The Financial Planner www.fpi.co.za Telephone: 086 1000 FPI (374) Tsholofelo Dihutso, CPRP Communications and Events Specialist (011) 470 6050 Postal address: PO box 6493, Weltevredenpark, 1715 Street Address: Palms Office Court, Block A, Ground Floor, Kudu Avenue Allen’s Nek, Gauteng, South Africa Membership Queries membership@fpimail.co.za Published by COSA media www.comms.co.za Advertising: Luke Gray luke@comms.co.za 021 555 3577 Michelle Baker michelle.baker@mediamarx.co.za
Fpi magazine, published by COSA Media, a division of COSA Communications (Pty) Ltd.
Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications. The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or pro-ducts or the reliance of any information contained in this publication.
Contents Letter from the fpi | 04
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The role of the newly appointed Consumer Advocate | 06 How to be a future-fit financial planner |12
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How tax changes affect your retirement planning |14 Using a trust as part of your retirement planning: Five good reasons |16
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The debate surrounding late joiner fees | 20
20 Sections:
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FPI NEWS
06
Employee benefits
12
Estates and trusts
16
Healthcare
20
Investments
22
LIFE
26
Practice Management
28
Profile
30
risk
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The Financial Planner
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Letter from the FPI When I was officially appointed in June 2012 as Head of Business Development and Membership Services, I realised that I will have to live out our theme for 2012, ‘Changing Mindsets’, in my new department. The correct use of the CFP® mark was extremely important to me when I headed up the certification department. This will never change although I had to think differently about the use of the mark. No longer could it be an enforcement issue, it had to add a lot of value for consumers, our members and FPI. The correct use of the CFP mark had to create awareness and lead to growth and retention of CFP professionals.
M
any of the FPI members probably received an e-mail from head office informing them that they are using the CFP mark incorrectly. Most of these members probably thought that the person who sent the e-mail had nothing to do and was spending time on nitty-gritty issues. Why did we spend so much time on ensuring that professional members use the CFP mark correctly? Legally, a trademark must be used correctly to prevent the trademark from becoming generic. There are many examples of trademarks that became so generic that the owners lost the
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exclusive right to use them. Those who were awarded the CFP mark after completing the ILPA exams, the postgraduate diploma in financial planning or the BCom honours in financial planning will know that it required hard work and many hours of study and, in most cases, we had to do this while we were working. We are all proud of the CFP mark and I’m sure none of us would approve of just anyone calling themselves a CFP professional due to the fact the we lost the exclusive right to use the mark. If we keep on using the mark incorrectly or together with nouns that are not approved, it could become generic. Despite the legal reasons, there are many other reasons why all financial planners should ensure that the CFP mark is used correctly when we communicate either in writing or verbally. This communication could be to clients directly or
indirectly through print media, radio or television. You might wonder where I’m going with this and why. The answer lies in the fact that we want consumers to know when they’re dealing with a CFP professional or a CERTIFIED FINANCIAL PLANNER® professional. The consumer must be able to make the link between professional financial planning and advice and the CFP mark.
“Those who were awarded the CFP mark after completing the ILPA exams, the postgraduate diploma in financial planning or the BCom honours in financial planning will know that it required hard work and many hours of study and, in most cases, we had to do this while we were working. We are all proud of the CFP mark and I’m sure none of us would approve of just anyone calling themselves a CFP professional due to the fact the we lost the exclusive right to use the mark.”
One of the main initiatives in the new FPI strategy is consumer awareness. We inform consumers of their need for financial planning and that professional financial planners should be used to address those needs. Consumers must know when they deal with a CFP professional. How will they know if we don’t inform them? How will consumers recognise a CFP professional if we are inconsistent in the way we use the mark in our communication? If we want to increase awareness of the value of using a professional financial planner to levels that will benefit not only consumers, but all of us practising financial planning, we must get this right. There are many CFP professionals who get the opportunity to write articles in magazines or newspapers. Many are interviewed on radio or television. We should insist that the publisher or producer use the CFP designation correctly when they introduce us, quote us or refer to us. There is a use of mark guide available specifically for the media. We should all download it and provide it to the media whenever they interact with us. FPI introduced a new Code of Ethics and Professional Responsibility (the code) in January 2012 with which we all agreed to abide. According to the code it is mandatory to disclose our affiliation with the FPI as well as the designation we carry to clients. If we look past the legal requirement and focus on the positive impact it will have on awareness, it could only benefit every professional financial planner out there. This is ultimately what distinguishes us from the majority out there and we should be proud of it.
If we all do it this way, consumers will recognise the CFP designation when they read the newspaper, listen to the radio or watch a programme on television. Through this the demand for the services of professional financial planners will increase. Consumers will be looking for professional financial planners and they will find you on the FPI website. As important as the correct and consistent use of the mark, so is our “Find a Financial Planner” profile on the website. It is important that each of us update our profile by adding a photo, a short bio and making it attractive for the consumer who will be looking for a financial planner in his or her area. Let’s work together and increase the awareness around the CFP mark. Every consumer needs proper financial planning. This service must be provided by those who uniquely qualified themselves as financial planners. Remember, the CFP mark is a designation and not a qualification. The qualifications were mentioned earlier in this document. It is similar to the CA (SA) designation, Joe Soap CA (SA) or Joe Soap, CFP®. Use it to your advantage. The use of mark guides can be downloaded from the FPI website. For any information on the use of mark or the “Find a Financial Planner” functionality on the website, feel free to contact our membership services department. The CFP®, CERTIFIED FINANCIAL PLANNER® and are trademarks owned outside the US by Financial Planning Standards Board Ltd. The FPI is the mark’s licensing authority for the CFP marks in South Africa through agreement with FPSB.
Anthony Campher, CFP ® Head: Business Development and Membership Services
The Financial Planner
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fpi news
The role of the newly appointed Consumer Advocate Paul Roelofse, CFP®, Consumer Advocate: FPI their need to plan their finances and finding quality advice through a CERTIFIED FINANCIAL PLANNER® professional. This is challenging as consumers can be intimidated by the complexities of the world of financial planning. Some even feel that CFP® professionals are above them and are only interested in wealthy clients. Some consumers may feel that they cannot afford the services of a CERTIFIED FINANCIAL PLANNER® professional which, let’s face it, holds some truth. To add to the challenge is the fact that there are just over 4 100 CERTIFIED FINANCIAL PLANNER® professionals in South Africa of which only about half are practising.
The role of the Consumer Advocate A need to create consumer awareness The Financial Planning Institute has, over the years, set the standard for financial advice in the industry. The CERTIFIED FINANCIAL PLANNER® designation represents quality financial advice through stringent qualifications and experience guided by a strong code of ethics set out by the institute. We, the members of our fine establishment, know all about this, but how much does the broader public know about financial planning, what a CERTIFIED FINANCIAL PLANNER® professional is and where to find one?
A new consumer initiative The FPI has embarked on a coordinated initiative which is an outreach to consumers. Part of this initiative is the creation of a persona – the Consumer Advocate – who has been appointed to open up to and relate with consumers by bringing home the message of
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The Consumer Advocate will need to relate with consumers by helping them to understand the basics of financial planning and assisting them in overcoming their inherent fears and apprehensions caused by the complexities and jargon of our industry. There will be opportunities to appear on radio and television and at public events, engaging with consumers on issues relating to financial planning. The Consumer Advocate will also be writing articles in popular publications and in the press with a view to educating consumers and making them aware of how to plan for their future. The more awareness we can create about the need for financial planning, the greater the demand there will be to find CERTIFIED FINANCIAL PLANNER professionals. The effort could also result in more financial advisers in the industry wanting to attain the prestigious CFP certification.
Personal and simple The persona of the Consumer Advocate will be consistently friendly and approachable; taking time to help consumers understand the world of financial planning. Sharing the experiences gained over years of presenting A Word on Personal Finance on Radio 702 and Cape Talk 567, the Consumer Advocate will aim to gain the trust of consumers by helping them understand financial
matters by engaging with them in a personal way, keeping the advice and guidance simple.
