That familiar feeling that

Mark Cronje, CFP®, Old Mutual Private Wealth Management Chair of the Client Engagement ISG of the FPI.

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Be the master of your client engagement

Client engagement While the slicing, dicing, cooking and baking is frenetic, the difference between being a terrible cook or a master chef, and being a financial planner who fails as compared to one that truly masters the disciplines of financial planning and engages with clients, boils down to a few critical elements.

Deciding on what we are cooking

In Master Chef, if the challenge presented is to bake a chocolate cake but we prepare a curry, the probability of going through to the next round is very slim (even if the curry is fantastic). The same principle applies to financial planning. If we fail to understand the client, their goals, what they want, need and are most afraid of, the chances of us ‘preparing’ the wrong menu increases. The key to this element is to stop speaking and really listen to your clients, with a view to truly understanding them. Fail at this and fail before your engagement has even commenced.

A recipe for success

As with the disciplines of cooking and baking, an essential part of financial planning is having a recipe that works well in achieving the desired outcomes and the desired life goals of the client. Without a clear, consistent and concise recipe to follow, the chances of drawing up a financial plan with flawed outcomes increases.

Adhering to a recipe that is tried and tested allows for credible and balanced engagement. The engagement recipe can be nuanced as time passes, provided that recipe remains true to the client’s desired outcomes.

The right tools in the kitchen

The tools in the Master Chef kitchen, where used appropriately, equip the chefs to create culinary delights. Financial planning tools must equip planners to create planning clarity while providing a platform for planner and client interaction and engagement. No financial planner can properly advise a client without the appropriate tools.

The amateur chefs among us are satisfying their need for culinary inspiration by watching the current season of Master Chef, in search of that winning recipe. We are able to make interesting observations and correlations between this cooking competition and the financial planning industry, specifically the client engagement process.

In Master Chef, a large group of amateur chefs start a gruelling threemonth competition where they cook, bake and prepare a variety of foods for three top-rated chefs. At each stage in the competition, the contestants attempt to produce the most outstanding culinary masterpieces (sometimes with limited ingredients) in order to progress to the final stage. At the same time, contestants are trying to impress the judges with their skill, guile, expertise and all the tools they have at their disposal to ultimately win the competition.

While we can sometimes substitute certain tools in the short term, without dedicated systems and tools to deliver to the client consistently, the likelihood of us failing our clients and ultimately as planners will be high. The key is to make use of the tools, to use them as intended and in a manner that fosters real engagement in plannerclient interaction. This is likely to engender trust and strengthen the relationship between planner and client.

Quality of the ingredients

The quality of advice, just like the quality of the ingredients in Master Chef, is directly correlated to the quality of information we have at our disposal in the advice process. The quality of the input will inform the quality and relevance of the planning output. This element reinforces the importance of understanding what we are cooking. If we are clear on that, the information gathered in that context should align to the client’s desired goals and outcomes.

The appropriate cooking process

The real value of a financial planner is in how we pull the recipe, the tools and the ingredients together into the cooking process. This is a critical step we take with a client in order to ascertain the client’s ultimate strategy so that they can achieve their desired outcome. If the financial planner gets this stage of the process wrong, there is a high probability of a disappointed client and a relationship lost. Client ownership of the planning outcomes and decisions is key. Ensuring that 

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this strategy is not our strategy for the client, but rather the client’s own strategy, is the secret to success. In other words, we shouldn’t simply give clients what they want. We should rather assist the client with what the appropriate options are; the consequences and actions for each alternative and, based on this information, allow the client to choose the strategy that best suits their needs.

Adherence to a thorough method of planning ensures the best chance of successful planning outcomes and meaningful client engagement. That both the planner and the client are clear about which path is being taken and why, as well as the consequences for their chosen action.

It’s in the presentation The single biggest influence in Master Chef, which applies right through the competition from the moment the first potato is sliced to presenting the winning plate of food, is how the contestants conduct themselves. We can have the best tools, recipes, ingredients and the best process or method in the world, but if we fail to communicate and truly engage with our clients properly, we will never succeed at financial planning.

The principles of behavioural finance provide wonderful insights and guidance to the appropriate way for us to treat our clients in a way that is empowering and fosters long-term trusting relationships. With all these principles can we ensure we win the hearts of our clients with each engagement? Looking at the work of David Rock, renowned behaviourist and neuroscience specialist, one piece of work stands out as a constant reminder to how we should be engaging with clients.

This is summarised in the Principles of SCARF:

Status In Master Chef, the main aim is to impress the judges. What is the most important thing in the financial planning process? Is it the money? Is it the fees we will earn from the client? Or is it the client? If it’s not the client, our chance of acquiring the client and retaining the client relationship will diminish.

Certainty If we don’t explain the dish we have created, with the myriad flavours and aromas, the judges will be left to decide on the merits of the dish

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on their own. Similarly, should a client be uncertain about any aspect of the goals they want to achieve, and how the detail of the financial plan underpins the actions needed for them to achieve their goals, the lack of certainty will significantly diminish the chances of the plan being adhered to or fully ‘owned’ by the client.

Autonomy The judges should feel like they are in control. This will give you a greater chance of becoming the master chef. If you ignore what they have to say and do only what you think is appropriate, the outcome may not be as you intended. The same applies to dealing with clients.

The more they feel in control of the advice and engagement process, and by implication, their financial planning lives, the better chance we have of securing the client for the long term.

Relatedness Having the ability to understand how the judges see the world of food in the Master Chef competition gives you the inside track on what dish to prepare, improving your chances of securing the title.

Having the ability to relate and empathise with a client’s life and their circumstances will give you an enormous edge in understanding how to approach the engagement and planning process for that client.

Fairness No one wants to be eliminated from the competition for cheating.

The financial planning industry is no different. Always ensure that the way you and your client treat each other is equitable; from what gets charged all the way through to what you deliver to the client.

These five principles should help guide us through the financial planning process, and help get us into subsequent rounds with our clients. If done correctly, the likelihood of impressing the client and helping them achieve their goals becomes easier and we are given the best chance of making a meaningful difference in a client’s life.

Mixing these principles together into a co-ordinated approach, while at the same time building and maintaining a successful, sustainable financial planning practice, provides a financial planner with the best chance of becoming the master chef in their kitchen.

Client engagement

Your first money memory Take a moment to reflect on the role money has played in your life and what beliefs and thought patterns you have developed around money throughout your life.

Kim Potgieter,‌CFP®, Chartered Wealth Solutions

Do you recall your first memory involving money? What were you told about money when you were growing up? Was there an adage your parents reinforced, for example, “Money doesn’t grow on trees” or “Waste not want not”? Did you live a privileged life as a child or did your family live a Spartan way of life?

Money psychology, or people’s relationship with money, is of particular interest to me. This was one of the driving forces that led me to take the path of becoming a financial planner. And when dealing with clients, I investigate their money psychology before even touching their financials.

The idea is to guide clients to look for clues in their past that will help them to understand their current financial lives.

In life planning meetings, discussions around money almost always start with a conversation about the client’s first money memory. It doesn’t necessarily have to be the first memory, but rather the one that is highlighted in the client’s mind.

The memory that stands out for me has shaped so much of who I am. It’s Christmas, I am no more than eight years old, and my mother is pleading with my father for money to buy us all Christmas presents. My mom was always a stay-at-home wife and mother, while my father was the bread winner. Sadly, he had issues where money was concerned and used it to bully my mother by restricting the amounts she had

access to. All these years later, those experiences I had growing up drive me to be financially independent. Asking for money is definitely not an option. My money psychology has shaped so many of the decisions I’ve made in my life, financial and otherwise.

Some of you may be thinking whether you, as a financial planner, really need to know about your client’s money issues. I suppose the answer is that it depends on the kind of financial planner you want to be. I believe the more insight we have into our clients’ financial values and history, the better we are able to partner them. A client’s money psychology manifests in the financial decisions they make.

If they were wealthy and spoiled growing up, they might be spendthrifts and really battle with budgeting. If either of their parents made a bad business deal and lost everything, they’re probably extremely risk adverse. And there are others who accumulate piles of debt simply because spending makes them feel good about themselves. By understanding our clients’ money psychology, we are able to alter potentially harmful financial behaviour, and guide them into making healthy financial decisions.

The client’s well-being should always be at the heart of everything we do as financial planners, and the first money memory is powerful tool that helps us to achieve this goal.

