The Financial Planner magazine Special Edition (2015)

2015 Special Edition

The and Convention Official Journal of the Financial Planning Institute of Southern Africa

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Contents 4

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Letter from FPI

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retirement and investment

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Getting ready for the new normal

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Putting passion to paper

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Pre- and post-retirement planning key principles

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Planning for retirement

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Investment Planning for retirees

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Who is managing your investment risk

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The volatile relationship between risk and returns

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The fundamentals of a world-class retirement and investment planning value proposition

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Suitable investment planning for invesment

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Buy and Hold baloney?

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Goals based investing

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Preserving wealth and retirement

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Tax on retirement fund lump sum benefits

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Tax at retirement

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From policy development to implementation

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letter from fpi

Journey to define our role

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he past months have been incredibly challenging and the journey to define our role as an Institute has been a critical one. Although tough, we have had some exciting times where our efforts have translated into good service delivery for our members and stakeholders at large.

We found ourselves operating in a space where economic instability, corruption, lack of service delivery, xenophobia and cybercrime dominated. We even had teachers and police officers cashing in their retirement funds due to lack of clarity or understanding of these funds.

As CFP® professionals we are affected directly and indirectly as it’s our clients who are affected by the impact of these issues.

Excellent financial planning objectives cannot be achieved in a country that is affected by economic instability. This highlights the need for financial planning education and advice to function as a

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tool to eradicate corrupt activities. We know that the more people are educated, coached and mentored about their finances, the more they will use their finances responsibly.

The Financial Services Board (FSB) Retail Distribution Review (RDR) paper came out on 7 November 2014 inviting comments from the financial services industry. After much debate and discussion, our members have received RDR well; as it ultimately defines the environment we as CFP® professionals want to work in.

FPI members have taken the lead, demonstrating their commitment to the industry by participating in the structure set up by FSB and together with the views and comments of FPI we anticipate fruitful results.

There is no doubt that RDR, Treating Customers Fairly (TCF), Protection of Personal Information (POPI) and Twin Peaks are going

to change the way we do things, if they have not yet. A quote by Charles Darwin, rings true; “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”.

Being a change agent in an ever changing world is imperative if we want to remain relevant in addressing the financial needs of our clients.

We need to continue serving our clients with utmost passion and pride. It is our calling to address the challenges they encounter in investment, retirement and estate planning. Taking on the challenge and guiding our clients requires perseverance and commitment.

I firmly believe that the success rate in serving our clients and maintaining a good relationship with them boils down to one question – how will our financial planning firms continuously lead and manage its client base. By building a sustainable business with proper succession planning in place, we ensure that the interests of our clients are always first. It is with this in mind that our practice management strategies must include investing in our people by transferring our knowledge and experience.

As CFP® professionals, we are always reminded to master the skills of management and leadership which include the disciplines of finances, logistic strategy and planning as well as aspects of team work. This essentially adds to the value of service we offer our clients.

The industry looks to us, CFP® professionals, as leaders and it’s our responsibility to coach and mentor our clients to make sure that they don’t end up with bad debts. We have to lead them to paths that allow them to create and preserve their wealth.

We recently attended Financial Planning Standard Board’s (FPSB) meeting in Paris which was attended by representatives from more than 24 countries. The intention and objective of the meeting was

to continue the journey of crafting and enhancing the financial planning standard and how we can benefit from other countries.

FPSB’s creation in 2004 was a logical step in the evolution of financial planning and the CFP® certification programme. It evolved from the idea of a professional practice called financial planning in the early 1970, to the call for an independent organisation to oversee CFP® certification.

FPI is still the only institute to bestow the CFP® designation on its members who have soldiered through the entire certification process. CFP® professionals operate in neighbouring countries like Namibia, Lesotho, Swaziland, Botswana and other African countries advocating the CFP® designation. We want to be the gateway to improving the economic state of Africa and its people through financial and literacy education.

It is with this in mind that our practice management strategies must include investing in our people by transferring our knowledge and experience.

A heartfelt thank you to my colleagues and fellow CFP® professionals, the Board , CEO, FPI Office and the financial planning community for dedicating your careers to providing quality financial planning advice. FPI would not have achieved what it has, if it had not been for the value you add.

Thank you for being relevant and committed to your role; together we can make financial planning accessible to all South Africans.

Adv. Sankie Morata, CFP® Board Chairperson | Financial Planning Institute (FPI)

Are you a fiduciary professional?

Can you afford not to be a FISA member? Membership is open to anyone in the fiduciary field who meets our membership criteria, including financial planners, attorneys, and accountants.

FISA members are subject to a Code of Ethics demanding the utmost integrity and diligence.

Apply here.

practical experience. Register here by 3 September.

FISA offers the professional designation FPSA®* indicating competency and professionalism in estate planning, wills, estates and trusts. Read more at www.fidsa.org.za. *Fiduciary Practitioner of South Africa®

Attend the FISA conference on 10 September 2015 at the Sandton Convention Centre, for a powerful mix of academic thought and

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Director: Institute of Behavioural Finance

PROF MATTHEW LESTER

Professor: Rhodes University

KATE HOLMES

Founder and CEO: Belmore Financial, LLC

WARREN INGRAM, CFP®

Director: Galileo Capital

ROLAND ROUSSEAU

Equity and Quantitative Strategist: Barclays Africa Group Limited

REX COWLEY, MCIM, MCSI, MSc

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Co-founder International Wealth preservation, asset protection, retirement and succession planning

NOEL MAYE

GERDA VAN DER LINDE, CFP®

CEO: Galileo Capital

CEO of the Financial Planning Standards Board

CFP® professional: Consolidated Financial Planning

THEO VORSTER

PAUL NIXON, CFP®

ALEC RIDDLE, CFP®

Head: Alexander Forbes Research Institute

21 & 22 September | Western Cape @ GrandWest Casino

Head: Technical Marketing and Distribution Support; Barclays Global Investments and Solutions

KIM POTGIETER, CFP®

Director: Chartered Wealth Solutions

ANNE CABOT-ALLETZHAUSER

Retirement and Investment Convention 14 & 15 September | Johannesburg @ The Forum

17 & 18 September | KwaZulu-Natal @ Coastlands Umhlanga Approved Knowledge points

2.5

SPEAKERS

Approved Ethics points

The Financial Planning Institute (FPI), leading independent professional body for financial planners in South Africa, will be showcasing professional financial planning in the areas of retirement and investments in September. The focus of the two days will be on financial advice rather than on product offerings.

The conference promises to be very practical and educational.

We invest in you Retirement and Investment Convention

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n September 2015 FPI’s Centre for Professional Development (FPICPD) brings you an outstanding event not to be missed. A mini-conference that invests in those professional financial planners and advisers in South Africa, who spend hours of their time and knowledge every year investing in their clients. Over two days top speakers will be presenting topical and contemporary subjects in the fields of retirement and investment planning to members and non-members.