Consumer channels created A consumer portal, which will allow consumers to interact directly with the Consumer Advocate, has been developed on the FPI website, supported by social network platforms. The portal will provide basic advice to all consumers. The Consumer Advocate will take advantage of other social media platforms, such as Twitter, to talk to consumers with a view to building up a large base of followers over time. The Consumer Advocate will also have a blog on the portal which will support the initiative. CERTIFIED FINANCIAL PLANNER® professionals need to become more accessible to consumers. The initiative of having a Consumer Advocate will contribute towards an increase in awareness of the CFP mark and bring the valued CERTIFIED FINANCIAL PLANNER® professional closer to the consumer. It is easy to promote the FPI to consumers given the calibre of our members and the trustworthiness of their advice. A measure of our success will be the responses we get through our website on where to find a CERTIFIED FINANCIAL PLANNER® professional as well as the visits from consumers to our Consumer Portal seeking the advice on offer. The role of a Consumer Advocate has many possibilities and opportunities to showcase the CERTIFIED FINANCIAL PLANNER® professional, mindful of the responsibilities and expectations placed on the CFP mark’s brand. The way forward should be interesting and exciting.
fpi news
Financial Planning Institute Launches MYMONEY123, a financial education community outreach programme personal financial planning emphasising three critical areas:
Nigel Willmott, CFP® | FPI Project Manager: Pro Bono Initiatives
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P ersonal financial management and budgeting
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Dealing with debt
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Understanding savings and investments.
The programme follows a logical linked building-block approach. The emphasis is that you first need to plan your daily, weekly and monthly expenditure; understand the use of credit; and be aware of the impact of high levels of personal debt. Once you have your monthly plan in order and your personal debt is under control, you can move forward by saving and investing for the future. This is where effective personal financial planning starts. There is no point in considering more advanced forms of personal financial planning if these three critical areas are ignored and avoided.
A call to action The success of the financial education outreach programme will be dependent on the time and support that members of the FPI are willing to donate. The FPI will be approaching preferred practice partners to pitch in and support the initiative. A volunteer portal has been set up on the FPI website where members will be able to indicate their willingness to participate in the programme. Volunteers will be matched up against requests from groups to facilitate the financial education programme presentations.
What does MYMONEY123 material include? On the day attendees will receive the following: •
An attendee workbook
•
pocket book-sized personal monthly A budget planner Piggy bank.
As simple as 123
The FPI and Financial Education
•
MYMONEY123 is a financial education community outreach programme initiated by the Financial Planning Institute (FPI) and will be implemented nationally from September 2012. It will form an integral part of the broader planned pro bono focus of the FPI strategy going forward.
The FPI recognises that consumers need independent financial education so that they can be better equipped as consumers of financial products. Often, ignorance and misguidance leaves South Africans feeling dissatisfied and disillusioned with the financial planning industry. Financial education is a key factor in changing mindsets.
We have developed a Facilitator Guide and a MYMONEY123 PowerPoint presentation for our volunteers. All the material is standard and is produced by the FPI. Strict rules regarding the use and positioning of the initiative and the programme content will be monitored and enforced by the FPI.
The aim of the programme is to actively engage all South Africans to consider and ponder their personal financial planning responsibilities and goals. Many South Africans have never had the appropriate access, guidance or opportunity to explore and discuss their personal financial planning needs. The MYMONEY123 financial education programme will focus on the basics of
The CERTIFIED FINANCIAL PLANNER® professional The MYMONEY123 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® designation and encouraged to seek out and engage with suitably qualified and experienced financial planners.
Where to from here? The programme is being implemented nationally from September 2012. The success of the programme will be due to the willingness of our members to pitch in and participate. Go to the FPI website or e-mail mymoney123@fpimail.co.za. and put your name forward as a volunteer. Watch out for information that will be distributed by the FPI about the programme over the coming months.
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fpi news
CPD: A competence requirement Anthony Campher, CFP®, Head: Business Development and Membership Services, FPI
“The final board notice on this topic will soon be published by the FSB. FPI members should continue with CPD activities as before.”
as what was required by FPI for professional certification, it was just at a lower level.
When the Financial Services Board (FSB) announced that it was going to introduce Continuous Professional Development (CPD) as another competence requirement, it did not come as a surprise for FPI. At that stage, FSB introduced various requirements; among them the requirement for a qualification, experience and Regulatory Exams. These requirements were the same
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It was always mandatory for FPI members to obtain CPD points. We knew that this was the only requirement not yet implemented by the FSB. When this requirement was eventually published, FPI welcomed it as it would further assist efforts of professionalising the industry. Consumers will ultimately be the ones to benefit. Many members were worried about the possibility of having to meet two similar but different requirements. This is not the case. There will be no duplication and there will be only one CPD requirement. As a professional body, our requirement will always be more onerous than that of the regulator; this is ultimately what distinguishes FPI members. The final board notice on this topic will soon be published by the FSB.
FPI members should continue with CPD activities as before. FPI had a huge influence on the current draft determination and everybody will recognise many items that are currently part of the FPI CPD policy. Nobody has been approved by the FSB as a CPD provider, neither have any programmes been approved for CPD purposes; don’t be caught by misleading adverts. If in doubt about FPI-approved CPD programmes, confirmation can be obtained from the FPI’s certification department. It must be understood that FPI fully supports any effort in professionalising the insurance industry. This is exactly what the ILPA, and later the FPI, has been trying to do for 30 years. As a professional body we have the responsibility to protect the public we serve. We will achieve this only if we set professional standards and provide financial planners and adviser an opportunity to practice according to those standards. Consumers will continue to demand the services of those who have distinguished themselves in terms of competence. Meeting minimum requirements is no longer enough. An FPI designation will be the guarantee to the consumer that they are dealing with a professional who meets far higher requirements.
The Future of FPI’s Designations: The Financial Planning Institute recently launched its new Strategic Plan 2015 which has at its core the pre-eminence of the CFP® designation as well as positioning FPI to be a bona fide professional body. Our challenge is to focus on the future and to do what is required to elevate financial planning to a universally respected profession. Following extensive consultation and research, the FPI board resolved to make some fundamental changes that are aimed to transform the FPI into a bespoke professional body as well as increase its value to its members. The FPI is determined to speed up the transformation of the institute
into a true professional body which is respected regionally, nationally and globally. The Future of FPI’s Designations discussion document explains the proposed structural changes to membership flowing from the FPI Strategic Plan 2015 as adopted by the FPI board of directors. These changes are important to the successful repositioning of the FPI as a pre-eminent professional body and the CFP mark as a symbol of excellence in financial planning. While we appreciate that some of these changes may potentially cause some discontent, we assure you that the issues were carefully deliberated and the tough decisions made were carefully considered.
“The FPI board resolved to make some fundamental changes that are aimed to transform the FPI into a bespoke professional body as well as increase its value to its members.”
YOUR OPPORTUNITY TO COMMENT The Future of FPI’s Designations discussion document explores the provisions of the new strategy concerning the proposed structural changes in the institute’s professional designations. Members are invited to comment and send feedback to these proposed changes to strategy@fpimail.co.za or call (011) 470-6000 or send a fax to 086-636-0288 or via post to PO Box 6493, Weltevredenpark, 1715.
FPI participates in the second JSE National Youth Financial Literacy Day Taking financial literacy to another level, the FPI partnered with the Johannesburg Security Exchange (JSE), the Banking Association of South Africa, Strate, Mamepe Capital and the Credit Regulator (NCR) to partake in the country’s bid to increase financial literacy among the youth. Now an annual event initiated by the JSE, the National Youth Literacy Day, held in Johannesburg on Friday, 27 July, was attended by 350 youth which included high school learners, university students, young entrepreneurs, professionals and unemployed youths. “This event is aimed at drawing young South Africans into the country’s economy by giving them more knowledge about the way it operates,” says JSE Director Geoff Rothschild. “It will equip youth with the necessary knowledge to make informed decisions and highlight the importance of saving. The National Youth Financial Literacy Day also aims to expose the youth to the investment markets which will enable them to have sound financial habits.”