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No room for urban legends in employee benefits South Africans are not as financially literate as we’d like to think. Maybe it’s time that companies realise the bottom line benefit of giving employees access to financial education.

If you need advice on how to make the finest biltong, boerewors or beer in the world, then South Africans are definitely the people to ask. But when it comes to finances, we’re not as clued up as we are about the three ‘B’s. That’s why it’s so sad that e-mails from employers about healthy finances and budgeting are auto-filtered into spam folders across the country.

Kelsy Moodley, Actuarial Analyst Financial Services

High knowledge score

High behaviour score

Albanta

45 percent

39 percent

Armenia

46 percent

41 percent

Czech Republic

57 percent

48 percent

Estonia

61 percent

27 percent

Germany

58 percent

67 percent

Hungary

69 percent

38 percent

Ireland

60 percent

57 percent

Malaysia

51percent

67 percent

Norway

40 percent

59 percent

Peru

41percent

60 percent

Poland

49 percent

43 percent

South Africa

33 percent

43 percent

United Kingdom

53 percent

51 percent

BVI

57 percent

71 percent

Each of the columns reports percentage of respondents gaining a high score (six or more on knowledge and behaviour, more than three on attitudes).

(Source: OECD working papers on Finance, Insurance, and Private Pensions, Number 15 (2012))

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An Organisation for Economic Co-operation and Development (OECD) survey about the global financial literacy of people from different backgrounds found that only 33 percent of South Africans surveyed had a basic knowledge of key financial concepts. South Africa scored the lowest of the 13 countries in the study.

South Africa also scored lowest when it comes to positive financial behaviour, which includes thinking before you buy, paying bills on time, and budgeting; with only 43 percent of respondents displaying good behaviour.

In a defined contribution (DC) retirement fund environment, it is the individual member who bears the risk and responsibility for the outcome they achieve in retirement. Members have to make decisions about the structure of their investment portfolio, contribution rates and postretirement annuity choice. Often these members don’t have the necessary financial knowledge or understanding to make these choices. So why are financial education programmes so unsuccessful?

Myths about financial education programmes There are misconceptions about the way an effective financial education programme should be structured. As a result, many fund members become disengaged from their benefits. Here are

Employee Benefits some issues we need to tackle if we want retirement fund members to become more engaged and improve their retirement prospects.

Myth: Once we’ve told them what they need to know, they’ll change their behaviour.

Myth: We can’t teach fund members anything new about their finances.

Reality: The best financial literacy programme will fail if we cannot first help people to identify areas where they can reasonably afford to save. One way of identifying those areas is a detailed study of the saving and spending behaviour of people who are grouped according to characteristics like where they live, number of children and level of education. People can then compare their spending with people with similar characteristics and see where they don’t fit the pattern.

Reality: We simply cannot make any assumptions about the levels of financial literacy of fund members. Instead we have to explain things in plain language and explain complex concepts to interested fund members.

This could be done online where it is easily accessible. Another way to create awareness about healthy finances is with posters in break areas and canteens.

Myth: Projection statements tell members everything they need to know.

Reality: Nothing is certain in a DC environment and funds often rely on the projection statement to show up the uncertainty. However, many members struggle to understand their projection statements because of technical terms and because they don’t show members their future benefit in Rands and cents. They also don’t show the uncertainty in the projection in a way that fund members can understand. A good statement has a clear objective (to prompt members to take specific action to improve their retirement outcomes), is short and sweet, and conveys the message in simple, non-technical language.

Myth: A one-size-fits-all financial education programme is best.

Reality: With the rise and popularity of social media, and other new ways to communicate, we’ve become so concerned with ‘how’ to get our message out that we’ve forgotten the ‘who’ and the ‘what’. If a fund member cannot relate to your message, you’ve lost them. It’s best to personalise the message for people based on their life stage. Topics that might appeal to a person close to retirement will not appeal to a young fund member.

Single

Family

Money management

Money management

How saving early can be more beneficial than saving late

Estate planning

What risk cover do you actually need?

Preserving retirement benefits Investment planning

Wills and beneficiary nomination Saving for your child’s education Prioritising saving or spending over your life cycle Are you underinsured?

The bottom line Employers may be reluctant to offer financial education because they’re concerned about giving unregulated advice and facing unwelcome liabilities. Employers in umbrella funds may also resent the extra cost of financial education programmes. But a bigger waste of resources is an employee benefits package that does not meet the employee’s needs or a package they cannot engage with because they don’t understand the intricacies of the fund.

If employers don’t take action, it will affect their bottom line. Studies show that organisations with high employee engagement levels have an improvement in operating income of 19.2 percent. In contrast, organisations with poor employee engagement levels saw a decline in operating income of 32.7 percent. This is a real incentive for companies to restructure their benefits programme: showing people the value of employee benefits leads to a healthier, more engaged workforce and an increase in the profitability of an organisation.

Single parent

Middle aged

The importance of life cover

Increasing your saving for retirement

Saving for your retirement

Are you under-/ overinsured?

Saving for your child’s education

Mid-life money management

Wills and beneficiary nomination

Retirement Preparing for your post-retirement medical care needs Purchasing the correct annuity product Know your government grants Budgeting in retirement

Estate planning Understanding savings options

Preserving your retirement benefits

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An international Dilemma If an individual owns foreign (offshore) assets, the question arises as to whether more than one will is required. The reason for this, is that the provisions in a will made in one jurisdiction may not necessarily be recognised in another jurisdiction where the offshore assets are registered. Also, even though one will could be used, there may be practical advantages in having an additional will.

Oliver Charles Phipps, FISA member and solicitor in England with Lester Aldridge LLP.

For example, a South African will would not be effective to deal with a house in Jersey, unless the necessary formalities of having read the will out loud and witnessed by a notary public had been observed.

Another example involves civil law jurisdictions, such as those found predominantly in mainland Europe, where those jurisdictions have statutory rights (forced heirship) for certain family members to inherit, regardless of what is stipulated in a will. Therefore, depending on the foreign jurisdiction, a South African will may not remove the effect of forced heirship where the offshore assets are located in a civil law jurisdiction.

Another common query is why an offshore will is necessary at all if the executor has the authority provided by South African letters of executorship.

The answer is that the majority of asset holders registered outside of South Africa will not recognise letters of executorship and will request a local probate (court authority) or a local notarial declaration (depending on the jurisdiction) before they will allow an executor to administer the asset.

Broadly speaking, the options for dealing with offshore assets are: a single will, which governs the worldwide estate; a will limited to the jurisdiction where the offshore asset is situated; or a will dealing with worldwide assets outside the country of domicile (permanent residence). Each of these options has its own advantages depending on the nature of the offshore assets and in which jurisdiction they are situated. The starting point for analysing how the will or wills should be structured is to consider what formalities will have to be followed in the foreign jurisdiction to facilitate the succession. This analysis will be illustrated with the following examples:

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Estates and Trusts Planning

Case for one worldwide will The first example is where an individual is domiciled in South Africa and the only offshore asset is a bank account registered in England. In this instance, the will draftsman should consider what the formalities will be, if the testator passes away, to administer the bank account in England.

Each bank in England has its own threshold in which it will release the funds without wishing to see an English court authority and, on average, this is approximately £10 000. So if the funds are over the bank’s relevant threshold, an English court authority is required. In these circumstances, there is a fast track procedure called ‘resealing’, whereby the English court could formally recognise and give effect to the South African letters of executorship.

In this case, the will draftsman may consider that one worldwide will is appropriate. The only drawback is that the South African administration and English administration cannot be conducted simultaneously. Before the letters of executorship can be resealed, court seals and certified copies of the letters of executorship will first have to be obtained, which may take many months.

However, the draftsman may consider that the slight delay in administering the English account is not worth the trouble of preparing two wills.

Case for a domicile will and will outside of the jurisdiction The second example is that of an individual who is domiciled in South Africa, but also owns unit trusts in Jersey, a bank account in the Isle of Man and stocks and shares in England.

In this example, the assets are located in four different jurisdictions. Preparing four wills could be quite a messy and dangerous exercise and not appropriate in these circumstances. A practical solution would be to have the domicile (home) will, limited to South Africa only. In addition, there should be an offshore will, which applies to all jurisdictions outside of South Africa. The offshore will could then be used to administer the assets in Jersey, Isle of Man and England.

Case for a worldwide will and separate will limited to one jurisdiction A third example is where an individual is domiciled in South Africa, an Italian national, and owns a holiday home in Italy, which is a civil law jurisdiction.