When and where: 14 and 15 September | Johannesburg, The Forum 16 and 17 September | Durban, Coastlands Umhlanga 21 and 22 September | Cape Town, GrandWest Casino

By Wessel Oosthuizen, CFPÂŽ General Manager: FPI Centre for Professional Development

The presenters consist of academics, global and local industry experts and financial planning practitioners representing some of the best our industry and institute has to offer. Attendees can look forward to a number of thought provoking and contemporary sessions over the two days.

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Noel Maye, CEO of Financial Planning Standards Board (FPSB), will be talking about financial planning as a global profession. Noel will also speak about the CFP® mark which is currently the professional mark of choice in 26 countries including most of the economic powerhouses in the world.

Kim Potgieter, CFP®, will share her insights, based on her recently published book, Retiremeant: Get More Meaning from your Money.

She will share her thoughts on the process of financial life planning – an approach that she has found enormously successful in helping her clients identify what they want, with the aim of living a meaningful retirement. Further she will convey what an effective planner should know in order to understand what his or her client wants to retire TO (not FROM) so as to plan for the client, not just for their money. She feels strongly that life planning creates a platform where clients are encouraged to talk about how they can get more meaning from their money in retirement.

Alec Riddle, CFP®, in his presentation “looking beyond the mountain” will highlight the many pitfalls that can be avoided by actively reviewing a client’s retirement plan, while also illustrating the many benefits thereof. As an example he will discuss the importance of a thorough liquidity analysis pre-retirement (projected forward 20-30 years) to enable you to know exactly how much cash is accessed from clients’ retirement funds to fund capital outflows effectively and efficiently. Amongst other things he will also be focusing on the 3 stages of retirement as opposed to retirement being a linear line, split into the ‘go go’, ‘slow go’ and ‘no go’ phases of retirement.

Kate Holmes, CFP®, will highlight the importance of the new generations and alternative ways of doing financial planning. She will focus on virtual retirement planning but will also share with us how to build a virtual practice, add value, reduce expenses, as well as expand your client base. She is of the opinion that as client’s move into retirement, travel more and possibly move away, it’s important for your practice to evolve and continue providing value to maintain and grow those relationships. Kate also believes that you should look towards the next generation of clients and planners, and think about how you can transition to a more lifestyle-based practice.

You will learn how to service your clients in the digital age, attract and build trust with new clients, regardless of where they’re located and reduce expenses while creating a business and a life you love.

Warren Ingram, CFP®, will end the first day talking about investment planning for retirees which will be a great end for the first day and an excellent introduction into the second day where more investment related topics will be covered. He will share with us that instability is the “new normal” for retirees in South Africa and financial planners who service retirees need to ensure that they are advising their clients correctly to cope with these conditions.

According to Warren it is imperative to manage your client’s expectations about their future investment returns without creating panic. Especially where issues like the slowing economic growth, political instability, increased longevity and potentially poor returns

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from equities in the future are highlighted by the media. He will share some ideas on how to review investment strategies with your clients, hopefully keep them calm in volatile conditions and ensure that they don’t make irrational decisions at the wrong times. In particular with a focus on rebalancing of asset classes, especially the equity allocation, reinforcing the futility of market timing and the importance of a long-term focus.

On the second day Gerda Van der Linde will share with us thoughts, based on global research, about best practice risk profiling in a highly regulated advisory world. She will provide a framework for risk profiling which will assist the financial advisor on how to give suitable advice and reach informed consent from the client for such advice. Gerda will also share and discuss the building blocks and processes to reach suitable advice and to meet suitability guidelines as reflected in current and proposed legislation. The objective of her session will be to provide guidelines to financial planners to manage client’s investment expectations and also emphasize non-investment related benefits of financial advice to clients.

Paul Nixon, CFP®, will talk about what the cost of being human will be. He will look at different questions on this topic, for example: What does it mean to us and prospective investors? Is it merely a theory or hypothesis with limited practical application? Are the challenges from supporters of the Efficient Markets Hypothesis valid? What does it mean to be “rational” and limit the impact of emotions on investing?

Is there a behavioural cost to being human? Paul’s session will provide a brief journey with supporting evidence through the field of cognitive psychology where we discover our limitations in processing information, the need to use mental schema’s or shortcuts to cut through vast amounts of stimuli and the severe limitations of classical economic and utility theory. This culminates in an understanding of what our quantifiable value (as advisers) to clients really is.

Prof Mathew Lester a member of The Davis Tax Committee (DTC) will talk about recently released proposals regarding estate duty in South Africa. This may have a profound effect on estate planning as we know it in South Africa today. He will explain the effects of the DTC proposals and analyse the world-wide trends regarding wealth taxes.

Last but not least Anne Cabot-Alletzhauser will discuss what financial advisors may be missing in the value-add debate. She will also look at what exactly the advisors value-add is. She will touch on why the investment value add is not the central point that was alluded to and will share some thoughts on the active versus passive investment debate.

Adding to the above Rex Cowley will be talking about “The use of international retirement products for SA residents and their use in financial planning”, Roland Rousseau talks about “Who is managing your Risk?” and Theo Vorster updating us on the current economic situation; it is clear that we have a presenter lineup and topics of high quality. We can certainly look forward to a very interesting, thought provoking and informative two days in the fields of retirement and investments in September.

More on the speakers Noel Maye

CEO: Financial Planning Standards Board (FPSB) Noel Maye is the chief executive officer of FPSB. Before joining the organization, Maye was senior vice president of Certified Financial Planner Board of Standards, Inc., (CFP Board) in the United States, where he oversaw the international, legal, consumer and public affairs, and communications departments, and served as corporate spokesperson. As CEO, Maye is a non-voting member of FPSB’s Board of Directors.

Academic accomplishments: BA, BAI Electronic Engineering, MBA, Executive Certificate in Global Management Professional accomplishments: Certified Association Executive credential, Completed the National Association of Corporate Director program, lead auditor for certification bodies through American National Standards Institute.

Kim Potgieter, CFP®

Director: Chartered Wealth Solutions

Alec Riddle, CFP®

Executive Financial Planner: Consolidated Financial Planning Alec was named FPI Financial Planner of the Year in 2009 and has spoken on a variety of financial planning topics in all of the major cities of South Africa.

In addition to his financial planning career, Riddle competes in Ironman events and won the Half Ironman World Championships in 2011 in the 50-plus age group. He has given numerous inspirational talks about his journey from a jobless, overweight “couch potato” to a successful financial planner and Ironman champion.