“This event is aimed at drawing young South Africans into the country’s economy by giving them more knowledge about the way it operates.” The Banking Association of South Africa estimates that 70% of adult South Africans do not save. Youth makes up 52% of the total population; therefore, behavioural change of the youth has to be influenced. “One main focus in the new FPI strategy is to take a leading role in financial literacy to ensure the maximisation of consumer awareness. Our participation in this JSE initiative must be seen within this context. We are determined to continue supporting national projects that drive financial literacy,” says Anthony Campher, CFP®, FPI Head of Business Development and Membership Services.
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fpi news
FPI New Appointments FPI announces the appointment of new board members The Financial Planning Institute of Southern Africa (FPI) is pleased to announce the appointment of three new non-executive directors of the institute for a two-year term: Logie Govender, CFP®, David Thomson, CFP® and Natasja Norval Hart, CFP®, effective from July 2012. These new FPI board members will replace the outgoing Raymond Snyders, CFP®, Kathrin Franz, CFP® and Nasrat Edoo Sirkissoon, CFP® who contributed enormously to the institute during their tenure.
David Thomson, CFP®, an attorney, is employed as a legal adviser by Sanlam Life (Broker Distribution Services) and has served independent financial planners and selected intermediaries in the banking environment for 15 years.
Almo Lubowski appointed as FPI’s HOD Technical and Advocacy
Logie Govender, CFP® is currently the regional manager at NMG Employee Benefits in Durban and consults to a broad range of clients.
Natasja Norval Hart, CFP®, was the 2010 FPI Financial Planner of the Year and is currently an independent financial planner with Sasfin Financial Advisory Services.
The Financial Planning Institute of Southern Africa (FPI) is pleased to announce the promotion of Almo Lubowski, CFP®, to Head: Technical and Advocacy Services effective as of 16 July 2012. Lubowski has been serving the FPI as the technical services manager for the past two years and has been successful in establishing a very effective technical services department. In his new role, Lubowski will be responsible for developing policy positions on issues affecting the financial planning profession and advocating for these positions with policymakers, regulators and industry bodies. He will also be responsible for ensuring the continuous professional competence of members as the financial planning profession evolves.
FPI launches FSA™ designation As the leading independent professional body for financial planners, the FPI is once again raising the bar by providing qualified professional advisers with an opportunity to set them apart from the rest. It is with great excitement that the FPI recently launched the FINANCIAL SERVICES ADVISORTM (FSATM) designation. FSA certification is available to qualified licensed
advisers who want to distinguished themselves from the majority and who aspire to become CFP® professionals. FSA certification is attainable upon completion of a suitable bachelor’s-degree, meeting relevant experience requirements and successful completion of the FPI FSA Professional Competency Examination. In addition to the academic and experience requirements, the holder of an FSA certificate is expected to maintain the highest ethical standards in their profession by subscribing
to the FPI Code of Ethics and Professional Responsibility. FSA certificants will further distinguish themselves through a commitment to lifelong development of their professional competence by undertaking Continuous Professional Development (CPD). The FPI invites candidates to apply for FSA certification and is committed to assisting prospective certificants in attaining the designation. For more information, please contact FPI Membership Services on 086 1000 FPI 374 or e-mail the FPI at membership@fpimail.co.za.
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How to be a future-fit financial planner Kim Potgieter, CFP® Chartered Wealth Solutions
In June of this year, I spoke at the Financial Planning Institute’s (FPI) annual convention and shared my thoughts on what it takes to stay ahead of the game as a financial planner. In the timeless words of Bob Dylan, Times they are a’changing. Change is nature. The only thing guaranteed in this life is that things will change; it’s inevitable. The world is constantly changing, our perceptions about life change, so it is only natural that the nature of jobs will change, too. We have a choice of course: we can embrace change, or we can use all our energy to resist change. “Progress is impossible without change. And those who cannot change their minds cannot change anything.” – George Bernard Shaw I strongly believe in embracing change: not change for the sake of change of course, but change in the name of growth and progress. Today, keeping up with the times is absolutely critical. My hope is that as an industry we will develop a culture that embraces change. I also envision a new breed of financial planners who are trusted and respected in their communities; financial planners who are agents for change. Quality financial planning plays an instrumental role in people’s lives. The process and discipline of financial planning can provide the bedrock for the future financial stability of individuals and families. Yet our work is so often misunderstood and misinterpreted, and financial planners are often seen as untrustworthy. I believe that in order to change these misconceptions, we have to start putting the needs of our clients first. As financial planners we have
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the power to change perceptions and to make a real difference in people’s lives. My philosophy has always been that if we do what is right for the client and what we are passionate about, the money will take care of itself. Beyond the changes happening in the financial industry, are those taking place in the global community in which we all operate. Twenty years ago our access to information was considerably more limited than it is today. This means our clients and potential clients have access to financial and investment information that affects the financial choices they make. This begs the questions: what value-add can a financial planner offer? The reality is that no matter how qualified we are, and how many years of experience we have, we will never be able to control the markets or our clients’ return on investment. The role of a financial adviser, just like everything, is evolving. There is now a coaching dynamic at play between planner and client. It is our responsibility to guide a client to make the most rational and informed decision, and not one based on greed or fear. Clients no longer want purely financial information; they want us to consider their finances in the context of their life. This shifts the discussion from one based on return on investment to a discussion about return on life. It is no longer enough to focus on fact, logic and reason alone. The time has come to acknowledge the emotional side of financial planning.
employeE benefits The facts and the analysis are important, but no longer sufficient. This is a philosophy that I learnt from Mitch Anthony, and one that inspired me to pursue change in the financial planning industry. To remain future fit, we all need to be proactive about the changes that are facing our profession. Don’t wait until it is too late. Think of ways to add value to clients beyond your technical abilities. By making change and offering authentic value-added services, I can guarantee you a place ahead of the game. Here are a few simple tips that will help you to connect better with clients: 1. A good place to start is to treat your client as number one. A great book that helped me was, Everyone communicates, few connect, by John Maxwell. 2. Make sure you are listening attentively and hear what your
client is saying. Minimising the noise in your head and leaving your assumptions behind is essential. 3. Ask the right questions. You don’t need all the answers. This is something Mitch addresses in his book, Clients for life. 4. Bring your real self to the meeting. Clients need to be able to relate to you, and know that they are dealing with someone who knows more than they do. 5. Be curious about your client and their life, it makes your client feel important. 6. We connect with clients on three levels; their minds, hearts and guts. Clients are no longer impressed with analytical facts and numbers. They need to feel some kind of emotional connection, too.
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How tax changes affect your retirement planning In an article published in a financial magazine shortly after the delivery of the annual Budget Speech, a respected local economist made the comment “…essentially this was not a good budget for the saver…”. But is this really the case? Not necessarily, says John Kinsley, MD of unit trusts at Prudential Portfolio Managers. In fact, long-term savings via a government-approved retirement vehicle have become even more attractive than before. Investors should be informed of the long-term impact of tax changes on different investment vehicles to ensure they have adequate savings.
The most important tax changes for future retirees The two tax changes that are particularly relevant are: 1. An increase in Capital Gains Tax for the individual from 10% to 13.3%. 2. The introduction of a Dividend Withholding Tax of 15% on all dividends paid to South African individuals.
Investing in a government-approved retirement fund versus a balanced unit trust To really see how these changes affect your retirement planning, we will use a case study of a 35-year-old individual who wishes to retire at the age of 60 and can afford to set aside R2 500 each month towards retirement. Also, whereas most analysis focus only on the build-up phase (before retirement), we will also take into account the actual retirement phase. The table below summarises the differences between investing in a retirement annuity versus investing in a balanced unit trust as an individual:
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Different implications for the returns on different savings mechanisms To illustrate the impact of the tax changes on the returns of these two savings options, we’ll assume the targeted return for both options is inflation plus 5% after investment management fees of 1% per year, and that inflation is 6%. The two tax changes mean the following: 1. For the individual investor (option 2), dividends will be taxed at 15%, while in a RA (option 1) there is no tax on dividends. 2. For the individual investor (option 2), any interest above the exemption level will be taxed as income – we assume an average rate of 35% – while in an RA there is no tax on interest. This difference in tax means that the effective return for the RA (option 1) is 11% per year, while for option 2, it drops to 10.5% per year.