In this example, alarm bells should be ringing for the will draftsman in South Africa as there may possibly (depending on the family) be forced heirship issues to consider. Also, where immovable property (such as land and houses) is owned abroad, an offshore will is almost always advisable and, where forced heirship might arise, necessary. This may be because the foreign jurisdiction will only recognise a local will to dispose of property in their jurisdiction or because an offshore will can be given authority and used in a more timely fashion, which will then enable the executor to deal with the property more efficiently.

In this example, it would be appropriate for the South African will draftsman to prepare a worldwide will excluding Italy and, at the same time, advise the client that they must have an Italian will dealing with their Italian estate only.

Obtaining advice Cross-border estates require careful planning and it is always recommended that a professional, such as a qualified FISA member, is consulted to advise on the most appropriate will structuring.

Tips for individuals: 1.

Always advise a will draftsman if you own foreign assets. Do not assume that a South African will can adequately dispose of foreign assets in the way that you wish.

2.

Always advise a will draftsman if you already have an offshore will.

If you do not mention this, a later will may accidentally revoke your offshore will, which is already in existence.

3.

Look carefully at which jurisdiction your assets are registered. For example, remember that the United Kingdom comprises England, Wales, Scotland and Northern Ireland only. The Republic of Ireland, Isle of Man, Jersey and Guernsey are separate jurisdictions. It is no good asking for a will limited to the United Kingdom when you hold assets in one of the Channel Islands, such as Jersey or Guernsey.

4.

Where you own immovable property abroad, it is almost always essential to have a local will in place to deal with the succession of the property. In this case, it is customary to obtain advice from a lawyer in the jurisdiction where the property is situated.

5.

Remember that if you are a foreign national of a civil law jurisdiction, there may be forced heirship (compulsory shares to family members) to consider.

6.

When an offshore will is signed in South Africa, depending in which jurisdiction the offshore will is to be used, there are specific signing formalities that need to be followed and a professional, such as a member of FISA, should advise on these formalities.

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FPI news

FPI and FISA sign memorandum of understanding The Fiduciary Institute of South Africa’s (FISA) aim is to promote the fiduciary profession, by providing a framework within which members can achieve the qualifications and competencies to practice as fiduciary professionals and has introduced a Continuous Professional Development (CPD) programme.

In turn, the Financial Planning Institute (FPI) is the SAQA-recognised independent professional body for financial planners in South Africa with a well-established CPD programme. In the memorandum of understanding (MoU), the parties wish to explore possible areas of collaboration between them in general and with regard to CPD in particular.

The FPI and FISA undertakes to co-operate on mutually beneficial terms, in terms of enhancing the value to their respective members, specifically in the area of educational, training and other methods of enhancing member competence. This means that FPI members can obtain CPD points for attending certain FISA events and vice versa, with the possibility of hosting joint events in the future.

The door for collaboration has been opened. The FPI hopes that members will find this collaboration useful, especially for members with a focus on estate and trusts planning. Anthony Campher, CFP®, Head: Business Development and Membership Services at FPI, says, “The MoU with FISA is another achievement that will add a lot of value to FPI’s professional members. It is important that we engage and work together with organisations in areas of financial planning such as estates and trusts. Our professional members can only benefit from this.”

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FPI won’t compromise on producing topnotch financial planning professionals The Financial Planning Institute (FPI) is pleased with the progress made with its 2015 strategy, which, among other things, aims to reposition the status of the financial planning profession and improve the accessibility of financial planning in South Africa.

Godfrey Nti, CEO of the FPI, says he’s satisfied with the path the FPI is on and believes the institute is well on its way to reshaping the financial planning profession in South Africa. “Of paramount importance to the FPI is maintaining the highest levels of professionalism among our member base.

If financial planning is to be an integral part in the lives of most South Africans, it stands to reason that we should always have the interest of consumers at heart.

“While our aim is to improve membership levels as part of ensuring that there’s a wider spread of well-qualified and accredited financial planners, the quality of advice takes precedence. To date, the FPI has close to 6 000 financial planners registered as valid members, and we aim to increase this figure to 12 000 by 2015,” said Nti. Asked whether 12 000 members is a realistic and attainable figure, he said the FPI is confident of increasing its membership levels because it has seen numbers grow steadily over the years and various measures are in place to meet this goal.

Focus will be devoted to increasing member numbers in provinces such as Northern Cape, North West and Limpopo. There are 243 financial planners across these three provinces while in Gauteng there are about 3 000 members, followed by the Western Cape and KwaZulu-Natal; both provinces have 1 602 and 889 members respectively.

“When the 2015 strategy was finalised in the middle of 2012, a new accreditation system was highlighted as one of the key pillars of the FPI’s long-term vision.

Central to this was the introduction of the new, FINANCIAL SERVICES ADVISOR™/ FSA™ professional designation while, the ASSOCIATE FINANCIAL PLANNER™/ AFP™ , and REGISTERED FINANCIAL PLANNER™/ RFP™ designations will be phased out over the next six years to allow for smooth transition,” explained Nti. The FPI recently terminated 300 of the institute’s members, as they did not meet the re-certification requirements within the stipulated timeframe; this is in line with regulations in the institute’s membership policy.

“I’m proud to say that at present the FPI boasts a membership base of financial planners who have met the stipulated re-certification requirement. The FPI’s aim is to ensure that we put out only the best qualified financial planners in the market place as the consumer has the right to access the highest level of professional service,” concludes Nti.

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RSA Tel: 086 1000 381 International Tel: +27 21 975 2602 Email: info@ecpd.co.za

The Financial Planner

15

FPI news

FPI becomes a member of the International Centre for Academic Integrity The Financial Planning Institute of Southern Africa (FPI) is proud to announce the new affiliation with the International Centre for Academic Integrity (ICAI). The ICAI was founded to combat cheating, plagiarism and academic dishonesty in higher education. Its mission has since expanded to include the cultivation of cultures of integrity in academic communities throughout the world. ICAI offers assessment services, resources and consultations to its member institutions, and facilitates conversations on academic integrity topics each year at its annual conference.

In order to meet the continually evolving needs of membership in future years, ICAI will encourage, support and share research that predicts, describes and responds to trends and issues relating to academic integrity standards and practices with the FPI. “The strength of this organisation has always been the commitment of its members to the idea that integrity is truly central to the educational enterprise. Members like the FPI have made great strides in improving

David Kop, CFP®

the ethical climate of their own institutions and bought issues of integrity to the attention of the larger public. On behalf of the ICAI staff, we welcome FPI to the International Centre for Academic Integrity,” says Aaron Monson from ICAI. Godfrey Nti, CEO for the FPI, says, “We are very proud to have been admitted into membership of this important and noble institute, an institute with a strong international outreach.

“By joining ICAI, we are committing to further strengthening FPI’s certification standards by integrating into it the highest principles and guidelines of academic integrity espoused by ICAI. This will not only demonstrate FPI’s commitment to raising the status of the financial planning profession, but will also give FPI an important platform to join our peers around the world in networking, learning and sharing our own experiences gathered over the last 31 years of our existence.”

Kim Potgieter, CFP®

Johan Erwee, CFP®

FPI announces new appointments The Financial Planning Institute of Southern Africa (FPI) is pleased to announce the appointment of two board members effective as of 10 June 2013: Kim Potgieter, CFP®, and Johan Erwee, CFP®, while David Kop, CFP®, joins the FPI as technical policy and research senior manager.

FPI chairperson, Prem Govender, CFP®, comments, “All these individuals have profound knowledge of the Institute and the financial services industry that’s echoed through their commitment and dedication to our profession. I have no doubt that they will be a valuable addition to the FPI and we look forward to working with them.”

Kim Potgieter is a CFP® professional, director and part owner of Chartered Wealth Solutions, a specialised retirement financial planning practice as well as an FPI-Approved Professional Practice™.

She holds a Postgraduate Diploma in Financial Planning (UFS), BSocSci Clinical Psychology (UNISA) and BSocSci (Durban University).

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The Financial Planner

Johan Erwee holds BCom and LLB degrees from the University of the Free State and obtained additional formal qualifications in financial planning, taxation, estates and trusts.

David Kop has been appointed as senior policy and research manager. His area of focus is creating a stable research and policy framework to ensure the FPI continues to play a critical role in policyrelated matters that affect the financial services industry.

Kop completed a BCom in Financial Management at the University of Johannesburg and a Postgraduate Diploma In Financial Planning from the University of Free State in 2002.