Academic accomplishments: BA Ed, Mathematics, Postgraduate Diploma in Financial Planning (UFS) Professional accomplishments: FPI Financial Planner of the Year 2009, 21st in the Comrades Marathon (1988), Comrades Marathon commentator for 13 years (until 2004)

Kate Holmes, CFP®

Founder and CEO: Belmore Financial, LLC

As a CERTIFIED FINANCIAL PLANNER® professional and one of only two Registered Financial Life Planners in South Africa, Kim is well qualified to guide people to pursue the life they really want: freedom of choice from putting money in its place... the right place. Kim’s Industrial and Clinical Psychology degrees further enable her to assist clients in merging their money and meaning, bringing a fresh perspective to retirement. With this vision, Kim specialises in changing the way people view retirement in South Africa, strongly believing that retirement should been seen as a new chapter.

Kate Holmes, CFP® is the Founder of Belmore Financial, LLC, a locationindependent practice she started in 2013. She left an investment advisory firm, after 8 years’ service, to create a practice that she sees as the future of financial planning. Kate works with all clients for a flat fee or ongoing monthly subscription, regardless of their assets, net worth, or location. Kate is active in the financial planning industry, serving on the CFP Board Women’s Initiative Council, as a CFP Board Ambassador to Las Vegas, as the Financial Planning Association (FPA) of Nevada President-Elect

Academic accomplishments: B Social Science, Psychology, Postgraduate Diploma in Financial Planning Professional accomplishments: Author, FPI Board Member, Summit TV appearances

Academic accomplishments: Bachelor of Arts, Photography, Financial Planning Professional accomplishments: Author, President-Elect: Financial Planning Association of Nevada, CFP Board Ambassador

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Warren Ingram, CFP速 Director: Galileo Capital

Warren has been a financial planner since November 1996 and a CFP速 professional since 2005. He was the FPI Financial Planner of the Year in 2011 and the FPI Media Award winner in 2013. Warren co-founded Galileo Capital with his business partner, Theo Vorster in 2005. He is the author of 'Become your own financial advisor' and is a regular guest on 702 radio and Cape Talk with Bruce Whitfield. He also writes a monthly column on investments for Moneyweb and the Sunday Times and co-host Smart Money on Business Day TV. Academic accomplishments: Bachelor of Social Science, Economics, Postgraduate Diploma in Financial Planning Professional accomplishments: Author, TV presenter, FPI Financial Planner of the Year 2011, FPI Media Award winner 2013

Gerda can der Linde

Director: Institute of Behavioural Finance Gerda is often one of the 'go to' people on the subject of client risk profiling and behavioural finance in financial planning. She became interested in behavioural finance while she was consulting with major financial institutions responsible for advising individual and corporate clients, and pension funds. She is currently working towards her masters degree in Behavioural Finance and is researching the role behavioural finance can play with regards to regulatory compliance in the field of investment advice. She regularly presents training workshops and seminars on behavioural finance and consults to institutions on the various applications of this field.

Academic accomplishments: BA Hons, Psychology, Executive Development Programme Professional accomplishments: Certified Whole Brain Practitioner, Director

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Paul Nixon, CFP速

Head: Technical Marketing and Distribution Support; Barclays Global Investments and Solutions Paul started as a financial advisor in 2001 and in 2005 he opened his own practice specialising in wealth management. He later further specialised in investment management and assisted the University Free State with setting and moderating assignments and exam papers for their postgraduate investment courses. He is currently part of the Barclays Global Investments and Solutions team and is responsible for investment product enablement, ensuring quality, consistent and appropriate investment advice across the distribution channels. Paul travels regularly to their London offices to link their UK behavioural finance capability with the South African markets.

Academic accomplishments: Postgraduate Diploma in Financial Planning, Bcom Honours in business, management, marketing and related support services, current MBA student Professional accomplishments: Author, Head of Department

Professor Matthew Lester Professor: Rhodes University

Rhodes University Professor Matthew Lester was educated at St Johns College, Wits and Rhodes universities. He is a chartered accountant who has worked at Deloittes, SARS and BDO Spencer Steward. A member of the Davis Tax Committee investigating the structure of aspects of the RSA tax system, he is based in Grahamstown. Apart from teaching at Rhodes, Matthew lectures to a wide range of South Africans on taxation and money matters. He also writes the weekly column 'Tax Talk' in the Sunday Times Academic accomplishments: Bcom CTA, H Dip Tax Law Professional accomplishments: CA(SA), Rhodes University Vice Chancellors Distinguished Teaching Award 2001, SAICA Southern region Honours Tie 2009.

Anne Cabot-Alletzhauser Head: Alexander Forbes Research Institute

Anne Cabot-Alletzhauser heads up the Alexander Forbes Research Institute – an initiative that looks at the full spectrum of issues that confront the savings and investment issues for South Africa in particular and Africa in general. In 1994, she pioneered the development of the multi-manager management approach of pension fund management that has become the hallmark of that industry today. She has been an asset manager for 32 years, managing pension fund assets in North America, Japan, the UK, Europe and South Africa, with her primary focus being risk management, asset allocation, quantitative modelling and how the consulting industry can enhance their value-add to investors.

Academic accomplishments: BA and MA, Developmental Anthropology Professional accomplishments: Author, CFA Global Advisory Committee on Conferences and Education, FTSE/JSE’s Advisory Committee on the FTSE/JSE Indices.

Roland Rousseau

Equity and Quantitative Strategist: Barclays Africa Group Limited Roland has extensive international and local experience in portfolio construction, risk management and quantitative research roles that allows investors to adapt to changing market conditions more effectively. Currently an active member of the FTSE/JSE Index Advisory Committee which is responsible for all official stock exchange index calculations, design and quality control in SA. He is also the co-host of the weekly CNBC television investment program called Wealth Quest that critically debates the latest investment concepts and fund products.

Rex Cowley

Co-founder: Overseas Trust and Pension Rex has over 21 years’ experience in the wealth management industry and is recognised as a thought leader in the sector, having helped shape the international pension and retirement industries through the creation of award-winning, market leading and tax efficient products. He has held board positions with a number of listed blue chip regulated investment and fiduciary businesses. His successful track record in developing market leading products has earned him independent acclaim for his endeavours.

Academic accomplishments: MCIM, MCSI, MSc, B-Tech, Dip M Professional accomplishments: Author, Chaired industry master classes, Contributes to government consultation papers, Presented at investment and retirement seminars around the world.

Theo Vorster CEO: Galileo Capital

Theo is the Chief Executive Officer of Galileo Capital and has been in the financial services industry for 16 years.