Where you invest your money
Option 1 Government-approved retirement annuity (RA)
Option 2 Balanced unit trust
Is your money invested pre- or post-tax?
Pre-tax
Post-tax
A significant difference in the long run
Advantage
You qualify for the RA tax deduction, which means you can invest the full R2 500 each month.
Because you are not ‘locked in’ to a product and any changes to regulations governing retirement funds does not concern you, you have more independence.
“Even though 0.5% might not seem like a big difference, the compounding of this differential over many years will have a big impact on how much savings you, and your dependants, have at and during retirement,” explains Kinsley.
Disadvantage
Because your money is in an approved vehicle, you have limited access to and control over your money.
Because you will be investing post-tax money, and assuming a tax rate of 35%, you will be able to invest only R1 625 of the available R2 500.
The Financial Planner
employeE benefits Focusing on the first two phases of the retirement cycle, the figures in the tables and the chart below show exactly to what extent the different tax treatments of options 1 and 2 impact returns over the long term.
Ascertain your priorities when it comes to retirement savings
In the third phase where the surviving spouse continues to draw the same income based on the same assumptions for another 10 years, the difference between the final portfolio values of the two options becomes even more marked.
Investors have different circumstances and views, and some may regard having more control over their money, as in the case of investing in a balanced unit trust, as essential. The final decision will always remain a personal one, but the numbers certainly do tell a story that is worth considering.
1. The build-up phase: The value of your savings at retirement Assumptions
Option 1 Governmentapproved retirement annuity (RA)
The fund has been Retirement value R3.9 million allowed to build up over 25 years (age 35 to 60). (Our earlier assumptions about returns and inflation also still hold.)
Option 2 Balanced unit trust
Retirement value R2.4 million
2. The retirement phase: Your monthly retirement income and your portfolio value when you pass away Assumptions
Option 1 Governmentapproved retirement annuity (RA)
Option 2 Balanced unit trust
You need to draw R30 000 per month before tax from the age of 60 to live comfortably.
You can place the full amount in a living annuity, which means you will now pay tax on the monthly annuity amount.
You can sell units in your fund for the value of R19 500. There is no income tax implication (although there could be a small Capital Gains Tax liability).
Monthly income (after tax) R19 500 per month
Monthly income R19 500 per month
End value of portfolio R9.2 million
End value of portfolio R3.2 million
Your retirement phase lasts 20 years and you pass away at 80.
“Even though 0.5% might not seem like a big difference, the compounding of this differential over many years will have a big impact on how much savings you, and your dependants, have at and during retirement.�
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Using a trust Tiny Carroll, CFP® Fiduciary Specialist at Glacier by Sanlam
as part of your retirement planning: Five good reasons The pundits tell us that we can expect to live longer and experience better health after retirement than our parents and their parents before them ever did. While this is obviously good news, it does mean that making additional provision for retirement becomes even more necessary for those who wish to enjoy financial security along with an extended life expectancy. This article looks at five reasons for considering a trust, and more specifically, a trust which uses an endowment policy as its main investment, as part of a retirement planning strategy. It is not the purpose of this article to downplay the important and very necessary role played by traditional pension, provident and retirement annuity funds. Using a trust as part of your retirement planning should be a supplementary means of building retirement capital outside of your personal estate.
Reason 1: Annual donations tax concession Individuals are allowed to donate up to R100 000 each to any person including a trust each year; for married couples this means R200 000 each year. Donations above the R100 000 limit will be subject to donations tax. (Remember that the concession includes donations of occasional birthday gits to children and friends.) The donations tax concession is not cumulative. This means that if you do not use it in a particular year, the benefit is lost. Donations to the trust can be used by the trustees to fund the premiums on an endowment policy owned by the trust. The benefit here is that the premium, as well as the growth thereon, is removed from the planner’s personal estate.
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“The donations tax concession is not cumulative. This means that if you do not use it in a particular year, the benefit is lost.”
estates & Trusts Reason 2: The endowment advantage Using an endowment as the savings vehicle has a number of tax and administration advantages, including:
Trust assets will not be part of either party’s estate in the event of divorce, provided that the trust functions as a trust and that the ownership of trust assets vests in the trustees for the benefit of the trust estate and trust beneficiaries. If the trust is merely the alter ego of the ‘planner’, the assets supposedly held in trust will be subject to division on divorce.
I ncome and capital gains are taxed within the endowment at the insurer’s effective tax rate of 30%, which is lower than the 40% flat rate applicable to trusts.
Like retirement fund benefits, trust assets will not be attachable by creditors in the event of the planner’s insolvency. (The same proviso as above applies.)
•
ains in an endowment will be G taxed at an effective rate of 10%, as opposed to the effective CGT rate for trusts which is 26.6%.
Retirement fund lump sum benefits in excess of R315 000 (plus any previously disallowed contributions) will be taxed in accordance with the published scales.
•
ecause no income arises in B the trust (the income arises in the endowment), the complex income tax deeming provisions are not triggered, which eases the income tax and tax-administration burden normally associated with trust income and capital gains.
•
•
•
fter maturity, partial withdrawals A from the endowment will not be taxable for the trust or the trust beneficiaries. T he tax-free withdrawals from the endowment which are distributed to the beneficiary or utilised by the trustees for the benefit of the beneficiary will not have the effect of pushing up their marginal tax rate. This means that the marginal tax rate applicable to traditional annuity income is not increased, thereby enhancing the return on other forms of taxable income.
Reason 3: Protection on divorce or insolvency Up until retirement from a retirement fund a member’s benefit (pension interest) may, in terms of the Divorce Act, be regarded as part of his or her assets which are subject to division on divorce.
Reason 4: Tax-free lump sums at retirement
Lump sums withdrawn from the endowment and awarded to a beneficiary will not be taxable either in the trust or in the hands of the beneficiary. In appropriate cases the award to a beneficiary from the trust can take the form of a loan/s. The loan debt owing to the trust will need to be settled from assets in the beneficiary-lender’s estate on his/her death, thereby creating an estate duty deduction which can be used to reduce the dutiable value of the planner’s estate. The planner’s living expenses in effect become an estate duty deduction.
Reason 5: Mind over matter Diseases such as Alzheimer’s or dementia – often associated with old age – can sometimes impair a person’s faculties to such an extent that they are no longer competent to manage their own affairs. It is a common mistake to believe that a power of attorney granted to a family member, while still mentally competent, will suffice and that the holder of the power of attorney will be able to transact on behalf of the aged relative. A power of attorney will lapse when the giver of the power is no longer mentally competent. The patient’s financial welfare and care will depend on the appointment of a curator. The appointment of a curator or curator bonis is a costly and often lengthy process. Instead, the trustees of a trust which has been specifically established to take care of aged beneficiaries will be able to utilise trust funds for the care and wellbeing of the beneficiary.
Financial peace of mind As indicated at the outset, it is only one’s imagination that limits the use of trusts. Building a protected source of capital to be used to provide for financial peace of mind after retirement is but one of a trust’s many uses. However, the decision to use a trust and the application of the endowment within the trust must be taken only after proper consultation with a qualified financial adviser.
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Estate planning
THE SOFTER SIDE OF ESTATE PLANNING
Mike Lombard, CFP®
Financial and estate planning is a common practice among most financial planners in South Africa. The subject matter is vast and includes a wide range of regulatory, statutory, legislative and legal opinions which combine to challenge even the most celebrated practitioners both locally and internationally.
I recall many years ago (back in the early ‘90s), being appointed as part of a judicial management team to assist a client who held significant interests in an array of businesses including mining, agriculture and the hospitality industry. My expertise was called upon in a somewhat complicated situation which was further exacerbated by investment interests being held by the client in the old Transkei and Ciskei. To be completely honest, the task for which I was appointed was beyond my pay grade; but never one to turn down a challenge, I tackled the task with much vigour, eager to put my experience and theory to the test. As part of a larger team of more experienced people, my task was to do the number crunching looking specifically at the client’s present estate duty status and providing advice on how to reduce this or, at worst, peg the rising costs associated with this wealth tax.