Godfrey Nti, FPI CEO adds, “We’re very pleased to have made these appointments; the additions to the team are quite timely as we work towards the implementation of our 2015 strategy. I trust their valuable experience will be key in helping promote the importance of financial planning in South Africa.”

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Financial Planning Institute reachES consumers MYMONEY123 is a financial education community outreach programme initiated by the Financial Planning Institute (FPI). Since its successful launch in September 2012, the programme has reached over 600 consumers nationally.

The programme has been very popular and FPI has been invited to many employers, churches and other community groups.

MYMONEY123 visited the FIAS Ombud in Pretoria. Gerrie van der Merwe, CFP® professional, was a presenter on the day and the feedback from the attendees was extremely positive.

Next stop was Rhema Church on 18 February. Forty staff members attended the session, and again the feedback was very positive.

“The course is informative and was well received by the staff. Some would have liked to have a personalised presentation made to their own financial circumstances, afterwards,” said Charles Komape from Rhema.

18

The Financial Planner

Nigel Willmott, CFP® professional, and MYMONEY 123 programme developer for FPI explains, “Many South Africans have never had the appropriate guidance or opportunity to explore and discuss their personal financial planning needs without the guise to sell them something.”

The latest workshop was given to the employees of Entrepreneur Media SA (EMSA) where Nadine Todd, managing editor of EMSA, said, “Nigel’s presentation was extremely informative. It got our entire team thinking about how they handle their finances, and we have launched a budgeting challenge among staff members as a result.

“The financial health of our team is extremely important to us, and Nigel hit exactly the right note for us to get a programme off the ground, with full employee buy-in on the importance of taking control of their finances.”

On the day of the workshop, attendees receive an attendee workbook; a pocket

book-sized personal monthly budget planner and a piggy bank.

The aim of the programme is to actively engage all South Africans to consider and ponder their personal financial planning responsibilities and goals. The MYMONEY123 financial education programme focuses on the basics of personal financial planning emphasising three critical areas: •

Personal financial management and budgeting.

•

Dealing with debt.

•

Understanding savings and investments.

The programme also aims to introduce the public to the concept of a personal financial guide, a guide that stands for ethics and competency. The public is introduced to the CFP® professional designation and encouraged to seek out and engage with suitably qualified and experienced financial planners.

FPI news

CENTRE FOR PROFESSIONAL DEVELOPMENT - UPCOMING EVENTS ANNUAL REFRESHER WORKSHOP

This annual event will highlight all relevant legislative changes. Marius Botha and Wessel Oosthuizen will share new developments in the financial planning arena to make for an informative, structured sharing of information session.

Proposed dates 12 13 18 19 20 21

November

– 15 November November November November – 22 November

Pretoria Johannesburg Free State KwaZulu-Natal Eastern Cape Western Cape

LOOK OUT FOR THE FOLLOWING DVDS Portfolio Construction Workshop – Brandon Zietsman Incorporate (whether implicit or explicit) factors surrounding a client’s financial personality performs some form of cash flow modelling and projections, and guides recommendations in terms of appropriate portfolio solutions.

Retirement Planning – Shaun Latter With global trends regarding retirement continually challenging the norm, terms such as ‘refirement’ and ‘retyrement’ are becoming buzzwords for baby boomers. The bottom line is that times are changing and, as planning professionals, we should anticipate and react to this reality.

Estate Planning – Wessel Oosthuizen, Marius Botha This DVD provides an overview of the most popular estate planning tools.

Three case studies are analysed and discussed. These deal with the three stages of a person’s life, illustrating the need for proper estate planning throughout your lifetime. The latest legislation affecting certain areas of estate planning is also covered.

Buy and Sell Arrangements – Carmen Venter Learning how to interpret complex business structures and tax issues in buy-and-sell arrangements by means of a case study, which will enable financial planners to approach buyand-sell assurance opportunities in a practical way.

CLIENT ENGAGEMENT PACKAGE 1. Cultivating Connection between Financial Planners and their Clients – Prof. Dawie Smith This DVD focuses on what the mind shift from transactional-mindedness to transitionmindedness entails; what it means; and why it is imperative to make such a shift. We will look at various practical approaches to build, develop and maintain long-lasting, sustainable client relationships.

2. The Connection and Coaching Engagement – Nigel Wilmot This DVD describes the core factors that determine whether the financial planner will make the lasting client connection. We will explain what it means to start the conversation with the heart, move to the head, and end back at the heart. It focuses on relationship building, connection, empathy and coaching.

3. Insurance Funding Patterns – Schalk Malan The aim of this DVD is to provide an overview of insurance funding patterns and how to provide the best solution for a client’s needs.

Topics like the fundamental principle of insurance; funding your cover; are ‘level’ funding patterns always level; comparing patterns; and experience-based funding patterns are discussed.

The Financial Planner

19

The FPI annual closes on a high note

The Financial Planning Institute concluded what has been billed as the most successful of its annual conventions. The event was attended by over 1 000 delegates at the Sandton Convention Centre on 11 and 12 June 2013.

Andrew Bradley (left), CFP®, was awarded the Harry Brews’ Award (previously Chairman’s Award); Bradley is former chairperson of the Financial Planning Institute and current chief executive of Old Mutual Wealth.

Godfrey Nti, CEO of the FPI, says: “While South Africa has an advanced financial services industry, a lot more needs to be done to draw more of the population into the industry’s system. As the FPI, we are committed to getting the industry talk about ways of ensuring that we continue to build an industry that is inclusive. Of importance, however, is to ensure that we continue to promote the role played by financial planners in South Africa.”

Similar to previous conventions, this year’s event brought together a high calibre of speakers:

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The Financial Planner

•

Justice Malala, political analyst and columnist, provided an indepth analysis of South Africa’s current political milieu and various political permutations that are likely to surface in light of the upcoming general 2014 elections.

•

The National Treasury was represented by Deputy Director Ismail Momoniat, who provided an update regarding the regulatory landscape in South Africa and how it’s likely to impact the industry.

•

Former chief executive of McCarthy Limited, Brand Pretorious, talked about business strategies in a rapidly changing environment and the importance of delivering value to customers.

•

Renowned South African economist, Christ Hart, spoke about the inevitability of challenging conventional wisdom in financial planning, touching on key issues such as risk assessment and investment objectives.

FPI news

convention •

Gerhard Meyer, CFP®, a member of the international Financial Planning Standards Board Regulatory Advisory Panel and head of governance at Old Mutual Wealth, gave fascinating insights into the future of financial planning in South Africa.

Founder of Galileo Capital and 2011 Financial Planner of the Year, Warren Ingram, CFP®, clinched the Media Award.

Virath Juggai was named as the Top Student in the CFP® Professional Competency Examinations, while Megan Keip was named as Top Student in the FSA™ Professional Competency Examinations.

Warren Ingram, CFP®

Virath Juggai, CFP®

Megan Keip

According to Godfrey Nti, the success of the 2013 FPI Convention bodes well for the institute: “It’s an indication that we are doing something right. I’m confident that future events will be just as successful if not better, and we will continue to partner with key industry players to ensure that we create a platform for vibrant industry debate.”

From the left: Shaun Latter, CFP®, Barry O’Mahony, CFP®, Donovan Adams, CFP®

The FPI’s supreme objective is to promote financial planning in South Africa, and recognise the importance of rewarding the excellence in the industry. Barry O’Mahony, CFP®, founder of Veritas Wealth Management was awarded the 2013 Financial Planner of the Year title, and was joined in the awards ceremony by finalists Shaun Latter, CFP®, founder of Quaestor Wealth Management and Donovan Adams, CFP®, a retirement specialist at Chartered Wealth Solutions.

The Financial Planner

21

The practical implementation of prescribed minimum benefits

By Wynand Venter, CFP速, and Kate du Randt, CFP速, from Wynsam Wealth

22

The Financial Planner

healthcare Any advisor who assists their clients with claims would hear this question on a weekly basis. Consumers and suppliers of healthcare services are becoming more and more aware of prescribed minimum benefits (PMB).

However, not everything they think they know is actually fact. As an advisor, what do you need to know about the practical implementation of prescribed minimum benefits?

The definition as it reads, is fairly simple: Prescribed minimum benefit means the benefits contemplated in section 29 (1) (o) of the Act and consists of the provision of the diagnosis, treatment and care costs of – • 270 diagnosis and treatment pairs listed in Annexure A • Emergency medical conditions • Chronic disease List – 26 diseases listed in Annexure A – treatment as per specified algorithm.”