Most recently Theo was the Managing Director of the largest private client stock broking firm in South Africa. Theo is a regular market commentator on Moneywebs radio broadcasts on RSG. Academic accomplishments: Bcom Honours, Investment Management Professional accomplishments: Author, CEO, commentator

Academic accomplishments: BSc Economics, MBA Finance Professional accomplishments: Financial mail seven times #1 analyst in quantitative research, CNBC’s Wealth Quest co-host

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SERVICE SECURITY SUPPORT

OPES International Retirement Plan A unique wealth management solution for South African tax resident Members

OPES is an International Retirement Plan specifically developed for the South African market. It provides offshore retirement diversification and addresses many of the concerns facing the South African investor and their wealth.

Key Features and Benefits -

Tax Implications

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• Not subject to Donations Tax (not a gift) • Outside of Member’s estate • No tax on income and gains generated in the plan, prior to drawdown • Benefits by way of return of capital are not taxable • The Member can take full or part benefit, leaving the remainder for his/her nominated beneficiaries which can be a person or Trust • The remaining balance on death of the Member does not form part of the Member’s estate and is passed on to the nominated beneficiaries without deduction of death duties

OPES closely mirrors the features of a South African Retirement Annuity but with far greater flexibility No cap on contributions Access true international investments for diversification Not subject to Regulation 28 or asset swap limitations Full asset protection Mitigation of foreign probate Effective estate planning vehicle Significant succession planning options Highly tax efficient Benefit from a hard currency of your choice Flexible income options including lump sum, drawdown or annuity

(South African Tax Resident Members only)

Application Examples

Overseas Trust & Pension PO Box 285, Elizabeth House, Les Ruettes Brayes, St Peter Port, Guernsey, GY1 4LX Telephone: +44 (0) 208 209 9251 E-mail: contact@overseaspension.com

• To hold the exportation allowance • To hold assets in a major currency and outside of the South African common monetary area • Transfers from existing offshore trusts • Transfers of existing life policies • To hold assets of immigrants moving to South Africa • To hold assets of emigrants leaving South Africa • Consolidation of existing offshore assets held in own name

Overseas Trust and Pension Limited is licensed by the Guernsey Financial Services Commission under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000. Overseas Trust and Pension Limited is registered in Guernsey number: 55506.

Overseas Trust and Pension is exempt from the provisions of the FAIS Act in South Africa.

www.trustandpension.com

retirement and investment

Getting ready for the new normal in

Retirement Planning O

By Noel Maye, Chief Executive Officer, Financial Planning Standards Board Ltd.

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ver the past few months, I’ve met with regulators, firms, consumer groups, media, Financial Planning Service Board (FPSB) member organisations and CERTIFIED FINANCIAL PLANNER® professionals in nine of FPSB’s 26 member territories. The topic of helping people take control of their finances so that they can have the retirement of their dreams comes up frequently. However, on a recent conference call discussing the risks facing retail investors, conducted as part of FPSB’s response to the International Organization of Securities Commissions (IOSCO) annual investor risk survey. One of the participants made a provocative statement: “given that we know a sizable portion of those facing retirement lack sufficient funds, aren’t we failing on one of our most important social contracts – the idea that if you work hard, pay your taxes, raise your family and contribute to society, you can retire well”. This challenge has been humming in the back of my head as I have traveled the world these past few months.

Therefore I believe, it is an issue worthy of being tackled – how can we, the global financial planning community, ensure the world retires well?

Clearly financial literacy is one part of the equation. At an IOSCO-IFIE conference in Kuala Lumpur in May, attendees focused on how to motivate investors to take control of their financial futures. Throughout the conference, one theme continued to surface - the majority of people don’t seem to prioritize or adequately prepare for retirement in a manner consistent with the seriousness of the impacts good or bad decisions have on overall quality of life. The conference leadership, which included IOSCO’s Secretary General David Wright and Organisation of Economic Cooperation Development’s (OECD) Deputy Head of Financial Affairs, Flore-Anne Messy, talked about the importance of capitalising on behavioral finance traits. She introduced “nudges” to facilitate better financial decision making when it comes to investing and retirement, introducing regulations

planners – the fact that people are required to continue to make sound financial decisions and engage professional advisors as they age, while potentially experiencing diminished mental capacity. When does the level of trust built into the financial planning relationship require financial planners to call for medical interventions into a financial planning engagement? How should the financial planning profession address this issue? It’s another topic worthy of debate within our global community.

On top of increased market complexity and increased longevity, we’re also seeing the emergence of automated investment advice tools (or “robo-advice”) in some FPSB territories. Earlier this year, FPSB completed a study on the use of automated-advice tools globally, and the impact these tools have on the clients of financial planners. Respondents note that automated advice brings both opportunities and threats to the financial services market place, potentially putting more retail investors at risk while also increasing access to advice and products to larger segments of society. Respondents suggested that automated advice tools could address limited-scope activities, but would be unlikely to exclusively address the comprehensive needs or behavioral finance issues of financial planning clients or high net-worth investors. The respondents noted that while generally, use of automatedadvice tools is not widespread; they predicted the situation will change, with use growing within the next 12-18 months.

and oversight models to reduce conflicts, increase transparency and support better outcomes for investors as well as those planning their retirements.

On behalf of the global financial planning community, FPSB promoted the value of having a financial plan and working with a competent and ethical financial planner, such as a CERTIFIED FINANCIAL PLANNER® professional. Previously, in a comment letter to IOSCO, FPSB outlined the importance of ensuring that credentials and qualifications used by financial advisors and financial planners are legitimate and clearly communicated the holders’ competencies and capabilities to the public.

Another theme that emerged at the IOSCO-IFIE conference was the notion that, retirement has been described as a destination for too long, when in fact we

need to start talking about it as a journey.

The old notion of spending 30 years accumulating to then spend down your wealth over a shorter retirement period is increasingly becoming moot. In many developed markets, the new normal is that time spent in retirement can exceed time spent working. It’s clear that we need to take a new approach to talking to people about not only their money in retirement, but about what the nature of retirement is likely to be and how best to prepare for it. Central to this will be the notion that the public will need to continue to be guided by competent and ethical financial planners through decades in retirement so that they have the quality of life they seek and do not outlive their accumulated wealth.

Another participant in FPSB’s investor risk research raised the consequence of increased client longevity for financial

As the financial planning community in South Africa deals with the introduction of the Retail Distribution Review (RDR), changing client demographics and retirement needs, and an increasing demand for good advice, there is a tremendous opportunity to highlight the benefits of financial planning as well as the value of working with a CFP® professional.

I’m looking forward to my September trip to South Africa, and to engaging in dialogue with financial planning stakeholders on how to tackle the critical issues related to investing and retirement to support the emergence of financial planning as a distinct profession around the world, with the CFP ® marks its symbol of excellence. In an increasingly complex financial world, with a lot of challenges and opportunities ahead of us, the good news is the world is coming to financial planning. The better news – the global CFP ® professional community is more than up to the challenge.