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financial decision making. Of course, what I did not know was that this young girl had spent many years trying to maintain her independence which was wholly supported by the client. With the stroke of my pen, and with the best of intentions, I unwittingly overlooked this somewhat sensitive subject. In short, we lost the opportunity to do the business. The lesson is simple. Financial and estate planning is about people, their lives, aspirations and skeletons. We become experts and are sometimes blinded by the numbers. How many times do we have firm views on what is best for our clients because the numbers don’t lie? What makes you or me the go-to expert when dealing with complicated financial and estate planning issues?
After much diligence and application, I presented my analysis together with recommendations on how future estate duty costs could be mitigated. Even to this day, I can say that this was a work of art. This plan would save the client millions (literally) and ensure a promising liquidity position that would ultimately be repatriated to the family.
When any client deals with an expert, the first thing is that we know the ‘numbers’. What makes you a trusted expert is accepting that any estate and financial plan can never be mathematically perfect because people are unique, as are their circumstances. In the years that passed and after the many clients I have served, one unspoken question haunts me each time I prepare a financial and estate plan: what makes my plan better?
To my dismay, in the face of significant mathematical savings, the proposal was rejected and I was sent back to the drawing board. The reason was that within the context of my mandate was a young niece of the client who had a mental disability and I had proposed that she would be protected via a trust which would remove any independence she had in terms of her own
The answer is simple. It is designed to take a client’s unique circumstances into account and no matter what the numbers prove or disprove, there is significant value in sacrificing mathematical certainties and walking in your client’s shoes. Our services to clients are not unique; but our clients are. This is what makes financial and estate planning unique.
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“The lesson is simple. Financial and estate planning is about people, their lives, aspirations and skeletons. We become experts and are sometimes blinded by the numbers.”
The debate surrounding late joiner fees Sylvester Appasamy, Principal Executive Healthcare at PSG Konsult Corporate
Sylvester Appasamy unravels the rules about late joiner fees.
As reported in the media, the Council for Medical Schemes (CMS) and four medical schemes, Bonitas, Fedhealth, Medshield and Momentum, are being taken to the Equality Court by the National Consumer Commission for contravening provisions of the Consumer Protection Act (CPA). These four schemes are not alone in the industry to be applying late joiner penalties and waiting periods. The Consumer Protection Act of South Africa has been introduced to promote and advance the social and economic welfare of all consumers and seeks to establish a legal framework for a fair, accessible, efficient, sustainable and responsible consumer market. The Commissioner views medical schemes imposing late joiner penalty fees and waiting periods on members as being unconstitutional. As stipulated in the Medical Schemes Act (MSA): •
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edical schemes are within their rights M to impose late joiner penalty fees on members who are older the 35 who have never been a dependant on a medical
scheme and have never been a dependant of a registered South African medical scheme on or before 1 April 2001. •
T he MSA also stipulates that medical schemes may impose a three-month general waiting period and/or 12-month condition-specific waiting periods due to certain factors.
Although the MSA was established in 1998, late joiner penalties were introduced in April 2001 after the government granted an amnesty period that ended on 31 March 2001. This allowed members to join medical schemes without schemes being able to charge late joiner penalties. The reason for the late joiner penalties was to encourage younger individuals to join medical schemes. This is part of the legal framework to protect the interests of the existing members whereby: •
edical schemes operate in an M environment of open enrolment, which does not allow medical schemes to refuse membership to any applicant.
healthcare •
T here is a community rating system which means that premiums are not risk rated (and may differ only on the basis of the option selected, family size and/ or income level).
This is essential for their survival as the medical scheme environment works on a cross-subsidisation model whereby the young and healthy will subsidise the older and unhealthy. The commissioner’s view is that members should have access to benefits immediately; however, this could mean that members could join a medical scheme only when they require healthcare benefits and could terminate their membership when they feel that cover is no longer required. This would be akin to allowing motor vehicle owners to insure their vehicles after they had been in an accident. Another scenario that could be created is members could terminate their membership during the year once benefits were exhausted and join another medical scheme to have access to new benefits.
The commissioner also confirmed that it has received complaints from foreigners older than 35 who were subjected to the late joiner penalty when they joined their medical schemes, which we agree is a bit of a challenge because this factor is not within their control. Again, we believe the two regulatory bodies should discuss
this. The request for comments from the necessary stakeholders on this matter can then be addressed. We understand that the CMS has requested for an urgent meeting with the Consumer Commissioner to discuss the matter, and we keenly anticipate the outcome.
“Medical schemes operate in an environment of open enrolment, which does not allow medical schemes to refuse membership to any applicant.”
Therefore if medical schemes were not allowed to impose late joiner penalties and waiting periods, it would create anti-selective behaviour towards medical schemes and would impact the financial stability of the medical schemes which are already under pressure to control escalating costs. That said, we understand the reasons why the commissioner is raising these points. However, this matter should be discussed between the two regulatory bodies and, if need be, the necessary acts should be amended accordingly, or the MSA should be exempted from the provisions of the CPA. With the four medical schemes being cited, they will incur legal costs which will be paid from the reserves which belong to the members. Therefore, it is the very members and consumers the CPA is there to protect, who will ultimately be affected.
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investments
WILL ASSET CLASS RETURNS BE ENOUGH? David Crosoer, Executive: Research and Investments at PPS Investments
“The MSCI All Country World Index was marginally positive when measured in Rand, but only because the currency was significantly weaker against a number of other currencies.” concerning the direction of future short-term interest rates. However, global equity markets reacted negatively to the worsening economic outlook. The MSCI All Country World Index was marginally positive when measured in Rand, but only because the currency was significantly weaker against a number of other currencies. Similarly, the South African equity market gave negative returns over the quarter when measured in US Dollars, but was largely flat in Rand terms.
110 105 100 95 90 85 80
SA Equity (SWIX)
SA Listed Property
SA Bonds (All)
SA Cash (3mth)
Intl Equity (in lc)
30-‐Jun-‐12
75
31-‐Mar-‐12
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30-‐Jun-‐11
115
31-‐Dec-‐11
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Source: I-Net Bridge
Rebase to:
120
30-‐Sep-‐11
Local bonds (and property) were the standout performers in the second quarter, as both benefited from the change in market expectations
These trends are aptly illustrated in the chart below, which indicates that international bonds (measured in Rand) and SA property were the top two performers over the 12 months ended June 2012, while cash was the least preferred asset class in terms of performance. Within equities, there was little to distinguish between local and international equities.
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The market has consistently overestimated the ability of the Reserve Bank to increase interest rates in this cycle, and last quarter was no exception. After expecting an interest rate increase for at least the past two years, the market ended the second quarter of 2012 once again expecting a further cut. Driven by renewed global economic weakness, the breathing space given to the South African Reserve Bank by other central banks cutting rates and local inflation falling back into the 3% to 6% target band, these expectations proved correct. An interest rate cut of 50 basis points was announced on 19 July.
Within our equity market, there were important differences in performance. Defensive shares continued to re-rate as cash became less attractive, while cyclical shares dependent on the global economic outlook (and resource shares in particular) continued to de-rate.
There are concerns that global economic conditions could remain depressed for far longer than anticipated, and consequently that cash rates will remain stubbornly low for an extended period of time. In such an environment, cash and equities may struggle to generate the inflation-beating returns we have been used to over the past 20 years. Ultimately, it will become necessary to rely to a greater extent on the ability of a manager to outperform, rather than to expect an asset class to generate its historic real return.
Intl Bonds (in lc)
ZAR/USD
investments Gavin Wood, Chief Investment Officer at Kagiso Asset Management
Dangerous distortions activity. They then started buying massive volumes of bonds to bring down longterm rates and provide more liquidity to financial markets. The US Fed even told markets that short-term rates would remain at (practically) zero until 2013 (then revised this to 2014).
Investors currently face challenging choices and curious contradictions when exposing their assets to the prospective returns financial markets have on offer. The problems stem largely from government and monetary authority interventions in response to the global financial crisis. These interventions have driven down prospective returns for investors at a time when the developed world economy is in brittle shape.