Must a medical aid pay in full for any prescribed minimum benefit?

The short answer is yes; the medical aid must pay in full, meaning the full cost for the diagnosis, treatment and care costs of a prescribed minimum benefit.

However PMBs are, as the name indicates, minimum benefits and, as stated by the Department of Health, are not intended to give doctors a blank cheque as some providers seem to think.

The best way to explain how PMBs work in a practical way is by example: We recently had Mrs Y come into our offices. She had surgery in May under diagnosis code 905L. She had with her a letter from the anaesthetist, which had been attached to her bill, telling her this was a PMB diagnosis code and thus she is entitled to be paid in full by the medical scheme. Her medical bills for a day admission came to R15 523, of which medical aid paid R9 686.

Herein lies the first lesson. The invoices were submitted under a PMB diagnosis code; however, the medical aid paid at its rate. As advisors, this teaches us that schemes (and this applies to every scheme we have dealt with so far), do not automatically pay in full and waiver copayments for PMBs. Their systems simply do not differentiate between a PMB diagnosis and a non-PMB diagnosis. In every PMB case, some application of intelligence is needed. If your clients do not know what they are entitled to, they will not receive it.

So we sent Mrs Y’s bills back to the medical aid with a motivation from the doctor explaining that the diagnostic code was a PMB and we requested full payment. The scheme responded by asking for a clinically detailed explanation of why this was an emergency.

This is the second lesson. As per the law, any emergency is a PMB. In an emergency, the patient is entitled to seek medical treatment from the nearest service provider and the scheme must pay in full. In Mrs Y’s case, the scheme was challenging whether her treatment was in fact an emergency. If it was not, they would have a right to refuse payment in full.

We referred back to the law which states that a PMB is an emergency or one of the 270 diagnosis codes. It was questionable whether Mrs Y’s treatment was an emergency. She saw the doctor 10 days before she had the surgery. If we accept that it was not an emergency, how were we to proceed?

In the case of treatment that is not an emergency, a patient is required to use a designated service provider. Designated service providers (DSP) are chosen by the scheme, sometimes called network providers. If a patient voluntarily uses a non-designated service provider, the scheme is not liable to pay in full. A DSP, however, must be available without unreasonable delay and within reasonable proximity to the patient’s place of business or residence.

What followed was a 40-minute call to the scheme. The question was simple: if Mrs Y should have used a DSP; who is the DSP in her area? We were then told that Mrs Y had been notified that use of a non-DSP could result in a shortfall and she would be liable when her authorisation was given.

This is standard protocol when an authorisation is given; however, it still does not tell us who the DSP is. We were told that a DSP search can be done only by specific location and practitioner type. We informed the agent we needed a urologist and an anaesthetist in that city.

The Financial Planner

23

healthcare Our call was put on hold for 15 minutes. The answer from the scheme was: “Actually we have no DSP for either practitioner type, in any of those towns, on any of our plans.”

Mrs Y’s treatment was not an emergency. She was told to use a DSP and did not. But there is no DSP in her area anyway. The law is clear – in the case of the unavailability of a DSP within a reasonable time and proximity, the use of a non-DSP is constituted involuntary. Mrs Y’s claims were sent back with this information and the scheme, with no legal basis to reject the claims, paid in full. How was a 70-year-old retired woman going to fight this case alone? This case illustrates that the law is not as complicated as it may seem. But you need to know the law if you wish to successfully challenge the payment of a claim.

What you need to know and, in turn, teach your clients: •

Service providers will tell you that you are entitled to full payment as soon as any PMB diagnosis code is used. They are not always correct.

•

Regardless of whether a diagnosis is a PMB or not, schemes will in most cases pay to their rates and apply co-payments as with any other diagnosis.

•

As an advisor, you will need to intervene, at least to tell the client what they are entitled to. You really should do this before the treatment is given if possible.

•

Members of schemes must make an effort to use designated service providers when possible. Doctors will often argue something was a medical emergency when the patient had days between the diagnosis and the treatment of the diagnosis. This is the window in which effort must be made to find a DSP.

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•

If the effort is made to find a DSP and one is not available, either within a reasonable time period or proximity, and you have proof of this, then the scheme must pay in full for the treatment.

Doctors are going to tell your clients that they are entitled to full payment by their scheme for any PMB. As advisors, the best thing we can teach our clients is when to use a DSP and when to simply seek treatment as an emergency. In this way, we can ensure that they will not end up with a major shortfall on medical bills and thus positively impact their overall financial planning.

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GM_22885DIS_16/08/13_v5 The Financial Planner 25

Sydney Sekese,CFP®, Senior Investment Specialist, Old Mutual

Rdr

a reality c The retail distribution review (RDR) has been one of the most profound changes for financial advisors since the IFA was formally recognised decades ago.

Given that our Regulator has strongly indicated that we should follow the United Kingdom’s (UK) example, how can we use this crystal ball to proactively rethink the way we design and distribute savings products in South Africa? Creating the right environment within firms is an essential aspect. The tactical response to RDR calls for a strategic review and discussion around how planners prepare for RDR-style legislation in South Africa and adapt accordingly.

This developed into three broad areas of focus in the UK namely: • •

• In the UK, RDR has put many through the quandary of trying to decide if they should be independent or restricted and try to establish what their new business model should be. Many have been forced to rationalise their clients, now that the time allotted to each client has to be carefully managed, and advisors can no longer rely on commission. They have also had to revise their qualifications and take further exams to make sure they comply with the new regime.

The motive behind RDR was all about raising standards and making sure that clients get a better service. What needed to change was that professional standards needed to increase significantly. They thought that the relationship between the provider (product) and distributor was fundamentally flawed and that the issue was the remuneration bias and the meaning of the concepts of ‘independence’ and ‘advice’.

They also identified the need for a simpler process to deliver simpler products to more consumers.

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The Financial Planner

Market segmentation- the retail investment distribution market should be segmented and labelled.

Remuneration - those distributing products should be paid in a manner that does not influence the product they sell.

Professionalism and reputation - those distributing retail investment and savings products should possess high standards of knowledge and ethical behaviour.

However, in the run-up to RDR, some claimed it might have the perverse result of leaving some clients without any advice at all, as advisors could no longer justify their business.

European providers of exchange traded products have noted a substantial uptick in inflows into passively managed investment products in the wake of the onset of RDR. Prior to the introduction, analysts noted that its introduction should result in an increased investor appetite for lower-cost passive investment products, since RDR effectively abolished commission payments from fund providers to financial advisors.

INVESTMENTS to the one in the UK. The FSB’s initiative will apply across all areas of financial services that fall under its regulatory ambit. This will now include the banking sector in line with the twin peaks regulatory model whereby all market conduct regulation will fall under the FSB and all prudential regulation under the Reserve Bank.

heck Industry implications What are the implications for the South African industry? Those within the industry may need to adapt products, processes and business structures to align with regulations, seeking to ensure that advice is truly independent and that it reflects the needs of the consumers. They have to make sure that consumers are able to identify and understand the services they are being offered in the advice process.

Commission bias needs to be removed from the advice process and the advice given to the consumer needs to focus solely on the consumers’ needs and not on the commission paid by insurers. Consumers should be fully aware of all costs like fees and commissions; they should know which fees relate to which service, and when these fees should be paid.

There should be full transparency on all advice costs in the lifecycle of the policy and the industry should be professionalised through higher education standards. RDR-style legislation may impose onerous administrative and compliance requirements that could be more burdensome to smaller providers as well as new entrants to the market.

TCF and RDR RDR is the next step that follows the Treat Customers Fairly (TCF) initiative currently being implemented. The Financial Services Board (FSB) has a mandate from government to protect consumers of financial services that fall under their jurisdiction. As part of delivering on this mandate, the FSB has introduced a TCF programme similar

The TCF objective is to achieve six key outcomes for consumers at all stages of the product life cycle including product design, marketing and promotion, advice, point of sale, after the sale, complaints handling and the ultimate payment of the benefits at claims (or withdrawal) stage. TCF is a combination of principles and rulesbased regulation with a strong emphasis on embedding a TCF culture in conducting business. In order to do this, the TCF programme follows a top-down approach by starting with the business leaders and senior managers rather than a delegated tick-box compliance approach. There is a close linkage between TCF and RDR with the main difference being the remuneration emphasis of RDR which is seeking to remove commission bias. An RDR world will focus on commission bias as an extension of TCF, in an attempt to ensure the customer truly receives appropriate advice. Thus value of advice is a topic that takes on new significance.