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retirement and investment

Passion Putting

to Paper

What moves a young woman in her early twenties to make retirement her passion? Kim outlines the reason for her unique life’s mission, and how this translates into investing in her clients.

T

he early deaths of my parents (from a hijacking and cancer) prompted me to question the notion that so many hold to: to wait for retirement to live the lives they had always dreamed of. This started me on a journey of learning and discovery: how was retirement viewed by the average person, and what advice were the experts offering?

By Kim Potgieter, CFP®

Director, Chartered Wealth Solutions

Having attended a number of conferences and presentations, I was disappointed to find the message was the same, and it was a gloomy one: make sure you have enough money or you will have an unhappy second half of life. The discussions centred around savings, restraint, a return on investments.

Does this sound familiar to you as a financial planner?

But what about a Return on Life?

You may have had this experience with your clients who are approaching retirement.

After years of hard work and saving for a better life, many retirees find themselves restless, hopeless and, yes, even depressed – even if they have more than enough money to fill their lives with travel and leisure activities (what they tacitly believed retirement was meant to be all about!).

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I am grateful that, early in my financial planning career, I encountered a new view – the most effective financial planning has as much to do with personal goals and dreams as it has with rands and cents.

I attended the Walt Disney leadership course, and those principles urged me to take action: “All our dreams can come true, if we have the courage to pursue them!”

My journey to become a financial planner, a life planner and director of a financial planning practise has culminated in the publication of my book.

There was something at my core that demanded that this book be written. Why? Because I am convinced that planning for retirement has to be about more than the money. It is equally important to invest in yourself. A life plan and a financial plan together create a holistic plan to take you into retirement. Yes, make sure your money is properly invested, but what is that money for? I think these are crucial questions that a financial planner should be asking his or her clients to help them invest in themselves.

A life plan combined with a financial plan is the secret, I believe, to a meaningful retirement for your clients. Are we at times somewhat confused when our clients are receiving a great return on their investments,

yet they still seem restless? Could it be that they still need to find significance in their lives, something they may not have given consideration to in their busy working years.

The tagline: Money + Meaning = Magic indicates the result of investing, not just your clients’ money, but also looking at how they want to invest their time, energy and talents. I believe that understanding your relationship with money is crucial to achieving freedom. I urge my clients to think of their first money memory, and it becomes clear that 40, 50, even 60 years later, this memory is still dictating how they feel about and manage their money. Check this with yourself: even as a financial planner, you may still be controlled – possibly contrary to all logic – by a memory about money that you had all but forgotten.

Numerous life planning meetings and conversations with clients have taught me that investing in clients and their lives is a way of investing in myself, my business and, ultimately, the financial planning profession. I had been witness to remarkable transformations in the lives of our clients, and believe that financial planners can play a significant role in helping clients recognise that money is your servant, not your master.

I witnessed the dysfunctional relationship that my parents had with money (he, using it to control the family, she, in a powerless position of always having to ask for it), and recognised how that had shaped my own attitude towards it. These kinds of lessons prompted me to include a number of practical exercises and actual examples in the book – all to help my readers discover the keys to making retirement a triumphant transition. Of course, it is my hope that financial planners who read my book will derive as much benefit – and yes, enjoyment – from using those tools.

I know that were I retired right now, I would be living my life no differently. I love our definition of retirement: Retirement gives you the freedom to achieve your yet unfulfilled dreams and goals, on your own terms and in your own time.

My hope is that your clients will have that experience of retirement because of the guidance and advice you, their trusted planner, has given them.

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retirement and investment

Pre- and post-retirement planning

key principles Retirement planning, one of the major pillars of any client’s financial plan and any financial advisors financial needs analysis and planning process, holds some very pertinent key principles to take note of from day one. This article will enhance such advisors intellectual property going forward and no matter your tenure.

C

By Kobus Kleyn,CFP® Director, Kainos Financial Services

18

ontrary to popular belief, pre-retirement planning does not have a specific start date and some advisors believe the actual start date to be when an individual first starts working. The assumption is fair but there are many parents who already start retirement annuities for their children as a long term Christmas gift or similar from as early as 12 years of age. They also do this to ensure that they leave a legacy that will add real value the day their children get to retirement age while at the same time creating an investment and retirement culture from an early age.

Retirement planning through timely investment strategies should start as early as possible. As Albert Einstein said, “Compound interest is the eighth wonder of the world. He, who understands it, earns it… he who doesn’t… pays it.”

If starting early is important to long term pre and post retirement success and longevity, then how much to save, capital growth and preservation of capital during the preretirement stage is also important.

The rule of thumb is to invest around 15% of your income towards various types of retirement vehicles from the age of 25. It

certainly does not only consist of retirement annuities or company retirement funds but may include properties, unit trust, shares, business interest, endowments, deposits, containers, and so many more. For every 10 years you start investing late you would have to add 5%.

Following this rule of thumb your client would accumulate between 10 to 15 times their annual income at the date of their retirement. This would allow for a permanent pension income at around 70 % of their current earnings; considering that there won’t be children or dependants to take care of as well as no debt at the retirement date somewhere between the ages of 55-65, this percentage would be sustainable.

It is important that your clients stick to your recommended retirement strategy that has been put in place through your financial planning process. This is especially important in the case of clients, who go through life changing events such as resignation, retrenchment etc. especially when having to withdraw from the company retirement fund. The same applies to your clients who are self-employed entrepreneurs and professionals. Preservation and not interrupting the financial plans put in place during life changing periods is critical, and a contingency plan should always be in place.

Another crucial ingredient of a successful post retirement plan and to obtain the objectives above is capital growth. This will come from a well-diversified and balanced investment strategy over the long term with absolute consideration, to what I believe is the main principle of retirement investment strategies, “time spent in the markets and not trying to time the markets”, with full acknowledgement to the life stage (lifetime) investment philosophy of your clients from an aggressive equity exposure ( CPI + 5-7 %) from a young age to conservative over the last 2-5 years ( CPI +2-4 %) and vested over last year or so (CPI and mostly cash) pre-retirement date.

Product choices would be driven by capital available, risk profiling, dependencies, life expectancy and security to name but a few key drivers. One such choice could be a conventional life annuity where the product simply considers the capital and age of the annuitant. It will define a guaranteed monthly pension for life with or without annual increases to maintain some pur-chasing power, which should include a spouses annuitant income if alive as well. There are many variants on such life annuities which I will not go into at this stage, as I personally believe these products meet the needs of very few retirees within South Africa at retirement stage.

The product I prefer mostly, and I believe from discussion with my fellow financial advisors, planners and CFP® professionals, is the living annuity products. This is due to its significant flexibility to retirement needs over the post–retirement period.