Interventions from authorities In 2008, facing a freezing of financial markets and global economic activity and the possibility of a second Great Depression, stimulus was unleashed on an unprecedented scale. Governments spent more and taxed less, they bailed out ailing financial corporations and provided incentives for households to spend, racking up huge debt balances in the process. Between 2008 and 2011, the US, the Eurozone and the UK increased borrowings by almost US$10 trillion. Central banks slashed interest rates to stimulate lending and economic
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Between 2008 and 2011, the US Fed, the European Central Bank and the Bank of England expanded their balance sheets (i.e. bought bonds) by US$4.3 trillion, nearly a threefold increase. At the same time that central banks are directly helping governments fund their debt at cheap rates, financial regulators are requiring and/ or encouraging financial institutions to invest less in equity and more in government bonds. This is via Basel III for banks and Solvency 2 for insurers. Defined benefit retirement funds are also being encouraged to match liabilities more closely with bonds. These interventions have massively distorted asset prices and therefore prospective investment returns.
Challenging choices Currently, US investors can choose to earn 0% on shortterm deposits; 0.34% per annum on two-year bonds; 2.2% per annum on 10-year bonds; or 3.3% per annum if they want to lock their money up in a 30-year bond. This is
in an economy with inflation expectations above 2% per annum. While equity valuations look reasonable, they may be deceiving given that corporate profit margins are way above their long-term averages. In South Africa, we can earn around 5% per annum on short-term deposits (a multidecade low) and around 8.5% on long bonds. This is in the context of inflation expectations above 5% per annum and current inflation in excess of 6% per annum. Our equity market is at an all-time high, with the industrial sector looking particularly pricey.
Curious contradictions The various government interventions have resulted in contradictions that are historically anomalous and sometimes difficult to justify theoretically; for example: • The credit rating agency, Standard and Poor’s, downgraded the US to below a AAA rating for the first time in history, days after the US Government raised its debt ceiling in August 2011 and US bonds subsequently strengthened (to record low yields). • The colossal monetary stimulus has so far had limited impact on broad money supply or on bank credit extension and little
discernible impact on global inflation. • Poorer developing economies, such as the BRICS nations and particularly China, were approached for funding assistance by European leaders at the peak of the 2011 Eurozone debt crisis. • S ABMiller, the world’s second-largest beer brewer, was able to raise debt capital in January 2012 to finance its acquisition of Foster’s in Australia at an interest rate substantially lower than the interest rate on new debt for Italy, the third-largest country in Europe.
Sticking with absolute valuations While the market conditions described above have created a fantastic environment for those raising capital, it is a dangerous environment for investors who are providers of capital. Investors are therefore advised to be particularly vigilant at this time and not to be tempted by returns that appear attractive relative to alternatives that lock in historically low returns for long periods. Instead, investments should be carefully analysed and should only be considered if they offer attractive returns on a clear absolute basis.
investments
Invest for income and the capital will take care of itself Although capital growth receives a great deal of investor attention, investing is ultimately about income. Retired investors invest to generate an income stream. Pre-retirement investors invest to provide for their future income needs. Investors therefore need to consider two aspects: current income needs and future income needs, each of which will have different influences on their portfolio decisions.
2. Capital value growth The value of a company grows over time at the rate at which its profits grows. In the same way, the value of an investment grows over time at the rate at which its income grows. This relationship is clearly evident when looking at the dividend and price history of Mr Price in the chart below.
Investing for current income An investment portfolio providing for current income needs, such as a living annuity, should ideally provide this income without eroding capital. Capital erosion occurs when an investor draws more income than the income produced by the investments. By eroding capital, an investor reduces future income, so it is vital in the early stages of retirement that capital is preserved as far as possible. Capital preservation can be achieved by selecting investments that produce the desired income yield. Constructing a portfolio for current income involves determining the required income level and then acquiring a blend of cash, bonds, real estate and equities which will generate the required income – cash, bonds and real estate providing a reliable high income – equities, enabling the income to grow. Crucially, the choice of equities should include only those which generate a reliable, growing income stream.
Investing for future income Where income is not an immediate need, investment decisions are driven by a need to maximise investment value upon retirement. This can be achieved by: 1. Capital accumulation When income is not required to fund a lifestyle it is reinvested. Reinvesting income will increase an investor’s capital base which will in turn produce more income to reinvest. This accumulation of capital will increase the value of an investment over time.
To summarise, investment value growth is driven by income; the drivers being income yield and income growth. The more reliable the income produced, the more predictable the end result. Constructing a portfolio for future income involves determining an investor’s risk tolerance and recognising that investment risk lies with income growth. Unlike income yield, which is known at the time of investment, income growth is less predictable. Therefore, capital accumulation by reinvesting income is a more certain and predictable way of increasing the value of an investment. Over the long term, however, capital value growth resulting from income growth will generally produce a greater increase in investment value.
Adopting a balanced approach By combining high yielding investments (i.e. bonds) with investments that have the ability to grow their income (i.e. equities), it is possible for an investor to attain a reasonable level of income with inflation hedged income and capital growth. The income can be used to fund a lifestyle or can be reinvested to accumulate more capital. Advice for investors would be to focus on income and let the capital take care of itself.
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Vital signs:
the importance of a valid will The topic of death is often a touchy subject as it’s not something that people generally want to talk about. However, as a financial adviser, it is vital to ask your client whether they have a will and what the contents are. This helps to ensure that you are giving your client the best advice and that they have enough savings and insurance for their dependants should the worst happen.
Financial advisers need to be involved in the estate planning as they are aware of the client’s financial situation and could advise if there are any gaps in coverage or savings products. Clients can be approached about a will at any age. “Any person of sound mind over the age of 16 is able to draw up a valid will. If you have something to leave and someone to leave it to, you should have a will. Wills are thus not limited to wealthy or married individuals,” says Tiny Carroll, fiduciary specialist at Glacier by Sanlam. “There are also certain life stages where it’s critical to have a will; once clients get married or have children, they should create a will. And it should have a testamentary trust in it if the children are still minors,” adds Geraldine Macpherson, legal adviser at Liberty. If clients are hesitant to talk about their passing, the consequences of not having a will should be laid bare. “If you don’t create a will you will be dying intestate. Without a valid will, you will have no control over who inherits your assets and the executor will have to decide what to do with it. If you don’t have an executor, you put your loved ones in the difficult position of having to find an executor and follow intestate succession, which is completely undesirable,” says Lizl Budhram, advice manager at Old Mutual.
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There may be some instances where a client may not yet need a will, says Macpherson. “If the client is a varsity student they probably don’t have much need for a will. However, as soon as they have accumulated some kind of wealth, liabilities or started working, it’s essential to have a will to bring some clarity.” Under intestate succession law, spouses could lose out. If your client is married, the spouse will get the greater of R125 000 or a child’s share. “They are guaranteed R125 000. If the spouse is young and has children it’s not really that much at all,” says Budhram. If there is no spouse everything will go to the children and if there are no children, the estate assets will go to the parents. Following that, it will go to brothers or sisters or
if there are no siblings, to other family members. If there is noone to claim from the will, the estate will be forfeited to the State, which is again not ideal and should be avoided.
The role of adviser There’s no denying that the will is an important instrument and link to the estate plan. “They [financial advisers] must ensure that the will adheres to all the requirements, that the testator has signed on every page and that there are competent witnesses that have signed and witnessed the document. They should advise their clients to keep their will in a safe place, while making sure that it is accessible in the event of their death. Then, in terms of all the considerations that a client needs to think about when constructing a will, the adviser should be able to go through the pertinent points with the client. It’s important that, for instance, if the client has children, the issue of trusts and guardianships are discussed and the disadvantages and advantages of creating a trust examined,” says Budhram. This is why the financial adviser needs to be familiar with its contents and who needs to be provided for in the event of a client’s death. “Financial advisers
life are there to ensure that there is sufficient money left over for the surviving spouse and children and that there is enough life cover to pay for the bond in the event of a client’s death. They need to ask if the client’s liabilities will be addressed at the time of death. Advisers will ensure that the will coincides with the estate plan and that it’s a valid document,” explains Budhram.