Options Opportunities still exist in an RDR world. The value of advice and how the value chain remunerates the giving of advice is an issue that needs to be resolved. One objective in preparing for an RDR will be to resolve the problem of designing a remuneration model that will support a non-commission environment. This means that a review of the value of advice is thus necessary. Value of advice and the need for face-to-face contact must become the core competencies in building of trust with clients going forward.

Distribution methods will have to be designed to be cost-effective, while simultaneously addressing the needs of the market and fitting with the culture of the market. Products need to be simple and understandable and the method of distribution has to ensure that clients fully understand the workings and implications of these products. The distribution methods will need to encourage personal, face-to-face contact with clients.

Traditionally, government believes the South African consumer was largely taken advantage of and the government believe the implementation of RDR will force transparency in the industry and will be a further step towards consumer protection. Any RDR process in South Africa must take into account that we have very different needs to a developed country like the UK. The challenge of government and industry will be to make sure that those who most need financial advice (and who may not be able to afford fees) will still get financial planning advice. The RDR may see a significant drop in numbers of financial advisors. The government believes the consumer needs to be confident that the advice that they are getting will be truthful, honest and given without maximum gain in mind.

People are generally reluctant to change, but where change benefits consumers it must be embraced. South African consumers, including financial advisors should be offered truly world-class products and services. This is a clear indication that government wants to adhere to global best practice principles in order to protect the consumer. At the end of the day, it comes down to implementation and regulation and we have to ask, does government have the capacity to effectively implement and oversee this programme?

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27

INVESTMENTS

Potential dangers

of projections

By Lara Warburton, CFP®, Managing Director Imara Asset Management

As financial advisors, we strive to provide our clients with as much information and disclosure as possible. Meetings that once took an hour cannot be finished in two hours as we wade through mounds of paperwork, and our clients’ eyes glaze over as they sign their lives away. We understand the benefits of belonging to a profession and not just selling a policy, but is the level of disclosure always understandable to clients, and in their best interests?

In the General Code of Conduct for Authorised FSPs and Representatives, section 7(1)b states that a provider other than a direct marketer must, “whenever reasonable and appropriate, provide to the client any material contractual information and any material illustrations, projections or forecasts in the possession of the provider”.

When I think of projections, I think back to the days when life companies projected portfolio returns of 20 percent per annum, which usually lead to unrealistic expectations and ultimately disappointed investors. Projections can be dangerous, both short-term and long-term projections. There are so many factors that influence investment returns, including inflation, interest rates, investment market cycles, exchange rates, market corrections and crashes, and these can usually not be accurately predicted. So how do we make realistic predictions?

I always tell my clients that if I could make accurate predictions of how markets will behave in future, then I would be retired by now, living on my own island or moving between my various mansions.

We do not have crystal balls; on the one hand we need to encourage people to save and invest for their futures, and on the other we have to ensure that we are not setting them up for disappointment.

Looking at past returns and volatility will give an indication of how the investment portfolio has responded to previous crises and opportunities.

Another option is to make predictions linked to CPI; in other words, predict how the investment will stack up in the future based on the purchasing power of the money. This strips out the impact of variations in inflation and is perhaps more relevant for people planning their retirement.

Focusing purely on domestic portfolios, a leading investment consulting firm has projected the following returns for various asset classes (March 2013 data). The numbers are annualised for a period of five years ahead, and assume domestic inflation at 5.8 percent.

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Type of portfolio

Real

Nominal

Domestic equity

4.4 percent

10.2 percent

Domestic property

3.4 percent

9.2 percent

Domestic bonds

1.4 percent

7.2 percent

Domestic inflation-linked bonds

0.9 percent

6.7 percent

Domestic cash

0.4 percent

6.2 percent

We are able to construct a simple balanced portfolio with the following investment weightings: • • • • •

50 10 15 15 10

percent percent percent percent percent

equity property bonds inflation-linked bonds cash.

Over the next five years, this portfolio has a projected future return of 2.925 percent per annum in real purchasing power terms and 8.725 percent in nominal terms.

These are conservative projections and we know that most multi-asset class portfolios with moderate risk have outperformed this. How do we walk the tightrope between conservative projections that will not disappoint, and aggressive projections that will encourage the client to invest? At some point in the process the prudent question is: what will these projections look like after costs?

This article has raised some of the considerations we face in projecting future returns. We all need to decide how to meet our regulatory requirements without disappointing our clients. The ultimate decision on what to disclose and how to disclose it needs to be carefully considered. If we are to treat customers fairly and build trusting relationships, projections and the potential pitfalls need to be taken seriously. For investors, the decision to postpone consumption and invest for the future is tough enough, without being faced with low projections and a gloomy retirement. The alternative of a rosy outlook with a projected future value way in excess of what will probably be achieved has even worse implications, for both the disappointed underfunded retiree, but also for us in our practices.

Responsible investing PART 1

Responsible investing has become quite the buzzword in the investment world, with asset managers taking care to ensure that they meet the guidelines embedded in the Code for Responsible Investing in South Africa (CRISA), which was launched in July 2011.

Neesa Moodley-Isaacs, Financial writer

CRISA formally encourages institutional investors to integrate sustainability issues such as environmental, social and governance (ESG) into their investment decisions. Sunette Mulder, senior policy advisor at the Association for Savings and Investment South Africa (ASISA), says the aim of CRISA is to provide the investor community with the guidance needed to execute investment analysis, investment activities and exercise rights as institutional shareholders to promote sound governance and in doing so to give effect to the principles in the revised Regulation 28 of the Pension Funds Act. CRISA applies to institutional investors such as pension funds, insurers, asset managers and consultants. The code is not compulsory but encourages institutional investors and service providers to adopt its principles and practice recommendations on an apply-or-explain basis. Institutional investors are expected to fully and publicly disclose to stakeholders at least once a year to what extent the code has been applied. If an institutional investor has not fully applied one of the principles of the code, the reasons should be disclosed. Disclosure as well as policies should be made public.

Aside from ASISA, CRISA has been endorsed by the Institute of Directors in Southern Africa (IoDSA) and the Principal Officers’ Association (POA). The principles of CRISA are supported by the Financial Services Board (FSB) and the Johannesburg Stock Exchange (JSE).

Increased disclosure Since the code was launched in 2011, the CRISA committee has drafted a practice note that provides guidance on how to disclose

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the application of the code most effectively. The CRISA practice note, which was released earlier this year, separates disclosure requirements into three elements: Disclosure of policies, disclosure of responsible ownership practices and disclosure of implementation.

In all three cases, it is recommended that disclosure is made on a company’s website at least once a year. “While we recognise that full implementation of CRISA will happen only over a period of time, we expect that the new guidelines will lead to greater levels of disclosure going forward,” Mulder says. She adds the CRISA committee is also planning research into the uptake and application of CRISA. During 2012, the Sustainable Returns for Pensions and Society Project initiated by the Principal Officers’ Association (POA), developed a document that set out a framework and tools for asset owners and their service providers that would equip them to implement CRISA as well as respond to Regulation 28 of the PFA (see Regulation 28 for retirement funds). The first draft of the project’s Responsible Investment and Ownership Guide was released for industry comment late last year. At the time of going to print, the revised version was expected to be available for further industry engagement in September this year.

The project is run in partnership with the International Finance Corporation (IFC), a member of the World Bank Group, through the Sustainable Returns Steering Committee. It is supported by (ASISA) the Government Employees Pension Fund (GEPF), National Treasury, the FSB, Institute of Retirement Funds (IRF), trade unions and a number of other stakeholders.

More evidence of implementation required Shanay Narsi, investments consultant at Nedgroup Investments, says recent surveys have highlighted that 90 percent of South African asset managers agreed on the importance of integrating sustainability and ESG issues into investment decisions, while 94 percent noted an observed change in market participants’ interest in ESG matters since the introduction of CRISA and the amended Regulation 28.

INVESTMENTS “On a superficial level, I would agree that the importance of CRISA and other related guidelines has been recognised and adopted

by South African asset managers. However, we need to see more evidence of implementation before we can argue that the spirit of the code is being fully embraced. Furthermore, asset owners need to increase their knowledge of the principles and exercise their influence to see real progress towards the acceptance and understanding of responsible investing,” he cautions.

Challenges Paul Stewart, the head of asset management at Grindrod Asset Management, says one of the biggest challenges is having a clearly defined set of factors to measure ESG and how these factors need to be quantified in a company’s financial statements.