Living annuities allow the pensioner to plan retirement income on a needs basis and review it annually on the anniversary of the policy. Income can be selected between 2.5% to 17, 5% of capital and consideration should be given to the Association for Savings and Investment South Africa (ASISA) drawdown recommendation tables on longevity.

The general recommendations of average retirement at the age of 63 would be 5%.

This however depends mostly on capital available and longevity. The tables are more specific on the range and are also gender dependant. The one other critical driver on drawdown rates would be your selected investment strategy and risk profile, which may allow for a lower or higher drawdown

outside of the ASISA tables which is only a guideline at the end of the day.

On a living annuity, frequent servicing is crucial and investment strategies even more so. The same principles I mentioned above regarding a well-diversified and balanced investment strategy over the long term, would be pertinent to managing living annuities.

Post-retirement income from a living annuity will test your fidiciary duties on an ongoing basis with regards to longevity, investment and income variability risk. However, due care and dilligence should be taken under the Financial Advisory and Intermediary Services (FAIS) Act and (Treating customers Fairly (TCF) at all times.

In conculsion as financial advisors we have a major role to play within our clients life long retirement planning. Therefore we need to educate ourselves at all times on making sure we get it right to ensure the peace of mind for future retirees.

Now that you have been able to get your clients to post-retirement planning stage, there are new challenges to ensure the longevity and quality of life. This can have the same duration in years as pre-retirement which on average can be 30 years either way depending on various factors.

The first step is to get your client into the right product choice from day one. With a myriad of post-retirement products available this is never an easy or simple fiduciary duty for any advisor. Although there are many product choices, there are indeed really only two types of annuities which would be defined as life or living annuities no matter what names they carry.

19

YOU ADHERE TO THE

HIGHEST STANDARDS,

YOU PUT YOUR CLIENTS

INTERESTS FIRST

YOU ARE AN ACCOmPLISHED CFP速

PROFESSIONAL

LET PEOPLE

KNOW

FCB\10016856/JB/E

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retirement and investment

Virtual

Financial Planning Stop for a moment and look around. Chances are you’ll have to look up from your laptop or smartphone with which you have been so diligently working (or procrastinating!). Technology is around us in all aspects of life and the opportunities it’s providing us with are worth getting excited about, even in the areas of retirement and financial planning.

T

By Kate Holmes, CFP® Founder and CEO, Belmore Financial, LLC

22

he last 15 years have seen a dramatic shift in how we acquire information and get things done. More and more people are trading online, eliminating the need for stockbrokers to place trades by phone. Clients can access up-to-date account information from the convenience of their own homes, rather than wait for a paper statement to arrive weeks later and relationships can be maintained by phone or video when a client retires and moves away.

The necessity for paper account documents,

mailing items back and forth, creating hour-long agendas for quarterly meetings, and having a physical office are all but history. It is not only possible to run a hightouch completely virtual financial planning practice today, it’s actually happening, and it has great benefits for financial planners and clients alike. Virtual financial planning provides increased scalability, convenience for financial planners and clients, the ability to work with your ideal clients regardless of location, and an attractive model for the next generation of clients and planners.

Building trust and the service model A top concern of adopting technology and eliminating so much of the stuff we do for clients relates to trust. We have traditionally built client relationships by having clients pause their day, drive to our office, meet while sitting around a nice table, and walk through the hour-long agenda we created so their trip to us felt worthwhile. None of those details build trust. What does is our integrity, honesty, consistency, intent, competence and transparency. These are all characteristics that shine through regardless of whether we’re in person, over the phone, on video, or communicating via email.

There are multiple additional benefits to building a virtual relationship with clients.

In a world where there does not seem to be enough hours in the day, we need to remember our clients are often equally busy. Finding time for an in-person meeting may be challenging, but taking 20-30 minutes for a check-in call to discuss one or two items is relatively easy. This avoids a potentially overwhelming quarterly or semi-annual meeting, and allows us to focus on accomplishing a few things at a time. Over the span of a year we may have 10 short meetings, during which we tackle 10-15 aspects of a client’s financial life, rather than 2-4 meetings focusing on market performance of the months just passed.

of potential clients in their region.

By going virtual, you remove these geographic barriers. Do you specialise in working with engineers, or veterinarians, or family business owners? Whatever your niche, you’re able to work with clients near and far. This not only helps to grow your business, it helps clients work with someone that truly understands them, rather than the generalist just down the road.

expanding. Doctors and mental health counsellors will now meet and collaborate with clients virtually. So if you or your clients love what they do, but perhaps don’t love the commute, the hours, or the need to get out of comfortable pyjamas in the morning, adopting virtual efficiencies can be an ideal alternative to traditional retirement. What better way to show clients this than to be the example yourself?

Retirement planning for all

You may also be thinking about the next generation of your firm, in terms of financial planners and clients. The service models and firm processes that made sense 20 years ago are not likely to attract the clients needed to replace an aging client base — or the financial planners needed to replace aging owners! Younger generations are accustomed to doing most things electronically — shopping, booking travel, staying in touch with friends and family and paying bills. As you plan for the next five to 15 years and beyond, the benefits of adopting virtual financial planning cannot be overlooked.

As we work with clients on achieving their retirement dreams, we need to ensure we are also planning for that next phase of our own lives and businesses. We understand the health benefits of staying mentally and socially active in retirement, and there’s nothing that says retirement needs to be a dramatic leap from going into an office Monday-Friday to having nowhere to go. One of the greatest aspects of what technology provides us is flexibility. We can work from anywhere, at any time of day. If you want to spend three weeks in a villa in the south of France, you can do so without missing a beat.

The options for moving various careers into a virtual environment are constantly

Whether you test the waters by adding a few virtual aspects or completely transform your firm, the beneficial results will be felt quickly by all.

Running a virtual financial practice is about much more than just the forum for meeting with clients. It is about how you collaborate with them and the added value you can provide. As clients get nearer to retirement, their plans may start to shift, requiring an update or additional projection to be run on their financial plan. Traditionally, this would be a cumbersome and time consuming process. In recent years, however, there has been a big uptick in cloud-based financial planning software that allows us to easily make changes in real time in a visually appealing way the client can see. New providers are regularly coming to market so this is an area to watch closely.

Growing your business Historically, clients have been limited by the financial advisors within driving distance, and financial advisors, likewise, by the pool

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retirement and investment

For Retirement

P

lanning for retirement carries with it a tremendous amount of responsibility, as our clients are placing an enormous amount of faith and trust in our professional capabilities. Think of it this way, we are being entrusted with a whole lifetime of work and retirement savings, in order to ensure that the client and his/her family can achieve their future goals, while also ensuring that they have enough income for the rest of their lives.