“Without a valid will, you will have no control over who inherits your assets and the executor will have to decide what to do with it.” The role of the executor It’s essential that the client picks someone as an executor to ensure that the wishes of the will are carried out. There’s nothing stopping a client from appointing their financial adviser or broker as the executor, however, experts are generally not in favour of this approach. It is important, however, that financial advisers cast a critical eye over the documents to ensure that there are no errors. “Advisers need to make sure that when a will is read, it is understood. It must be set out in plain and simple English. Financial advisers should ensure the will is signed by independent witnesses, that it is dated and that their client and the executor know where the will is lodged or kept,” Macpherson concludes.
“If the client is a varsity student they probably don’t have much need for a will. However, as soon as they have accumulated some kind of wealth, liabilities or started working, it’s essential to have a will to bring some clarity.”
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practice management
Top practice management tips Mimi Pienaar, Head of Business Development at Masthead
strategic objectives. Whether the focus is on hardware or software, IT is geared to enhance the client experience, update information and increase capital value. For instance, the more efficient your CRM system, the better you will be able to segment your clients to effectively up-sell and cross-sell, while it supports the resale value of your business. As systemisation takes care of many of the routine tasks, you and your staff members have more time to pay attention to the things that matter. This improves performance and raises business productivity to levels that are both motivating and fulfilling. An independent financial adviser who recently worked with a business development adviser on systemising his practice achieved significant results. By introducing a CRM system, he increased his business value, improved client transferability, reduced compliance risk and achieved greater new business income by implementing a documented client review process. Furthermore, by converting the review process into a fulfilling client experience that uncovers vital financial planning opportunities, the business has enjoyed a spectacular 50% increase in new business revenue for the year to date.
An efficient financial planning business is vital to be able to survive and thrive as an independent financial adviser. In our experience, such a business is not achieved by chance or luck but is the result of careful planning and goes hand in hand with the competent management of resources. Harnessing information technology (IT) is one of the most powerful ways to improve productivity and profitability. By implementing the right systems, all the parts of your business can work together as a whole to achieve your
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In a financial advisory practice, it is impossible to do everything yourself and grow your business, so it is vital to employ and retain quality staff. Your strategic objective, your most powerful roadmap to determine where you want to be, can help identify the roles and accountabilities of the staff members you want to attract and retain. By creating an organisational chart – even if it is for one or two employees – you can define positions and the skills, knowledge and responsibilities required for each. The assigned job descriptions will assist staff to take personal accountability. To drive performance, your employees should be clear about how their contribution serves the overall strategic objectives of your business. It is important to retain good employees for many reasons, including the fact that new appointments are costly. Research shows that it can cost between R20 000
and R30 000 to recruit, set up a work station and train each new staff member. The workplace environment should motivate staff to do well and they should feel valued. Give your employees a reason to go beyond their perceived limitations and this will boost staff retention. Another way to retain staff is to be their mentor and coach. Find out what motivates them to deliver their best, hold regular open and direct discussions on their work content and elicit their contributions. Also identify what is required to attract and retain clients; in other words how you explain and demonstrate the value that clients experience with your business. This is expressed through your value proposition, which should be fairly short, have impact and tap into a positive sense of emotion for clients. Your value proposition should be a promise to clients. It is imperative to keep this promise, consistently and predictably. All staff members should thus understand the value proposition and be driven to fulfil this promise within their area of responsibility. Your role in the business is also a critical success factor as your vision, actions and spirit become the essence and guiding force of what happens in the business. Take time out from working ‘in’ the business as the technical advice expert and spend time working ‘on’ your business to determine where the business must go, what it must look like and how this will be measured. By acting on these key areas, you should see a remarkable difference in your business. There are many other ways to make your practice an efficient, profitable and highly professional endeavour. To obtain objective advice and solutions to suit your business, consult an experienced practice management specialist.
practice management
The importance of succession planning It is often said that those who fail to plan, plan to fail. This rings true for financial planners and advisers, whose businesses can take a serious knock in the absence of an adequate succession plan.
“Advisers need to ensure they put an effective succession plan in place with the right partner.”
Wealth advisers need to put plans in place that enable someone to step in and take over their client base in the event of a planned or unplanned exit from the business. It is therefore vital to consider someone who will have the best interests of your clients at heart. According to Grant Alexander, a director of Private Client Holdings, too few advisers make suitable plans for their departure from the business. “Every successful advisory practice requires a solid succession plan. It is a powerful tool that promotes long-term client loyalty, maintains and grows the value of a business and secures ongoing and future income for the adviser post-retirement. Succession planning is critical.” Alexander continues, “For wealth advisers and investors alike, succession planning is vital to ensure stability and sustainability. It provides a sense of certainty and peace of mind around an unpredictable future. Certainty is crucial to business continuity.” The Financial Services Board (FSB) requires all registered financial services providers (FSP) to implement a business continuity plan and procedures to ensure the ongoing servicing of clients. In addition, all advisers are now required to pass regulatory FAIS exams in order to be allowed to continue to practice. Those who fail to write or pass this exam will have their licence withdrawn and will no longer be allowed to practice as advisers. “Advisers need to ensure they put an effective succession plan in place with the right partner. Careful planning is essential to helping clients meet their financial and retirement goals. Yet many advisers still fail to heed this advice when it comes to preparing for their own retirement. This needs to change,” concludes Alexander.
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Jan-Carel Botha, CFP®, 2012 Financial Planner of the Year
1. Jan-Carel, congratulations on winning the FPI’s Financial Planner of the Year award for 2012. Tell us a bit about your journey to becoming a financial planner. Had you always known this was what you wanted to do? After wanting to become a fireman, it has always been my dream to advise people on money matters. I’m a farm boy and grew up in Tzaneen. Coming to the ‘big city’ to learn about and work in finance was a first in my family. With a student loan of R47 000 after my first year as a full-time student at Tuks, I decided to start working full time and study through Unisa. This proved incredibly valuable in building my career, as I learnt about economics and financial planning in a practical way. When I finished my degree, I consulted my own financial planner, Gerrit Viljoen, CFP® of Ultima Financial Planners, for some advice on how to enter the industry and start a career as a financial planner. His words to me were, “Selling policies is not financial planning and becoming an agent with one of the big insurers will give you little chance of learning proper financial planning.” He employed me straight after our conversation and became my professional mentor. Having had the privilege to learn from him gave me an opportunity and advantage that few ever have. I have been with Ultima ever since. 2. How do you hope this achievement is going to help you reach some of your career goals? When building your practice, clients need to trust in your ability. The award leads to better quality new business, while anchoring your existing clients, who gain more confidence in you as a result. The award helps to expand your network with industry leaders, too. Learning from them by engaging on various platforms has already been very valuable.
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3. What have been the most challenging and most rewarding aspects of your career so far? One of my challenges, as is the case for any new entrant into the industry, was to build a solid client base as quickly as possible, with no upfront commission on the implementation of advice and investments. To gain experience, build trust and a client base, and to make ends meet without overcharging the few clients who pay commissions and fees, is tough. It was very rewarding getting through this and starting to see the returns of sound financial planning. As with any reward, it didn’t come without significant sacrifice and hard work. 4. What advice would you give to somebody who has just entered the financial planning profession? Find a mentor and stick to sound financial planning practices. Up-front commission can be very lucrative, especially if it takes years of financial sacrifice to gain momentum. However, the instant gratification of that commission will sink you in times to come. This is what Gerrit taught me and I will forever be grateful for this advice. 5. What issues are facing financial planners now and in the future that weren’t significant only a few years ago? As are expected by many others, we are expecting a lower investment growth environment in the next five to 10 years.
PROFILE Coupled with higher life expectancies, people saving for retirement and especially those in retirement need to plan for the worst and hope for the best. Those in a retirement income phase need to know and understand that the medium-term future is likely to be much tougher than what we have seen over the past 10 years. When planning for retirement, financial planners and clients often rely too much on past averages. This applies to both investment returns and life expectancies.
originates. There is often a misconception about the role of the financial planner versus the fund manager. Clients expect financial advisers to pick the best performing fund or stock, but this is not our role. Unfortunately, advisers promise and sell this as their value add, in order to satisfy client expectations. We need to clearly communicate our role to clients; conducting financial planning with specific lifestyle objectives and crafting investment strategies to ensure that these goals are achieved over time.
Clients need to understand and have faith in your advice, as the planner next door may promise them better returns from their money than you do. Client relations will therefore be tested in these times and advisers will need to be competitive with the fees they charge and the service they offer.