“Once this is determined, investment managers will have an objective measure to determine how a company is doing in respect of responsible investing in general and be able to make meaningful comparisons in terms of the impact on a company’s future cash flows,” he points out.

“For example, we would interpret CRISA as meaning that we can invest in British American Tobacco (BAT), provided that BAT has clear principles for addressing ethical, social and good governance matters and for committing to measure and manage these outputs in the future,” Stewart adds. Narsi concurs. “First and foremost is the challenge of monitoring adherence to the policies. After all, CRISA is a set of guidelines and not a regulated framework with noncompliance penalties. As such, implementation of the principles which is different to the adoption of the principles, is voluntary and the pace at which it is implemented is also subjective,” he points out.

“Good asset managers already apply the principles (informally) when determining whether an investment is a sustainable, quality investment or not. But this investment process is often not communicated to investors and needs to be addressed in context of the code. To do this, asset managers need to devote resources to ensure the information is appropriate for CRISA’s demands as well as the trustees’ level of understanding,” he says.

“Conversely, I believe there is a responsibility upon trustees to ensure they learn the skills to recognise when asset managers are acting responsibly or not. Trustees can be more vigilant and demanding by adopting the code into their investment policy and strategy documents, and ensuring these considerations are addressed on every investment decision undertaken by a manager. In this way, trustee boards will actually define what they believe are responsible investing principles which will afford a more successful legacy for their retirement funds.”

CRISA principles •

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Principle 1 – An institutional investor should incorporate sustainability considerations, including ESG, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to beneficiaries.

Principle 2 – An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.

Principle 3 – Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional investors.

Principle 4 – An institutional investor should recognise the circumstances and relationships that hold potential for conflicts of interest and should proactively manage these when they occur.

Principle 5 – Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.

The Financial Planner

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Protection of Personal Information Bill

adapting your systems and processes accordingly Carla Letchman, Competency Specialist, Financial Planning Institute

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The Financial Planner

The Protection of Personal Information Bill is expected to be promulgated this year; it was initially thought that the bill would be enacted earlier; however, we have reached mid-year and it is yet to be promulgated.

PRACTICE MANAGEMENT

The conditions are:

The bill is in keeping with international laws and, as a result, it is premised on international pieces of legislation and more particularly the European Union Data Protection Directive. For South Africa to successfully do business on an international level, it needs to abide by international standards and one of these is the protection of an individual’s personal information.

The implementation of this law would encourage international companies and individuals to do business and invest in South Africa.

The bill also gives effect to the Constitution of the Republic of South Africa, 1996, in that it gives effect to section 14 in the Bill of Rights.

The right enshrined in the Bill of Rights is the right to the protection against unlawful collection, retention, dissemination and use of personal information.

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Accountability – the responsible party needs to ensure that the conditions for lawful processing are met.

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Processing limitation – the personal information must be used only in line with its original purpose subject of the data subjects consent.

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Purpose specification – the collection of the personal information should be for a specific purpose, a purpose the data subject should be aware of and, once that purpose is achieved, the personal information should be destroyed or deleted unless there is a legislated reason to retain the information. If such information is retained proper security of the information needs to be ensured.

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Further processing limitation – this must be compatible with the original purpose for obtaining the information and must be done with consent.

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Information quality – the responsible party must take reasonable and practical steps to ensure that the personal information is complete, accurate, not misleading and updated where necessary.

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Openness – a responsible party must maintain the documentation of all processing operations under its responsibility. Further, the data subject should be informed of the source of the information, purpose and the details of who is collecting the information (responsible party).

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Security safeguards – the responsible party must secure the integrity and confidentiality of the personal information. In order to achieve this, the responsible party must identify all reasonable and foreseeable internal and external risks to personal information in its possession and guard against it.

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Data subject participation – a data subject has the right to request that the responsible party to disclose what personal information they have of the data subject, whether third parties have access to the information and who those third parties are. Further, the data subject can request corrections or updates to the information.

A juristic entity will inevitably be affected by the bill. Systems and processes will need to be reviewed at in order to ascertain if the requirements are met and to make sure that appropriate checks and balances are implemented.

As mentioned previously, the starting point when trying to grapple with the bill would be to firstly look at your current systems and processes to ascertain if they are sufficient and if in fact they do protect the personal information of clients. If not, the risk needs to be identified and mitigated. The mitigation would equate to training your staff, implementing new software systems, ensuring that due diligence is done when dealing with external providers and finally physical security.

Further, internal paperwork, namely contracts need to be updated to provide for all the mitigation actions to be taken. Businesses need to establish an information officer function; this individual will be responsible for encouraging compliance with the bill. This would entail making sure the aforementioned conditions are met for the lawful processing of personal information.

The crux is that a responsible party needs to meet certain conditions when processing personal information. Therefore it is essential to know the definitions of a responsible party, what the bill defines as processing and personal information. The conditions that must be met by the responsible party are not included in the definitions section.

These conditions for the lawful processing of personal information are contained in Chapter 3 of the bill.

There are severe consequences for not complying with the bill. Any person convicted of an offence in terms of the bill is liable to a fine or to imprisonment for a period not exceeding 10 years; or both a fine and imprisonment for obstructing the Commission; or in any other case, to a fine and/or imprisonment for a period not exceeding 12 months. Further, a business could incur reputational damage, civil action and could be fined up to R10 million.

However, like with all rights enshrined in the Constitution, there is a justifiable limitation to this right, namely the right of access to information and allowing for the free flow of information within the Republic and internationally.

The Financial Planner

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PRACTICE MANAGEMENT

another word for

life

Time is an independent financial advisor’s most precious resource. Your effectiveness at managing time influences your success in growing your business.

procrastinate less and have more time to relax.

You will also be happier as you’ll be able to maintain a healthy work-life balance.

Mimi Pienaar, Head of Business Development at Masthead

If time is simply another word for life, good time management would be critical for both life and business.

You wouldn’t let your staff, product providers, service partners or even your clients shorten the days of your life, so don’t let them misuse your time.

The first step to effective time management is to be committed to change. Time management involves planning, prioritising, delegating, controlling your environment, understanding yourself and identifying what you will change about your habits, routines and attitude.

The second step is to choose to take charge of your time. Be prepared to protect your planned time. After all, if you don’t manage your time, somebody else will.

There are many time bandits that are ready to steal your time and your life from you. To overcome them, here are some bandit-busting ideas:

You also should not misuse your time, so be aware of how you spend it. You may find yourself constantly busy, with more than enough work to do each day.

However, some of your tasks may not have a real payoff for your business, while being busy may overtake the fundamentals of growing a healthy business. In many cases, advisors who say they have no time do not plan effectively, or they fail to protect their planned time.

Prioritise and stay focused – Evaluate your priorities by asking yourself: If nothing else gets done today, what are the one or two tasks that absolutely need my attention? Start your day by tackling these tasks.

The solution is to manage your time, a skill that many seem to learn through necessity. Time management takes time to develop and perfect, yet can offer great rewards when practised at full potential. You will find freedom from deadline pressure and from stress in general. You will be more productive,

Avoid ‘quicksand’ issues – Don’t get caught up in issues that cannot be resolved quickly.

Set aside time once a day or weekly to address issues that require investigation.

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Don’t postpone ‘bitter pills’ – Take care of critical matters that are unpleasant and cannot be handled by anyone else immediately. If you constantly postpone them, they will haunt you and waste precious time reminding you that they are still around.

Don’t overbook – Allow for interruptions by leaving a reasonable amount of unscheduled time every day. It will fill itself.

Delegate – Assign whatever tasks you can to your staff. Keep in mind that if the value of your time is R500, delegating non-income generating tasks to your support staff member (whose hourly rate may be R70) will free up your time and you have more life. Think about how much more business you could do, how much more effective and productive both of you would be and how much more time you could spend focusing on building value in your business.

Value your time – If you do, those around you will do the same. Institute a closeddoor, open-calendar policy with employees, colleagues and product provider consultants as much as possible. Put a time limit and formal agenda on visits. When someone other than a profitable client calls for an appointment, ask how long it will take and what will be discussed.

Focus on results, not work – The heart of good time management is setting goals and priorities that enable you to get results, not just stay busy.

Changing habits can be quite challenging, especially if you are extremely busy all the time.

Select one or two of the most impactful banditbusters and actively work to replace your old habits with productive new ones.

How effectively you can manage your time comes down to your willingness and commitment to establish the habits that will give you more control over both the expected and the unexpected things that happen daily.