By Alec Riddle, CFP Executive Financial Planner, Consolidated Financial Planning ÂŽ

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What I have learnt is that almost everybody has a workable plan on paper and we can all develop plans that look good to the naked eye. The same with being a running

coach, virtually all coaches can put together a good training programme on paper.

The challenge, in my opinion, is ensuring that our clients get from A to B with the greatest efficiency as possible. Think of it this way, top coaches in the world are not judged upon the programmes they compile, but on how well the athlete does, in other words did they make the team, the podium, or achieve their goals?

Because a retirement plan is often 20+ years, we as financial planners are not judged on the outcome and don’t generate referrals because of the outcome, but we are judged on how well the plan is presented

and how well we sell ourselves and the plan.

I would like to be judged as a professional financial planner long after I have retired, by the number of positive outcomes, in other words how many (hopefully all) of my clients successfully achieved their (realistic) goals and had sufficient income throughout.

When I attended the FPA Convention in San Diego in 2011, I was fortunate to listen to some excellent and thought provoking presentations and this has assisted me to think out of the box.

Studies have shown that virtually all retirees have a great plan for the first 10 years and in fact, often won’t realise what is lurking in the second decade of retirement. Thus, I have an educational presentation for clients which addresses the need for us, as a team, to look beyond the mountain.

This is a continuous process and stresses the importance of regularly reviewing our client’s plans.

Some of the most important things to consider are very often overlooked, possibly due to their simplicity and these can have a material impact upon the plan, examples include:

1. Cash flow needs Liquidity in a plan is vital to ensure our clients have access to funds required to fund their capital needs. We cannot simply select a lump sum to withdraw from the retirement funds accumulated, based upon tax efficiency at retirement. We have to weigh this up with potential tax inefficiency 10+ years down the road.

2. Personalised inflation

4. Withdrawal rates Investments don’t go up in a linear line and we can’t expect our retirement plans or income to go up in a linear line either.

It is all well and good while the markets are providing what they have done for the past five to six years, but it is vitally important to prepare our clients in advance for the possibility of a year without increases.

A dynamic withdrawal strategy (over a static one) can add many years to a retirement plan.

had no financial or investment education throughout their lives. Even though a client may require a moderately aggressively investment strategy, I do believe that we need to be cautious of jumping in at the deep end, as a bad start could derail them from their plan based upon emotions. Thus, one should always consider phasing the funds into the required investment strategy and while your client may be giving up a percent point if the market continues to run, it ensures that they remain committed to the plan if they encounter a storm within the first year or two.

5. Sequence risk Getting off to a bad start could blow the best retirement plan out of the water, so it is important to consider sequence risk.

Two retirement plans with identical goals and funds can have very different outcomes, depending when they start their retirement (even if the annualised return averages are the same). Once again the need for a varying and adaptable withdrawal rate discussion is required.

6. Investment strategy It is vital to identify what the required investment strategy is to assist our clients to achieve their goals and then up-skill them with investor education, enabling them to understand the risk and reward equation. This assists them to make an informed decision and we can then identify an investment strategy that will create more certainty and reduce risk for them.

7. Emotional risk Most clients approaching retirement are very conservative, largely because they have

“No person was ever honoured for what he received. Honour has been the reward for what he gave.”

– Calvin Coolidge

In conclusion Our clients are faced with a multitude of threats or risks (and opportunities) within the financial planning arena. If we want to be considered professionals, then we must make every effort to identify these threats and assist our clients to navigate potentially stormy waters throughout their retirement and not only at inception. Remember that our planning efforts are also compounded over time, so just as compound interest is magical over a longer period of time, so too are our planning efforts.

While Inflation targeted funds are becoming more and more popular and offer a good benchmark for our clients investments, we need to monitor our client’s personal inflation over time.

If necessary we have to raise the red flag and alert the clients to the fact that their expenses are increasing too rapidly.

3. Phases of retirement A client’s needs in retirement can change and one can consider three different phases of retirement when developing an under-funded plan. The Go Go Phase, is where a client pursues their bucket list goals while healthy and motivated. The Slow Go Phase is where there is a natural slowing down and the No Go Phase is when motivation and/or health is waning (or one spouse has passed) and clients are confined to their homes or retirement cottages.

25

retirement and investment

for Investment Planning

Instability is the “new normal” for retirees in South Africa, and those of us who service retirees need to ensure that we are advising our clients correctly to cope with these conditions.

If we consider the typical South African retiree, they face ongoing concerns about a range of issues:

• Stability and direction of the rand • Slowing economic growth • Political instability • Increased Longevity • Potential legislative reforms • Potentially poor returns from equities in the future

By Warren Ingram, CFP® Director, Galileo Capital

26

All of these issues are constantly highlighted by the media, which means these issues become topics of conversation with our clients’ friends and family. This creates the potential for sustained levels of anxiety and that is always dangerous when making investment decisions. Therefore it is imperative that we manage our clients’

expectations about their future investment returns without creating panic.

Here are some of the ways we review investment strategies with our clients, as we aim to keep them calm in volatile conditions and ensure that they don’t make irrational decisions at the wrong times.

Focus on the correct asset allocation There are many studies that show the importance of asset allocation in the investment world. We tell our clients that this is the most important decision to make when it comes to their investments. It is critical because the correct asset allocation (especially the amount allocated to equities) gives clients the best chance of achieving

Retirees

their desired lifestyle over long periods of time. If we agree that a client should have 66% in shares (as an example) this becomes our main guide for making decisions in the future. When the markets are booming, it means that we need to reduce their equity allocation to ensure they are not overexposed to the most volatile asset class.

When markets are falling we are actively buying shares and selling other asset classes thereby maintaining their ability to reach their long term investment objectives e.g.

CPI + 4% p.a.

are not surprised by a crash – you have been telling them about the possibility for months or even years!

If in doubt – diversify The truth is no one has any idea what the markets are going to do in the coming months. If you confidently predict a crash on the JSE or a continued decline in the rand, you might be setting yourself up for

an embarrassing failure. Rather ensure that your clients are properly diversified across currencies, geographies and asset classes. You can even diversify over time by phasing in lump sums or withdrawals over a few months. Helping clients to eliminate risks by moving all their assets to cash (especially offshore cash) is not a good financial planning decision whereas efficient diversification is nearly always a great protector of capital in the long term.

If you are able to reinforce the importance of asset allocation rather than market timing or chasing performance, it allows you to focus your client on the long term so that the emotional impact of short term volatility is less dramatic.

Reminder that market timing does not work While the markets are still performing well, you need to remind your clients that it is impossible to anticipate a crash, which is why market timing does not work. As financial advisors we always tell our clients that you need to know when to buy into the markets again if you want to sell out now. This usually pacifies them as they realise that “waiting for things to get better before buying” is not a good idea. If you remind them about the state of South African and European economies since the crash in 2009, one cannot say that things are “better” yet the JSE has boomed since the crash.