7. How has your membership of the FPI added value to your career?
6. You have been a fee-based financial planner throughout your career. Do you notice a distinct correlation between fee-based financial planning and quality of advice? There is definitely a correlation between charging fees and quality of advice. The general public do not understand the financial planning process or appreciate the value of a financial plan. This is where the expectation gap in terms of financial consulting fees
Keeping up to date with all the changes yourself is impossible. The FPI’s role in communicating and facilitating engagement between professionals, industry role players and legislators is invaluable. Planners cannot rely solely on their companies to keep them informed of all the changes without further input from a professional body. 8. Part of your prize is a return air ticket and costs to attend an international financial planning conference of your choice. What conference will you be attending and why? I will be attending the Financial Planning Association (FPA) Conference in the USA
at the end of September. I have spoken to other planners who have been to many international conferences and all agree that the FPA Conference is the one that added the most value to them as planners. 9. If you weren’t a financial planner, what would you be doing? I would probably be a struggling professional golfer. 10. What would people be surprised to learn about you? When I joined Ultima I was given my first computer and was too afraid to tell the other staff that I had never worked on one before and didn’t even have my own e-mail address. Luckily I discovered Google and learnt what I know about most IT-related things from there.
“Clients need to understand and have faith in your advice, as the planner next door may promise them better returns from their money than you do. Client relations will therefore be tested in these times and advisers will need to be competitive with the fees they charge and the service they offer.”
From left, Solly Keetse, CFP®, past chairperson of the FPI, Jan-Carel Botha, CFP® and Godfrey Nti, CEO of the FPI.
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Entrepreneurs and SMMEs might, under financial pressure, force yourself back to work too soon and further impair your health.”
to reap great benefits from income protection policies Paul McKillen, Head of Product Development [B.Bus.Sc (Hons), FASSA]
When insuring against disability, most self-employed South Africans reverse the old wise saying and fail to see the trees for the woods. “They’re so focused on the distant possibility of permanent disability,” says Paul McKillen of FMI Income Protection Specialists, that “they ignore the far greater and more immediate probability of short-term, temporary income loss through an accident or illness.” Three in 10 self-employed people will suffer from a temporary disability before retirement which will seriously affect their ability to earn, and yet only around 6% of disability premiums sold in SA cover such an eventuality. Another telling statistic is that someone in their 40s is 25-times more likely to have a short-term injury or illness of some kind than a long-term one. “Temporary income protection is a misunderstood and under-insured risk,” says McKillen, and he warns that it is leaving a group of self-employed people and commission earners, who number around two million in SA, horribly exposed. Anyone working in a large organisation with support systems like sick leave and short-term employer loans can ride the 11-week recovery period for illness or accident, which is the industry average for such claims, but a self-employed person would need a deep cash reserve to do so without cover. McKillen also points out that there can be long-term damage in many ways from short-term income loss. “Negative credit ratings, higher interest rates and even reconnection charges compound when you fail to meet a monthly debt obligation and, far more seriously, you
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He argues that temporary income protection (TIP) should be the first benefit put in place when constructing a disability portfolio, yet a recent FMI survey of one substantial group of personal financial advisers showed that over one-third were not offering it to their clients. “Maybe we need to separate the TIP category from the word disability because too many people, including advisers, assume that refers only to something long term,” says McKillen. He concedes that in the past the industry might have made it too difficult for clients to qualify and provided sluggish payouts which defeated the point of urgent, temporary cover, but he believes that has now changed. “There are now alternative products available to customers who are not medically underwritten and therefore don’t require a physical health exam, simply a short questionnaire. They offer quick, hassle-free payouts that protect you against any illness of injury that would prevent you from earning a living.” Policies are far more flexible in terms of level of cover, waiting periods (one day to 30 days) and duration (one month to 24 months). They are also adaptable; clients under the age of 32 are more likely to have accidents and less likely to become ill and therefore can take out an accidents-only policy. The policies are more reasonably priced than most imagine: R550 pcm in premiums can provide R25 000 pcm in full cover for up to 24 months (depending on specific criteria being met).
risk “Negative credit ratings, higher interest rates and even reconnection charges compound when you fail to meet a monthly debt obligation and, far more seriously, you might, under financial pressure, force yourself back to work too soon and further impair your health.”
McKillen has a raft of examples of where such cover has proved, if not a life-saver then, at the very least, a lifestyle saver: a commissionearning salesman suffering from depression; a fitter and turner with something as simple as a broken finger which prevented him from working; a car mechanic who was the gunshot victim of crime and needed eight months to recover; and people from almost every sector who have suffered debilitating back ailments. McKilllen concludes, “This is commonplace, almost routine stuff, and easy for any self-employed person to understand and predict, and yet alarmingly few of them are adequately prepared for it.”
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regulations
High costs threaten retirement fund sustainability Pieter Cronje, director at the Financial Intermediaries Association of Southern Africa (FIA)
Cost plays a major role when looking at the sustainability of retirement fund provision in South Africa.
Sustainability was the focus of the recent Institute of Retirement Funds (IRF) Annual Conference 2012, which took place from 2 to 4 September in Cape Town. Cronje, who presented at the IRF conference, says that the cost of retirement provision is something that the government has raised as a concern a number of times and in most instances, reference has been made to the cost charged by service providers and intermediaries. “While some service providers and/or intermediaries may have exploited members in the past, it is important to bear in mind that the cost pertaining to retirement savings is made up of various building blocks of which profit is but one,” he explains. One of the components that comprise the cost of retirement savings, which has not received enough attention, is the cost resulting from regulation, also known as the cost of compliance. “Service provision to retirement funds is normally a low margin business and it is necessary for service providers to pass on the cost of compliance to the member. The same principle applies to intermediaries,” Cronje continues. South Africa has not yet introduced the concept of a cost for benefit analysis when new regulations are introduced. “The FIA is in favour of the proper regulation of the retirement industry and strongly support the protection of members against exploitation, but has concerns about the cost of
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compliance to be passed onto members,” says Cronje. In recent years there have been a number of legislative amendments in the retirement sphere. “An increasing amount of regulations, requiring more involvement from the regulator, as well as additional procedures to be introduced by service providers and intermediaries to ensure compliance with the regulations, has emerged.” On the one hand there is a drive to protect members, but on the other hand, there is the need to encourage members to save more. “The higher the cost of those savings, the less members will be inclined to save. Ultimately, to ensure sustainability in the long run, there needs to be a balance between the two objectives.” According to Cronje, two recent pieces of legislation that impact this balancing act are Regulation 28, specifically the introduction of quarterly non-compliance reports, as well as a proposed directive for administrators, whereby quarterly reports on compliance and the appointment of a monitoring person will be introduced. “The value of some of the reports is questionable. As a result, the FIA is embarking on discussions with the regulator to consider a cost benefit analysis to be conducted on some of these reports in order to ensure that the best interests of members are served at all times,” concludes Cronje.
D N A E C N A N I F F T O N E T M N E E G M A T R N A A P M E D T N E M T INVES BCOM HONOURS FINANCIAL PLANNING WHAT WILL I LEARN? The purpose of this honours qualification is to develop the student’s expertise in the discipline of Financial planning. Qualifying students will have the skills to provide financial and investment advice to individuals and also reflect on the holistic implications of such advice. The following modules will help the student to achieve the purposes set out above: Investment Planning, Tax Planning, Insurance and Risk Management, Estate Planning, Employee benefits, Retirement planning, Case Study, Research Methodology.
WHAT WORK COULD I DO ONCE QUALIFIED?
WHICH PROFESSIONAL BODY COULD I BELONG TO? The Honours in Financial Planning offers a successful candidate an invitation from the Financial Planning Institute of South Africa (FPI) to take up CFP® professional membership (provided the candidate meets the other requirements of the FPI). For more information on the FPI and a career as a financial planner visit www.fpi.co.za.
CONTACT http://www.uj.ac.za/fininvestman Facebook: Finance@UJ
Students that qualify are employed in a wide range of financial planning specialities, the majority are employed by banks, retirement funds or other financial institutions as Financial Planners, Financial Advisors and Investment Analysts.
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