Remember that time is life and good time management is a way to get more life. Where else could you find a better payoff for your effort?

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How pretty is the bow around your affairs?

When last did you conduct a meaningful assessment of your estate planning as it pertains to your will and family trust? FPI gives some practical pointers for a review of your will and trust.

• Jenny Booth, Senior Associate Maitland

Review of your will Do the provisions of the will give effect to your current wishes? Often wills are not updated as regularly as circumstances and wishes change.

At the very least, consider the applicability of the will to your current situation. A more in-depth analysis would look at the following: •

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Whether the will still has a spousal abatement clause which leaves R3.5 million or an amount equal to the sec. 4A estate duty abatement to a testamentary trust. Each spouse is entitled to a deduction of R3.5 million for estate duty purposes and if you bequeathed your estate to your spouse, this deduction was not utilised and effectively lost. To combat this, abatement trusts were established in terms of the will to house assets to the value of the abatement amount. These spousal abatement clauses are no longer applicable as legislation changed with effect from 1 March 2010, allowing the first dying’s potential abatement amount to be utilised by the second dying in certain circumstances. In effect, the unused portion passes on to the surviving spouse. However, you may want to consider the appropriateness of leaving an amount equal to the abatement (currently R3.5 million) on the death of the first dying to an existing family trust, because the capital growth on the bequeathed portion of the assets occurs in the trust and not in the estate of the surviving spouse.

The Financial Planner

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Whether a testamentary trust has been created where an inter vivos trust would be more appropriate. For example, a sizable estate left to charity to endure for many years would best be served by an inter vivos trust deed that could be amended over time to take into account changes in legislation without having to go to court to effect the amendment.

Whether there are special bequests or cash legacies which should be increased to take inflation into account.

Whether you need to make provision for a beneficiary with special needs and exactly what that provision should be, and whether the existing provisions actually do what you need them to do.

For example, does the testamentary trust qualify as a special trust with consequently more favourable tax treatment than an ordinary trust?

Whether you would like to make provision for annuity income or a special bequest to a dependant, trusted friend or employee, and whether it would be appropriate to request your executor to purchase an annuity investment of a particular capital value to produce a specific monthly amount.

Review of your trust Should you have settled assets on a family trust, you may consider reviewing the terms of the trust in light of your requirements and likewise assess whether they meet your needs. A more in-depth analysis would look at the following: • Is there a loan account; if so is it an asset or a liability in your estate? If a liability, have you sufficient liquidity to settle it or will it

TRUSTS require the sale of assets that you ordinarily would not wish to be liquidated on your death? If an asset, how large is it in proportion to your other assets, will it result in estate duty being payable and, in that case, do you have sufficient liquidity to meet the liability?

Furthermore, have you bequeathed the credit loan account to a beneficiary or back to the trust? Will it result in the trust having to liquidate investments in order to repay the loan to your estate, which may trigger capital gains tax in the trust?

• Who are the trustees and is there at least one independent trustee? Are all the trustees individuals and how are they replaced if they are no longer willing or able to act as trustee? Are you able to nominate successor trustees on your death? Are they charging professional fees and how do these compare to the income of the trust? It may be that the trust was set up as an asset-protection vehicle many years before but with the changes in legislation and fixed property being moved out of trusts they may be no longer viable. It may be more efficient to collapse a multi-trust structure and pour the assets over into one vehicle.

• Who are the members of the class or classes of beneficiary and does this still suit your wishes or were the beneficiary classes merely the result of a drafter’s template clause that was included in the trust when it was drafted? For example, there may be a class of beneficiaries such as your divorced ex-spouse or your children’s spouses who you may no longer wish to benefit. If the class says “grandchildren”, is it your intention that each grandchild shares or do they only share in proportion to their parent? For example, if there are two children and six grandchildren but four grandchildren belong to one child and two to the other child, is it the intention that they share equally

•

•

•

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(per stirpes) or do two share 50 percent and four share the other 50 percent (per capita)?

As with the will, do you have a ‘special needs’ beneficiary and do the provisions of the trust deed actually give effect to your wishes and achieve what is required for the special needs beneficiary such as a special trust which qualifies for special tax treatment?

Does the trust hold shares in a private company and have you given your trustees guidance as to how these are to be dealt with on your retirement, death or incapacity? Is there key-person insurance that will pay out to the trustees on your death should you foresee financial damage to the company in the event of your demise? Is there a shareholders’ agreement providing for the purchase and sale of the trustowned shares and, if so, have you given the trustees guidance as to the valuation methodology to be adopted or better still is there life cover in place to pay for the shares (a buy and sell agreement)?

All the guidance you wish to give trustees, whether they are inter vivos or testamentary trustees, can be done by way of a letter of wishes. This should not be a template document but should be drafted specifically for your requirements to give effect to your wishes and needs.

In addition to reviewing your will and trust deed, you should also make a list of all your assets and liabilities as well as specify where documents such as title to assets are stored.

For peace of mind, consult a financial planning professional to attend to holistic estate planning.

The Financial Planner

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RISK

risk

Should family health be part of the risk planning process?

By Clive Salgado, Director, Salt Asset Management

All financial advisors are aware of the six steps to financial planning: 1.

Establishing and defining a professional relationship.

2.

Gathering data.

3.

Analysing and evaluating the client’s financial status.

4.

Developing and presenting financial planning recommendations and alternatives.

5.

Implementing the financial planning recommendations.

6.

Monitoring the financial planning recommendations.

As part of gathering data, many financial planners ask about the family medical history. However, sometimes this question is asked only once the financial plan has been accepted and the advisor is completing the documentation to apply for the required cover on behalf of the client.

It is essential to ask the question as part of gathering data as there are over 4 000 known hereditary diseases that could considerably affect the risk to the client of suffering financial consequences as a result of suffering a hereditary disease. We have researched some examples of hereditary diseases.

Cancer Researchers have discovered that mutations in particular genes, such as BRCA1 and BRCA2, cause some cancers. Women who inherit the mutation tend to get breast cancer early in life and in both breasts. Men with BRCA1 have an increased risk of prostate cancer, while BRCA2 increases the likelihood of cancers in the male breast, prostate, pancreas and elsewhere.

Heart disease Children of parents with heart and blood vessel diseases, such as heart disease, stroke or high blood pressure, are more likely to develop them. Plus, a person with a congenital heart defect is slightly more likely to have a baby with a heart defect.

Diabetes Type-1 diabetes is a genetic disorder, and if one or both parents have it, you are more at risk to develop it as well.

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The Financial Planner

We list some of the risks to financial planners if they do not ask about hereditary diseases.

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Younger clients who may have a family history of hereditary diseases, but have not yet shown any symptoms, may be able to get the required risk cover. This does not mean that the product providers will give them the cover without any loadings or exclusions to provide for the increased risk of having a family history of hereditary diseases; however, loadings might be lower than if the cover is applied for at a later stage. Even if the cover is not required at a specific stage in the client’s life, with benefits such as future cover, the planner can ensure that the client is able to implement the cover later when they might already show symptoms of the disease and would not be able to get the required cover or only with substantial loadings. By not asking about hereditary diseases, the planner might not include the benefits in the risk plan that will enable the client to obtain the required cover, and could be found to have been negligent at the planning stage.

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If the planner is aware that the client may be more at risk to contracting certain diseases, this could affect the financial plan with regard to the recommendation of risk benefits. For example, we know that with modern medical technologies a person suffering a heart attack probably would be back at work in a month or two, and even serious heart attacks would not necessarily define them as being occupationally disabled. This means the planner must consider the appropriate proportion of disability versus severe illness cover. It might also mean that the planner might need to consider including a functional impairment element in the recommendation for disability cover, as that would probably make it easier to claim than in terms of the occupational disability element of the benefit.

Product providers underwrite differently for certain diseases, and have products and benefits slanted towards the different conditions. For example, one product provider’s severe illness benefits might provide more comprehensive breast cancer cover than another product provider. If the planner does not take this into account for a person with a higher propensity for breast cancer as a result of their family history, the planner could be considered negligent. Determinations by the ombud have shown that he would decide against the planner if the recommended product does not match the client’s profile and needs as determined by the FNA .The risk for planners is even greater if the FNA is not sufficient to determine the client’s needs. So ask the question: is there any history of hereditary disease in the family?

Stand out.

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The designation effectively enables individual financial advisors to once again differentiate themselves as well as provide trusted expert advice to consumers.

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