We find it helps to constantly remind clients that they can lose money in the short term BEFORE the markets drop. If you are able to get them to understand and accept this principle while their investments are still performing reasonably well, then they

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While enabling our clients’ ambitions, we were recognised as Best Investment Bank and Best M&A House in Africa.

Each of our stories begins with our clients’ vision. When we partner with them, we are able to structure deals that make a real difference. In so doing, we were awarded both Euromoney’s Best Investment Bank in Africa and Best M&A House in Africa − true testament that when ambitions change lives, we all prosper. absa.co.za/cib Corporate and Investment Banking

Absa Bank Ltd Reg No 1986/004794/06 Authorised Financial Services Provider Registered Credit Provider Reg No NCRCP7

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When ambitions change lives, we all prosper.

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Working in partnership with our clients to realise the endless opportunities for growth and development in Africa, together we change the lives of millions. cib.barclaysafrica.com Corporate and Investment Banking

Top Overall Bank in South Africa

Best Domestic Cash Management House

Best Investment Bank in Africa Best M&A House in Africa Best Bank in Ghana

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Become an FPI Approved Professional PracticeTM and stand out as a role model for financial planning in your community.

As an FPI Approved Professional PracticeTM, your business would be distinguished as a professional financial planning practice offering financial services of the highest standard.

If your core business is financial planning, and you have a minimum of four full time financial planners or advisors, then send an e-mail to membership@fpi.co.za and use ‘Professional Practice’ in the subject line.

Contact us on 086 1000 FPI (374) or visit www.fpi.co.za CFP®, CERTIFIED FINANCIAL PLANNER® and are trademarks owned outside the U.S. by Financial Planning Standards Board Ltd. The FPI is the marks licensing authority for the CFP marks in South Africa through agreement with FPSB. Terms & Conditions apply.

retirement and investment

Who is Managing Your

Investment

Risk W

e can break down the evolution of investment management into three distinct phases. Until the 1970’s we have relied exclusively on the skill of active fund managers to try and beat the market in our pursuit for wealth generation. This we can liken to the period in human history called Romanticism or Idealism.

By Roland Rousseau Equity and Quantitative Strategist, Barclays Africa Group Limited

From the 1970s to about 2000, strong global evidence showed that successful managers never repeated their winning streaks and that investment markets were quite efficient, preventing even skilled managers from outperforming.

The term ‘zero-sum game’ was coined to describe that it is impossible for active managers in aggregate to beat the market.

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This can be likened to the period in human history known as the Age of Realism when society abandoned idealism.

This period of rationalisation, saw the birth of what is commonly known as the ‘passive’ investment industry when investors decided to abandon the optimistic and hopeful belief that talented fund managers are able to consistently outperform, especially after costs. They concluded that the most rational and effective way to generate wealth was to simply track the market.

We believe that since the 2000s, we have entered a third phase of evolution. We associate the current period with the period of Enlightenment or the New Dawn in human history when mankind moved away from theoretical arguments about market efficiency and rational expectations.

Today it is more acceptable that markets don’t behave like a self-regulating system that revolves around some efficient equilibrium. In fact, research is increasingly highlighting that markets are highly biased by human irrationality and that major crashes are much more likely to occur than rational market expectations assume.

As a consequence, given the 1998 Emerging Market crisis, the 2000 Tech bubble and the 2008 Financial Crisis, latest research shows us that the entire investment industry has miserably failed to manage client’s risk effectively. In other words, both active and passive investing has failed us.

The latest findings demonstrate that by trying to beat benchmarks, traditional active management has resulted in unnecessary higher risk, inflated costs and what economists call principal-agent conflicts (i.e. fund managers only participate in gains, not in investors’ downside).

Similarly, research also shows that traditional passive tracking of the market might have lowered fees for investors but certainly not effectively reduced risk from their portfolios.

Equity markets are even more highly concentrated with nearly 50% of the total value contained in only about five stocks in South Africa. Tracking the market index is far from buying a diversified portfolio.

Given these failings, we believe the investment management industry is finally entering a period where risk management is becoming the central purpose of delivering value to clients. However, we need to overcome what we call the Twin Sins before we can emerge successfully on the other side.

We rely far too much on human judgement in investments The future of good risk management lies with those who have the best or fastest analytical tools to convert terabytes of information rather than having humans analyse stale financial or economic data.

John Maynard Keynes once explained: “It doesn’t matter which stock you like, you need to invest in the stocks the market likes. The market can change its mind pretty quickly so using technology to monitor changes to risk appetite will be much more effective for investment managers than trying to forecast earnings”.

three variables simultaneously and are hugely prone to behavioural biases.

Instead, the investment management houses that decide to invest 80% in risk research and development (R&D) and technology will much more likely triumph. This makes current incumbent investment businesses vulnerable to sudden disruption from tech companies and non-traditional industry role-players.

Beating benchmarks and chasing past performance is bad for you The Nobel Prize winner, Eugene Fama, famously demonstrated that more than 80% of excess portfolio returns are due to excess risks, not due to fund manager skill.

The reality is that anybody can beat a benchmark by taking excess risk, regardless of skill. For example, by investing 70% in equity and 30% in bonds, the odds are hugely stacked in one’s favour to outperform a common benchmark of 50% in equity and 50% in bonds over time.

As a result, many investors still fall into the trap of confusing excess risk with the skill of the manager. Consequently, the managers at the top of a performance ranking are most

often not skilled but merely more risky.

The consequence of this moral hazard, global research is increasingly highlighting what author, James Surowiecki, recently summarised in The New Yorker: “But, in trying to reward reasonable risks, we’ve encouraged unreasonable ones as well.

And when you make it rational for people to bet the house, you may end up without a roof over your head … Because fund managers reap large rewards on the upside without a correspondingly punitive downside, they have a much greater incentive to take big risks than ordinary investors do.”

Therefore, the best managers might never outperform a single benchmark but can instead lower our risk and even save us fees in doing so. In fact, it is not difficult to show that risk management (e.g. minimising exposure to crises) is better for wealth generation than trying to do the impossible (i.e. constantly beat benchmarks).

The future is about lowering risk, not outperforming benchmarks Given all the above considerations, who today is managing your investment risk in your best interest? The unfortunate conclusion has to be - nobody! We have demonstrated that neither active management, nor passive market tracking are adept at doing what end investors really, really need.

In conclusion, the fund manager of the future shall not try to outperform their peers nor maximise your returns by delivering excess risk in a zero-sum game.

Instead, the fund manager of the future shall be rewarded for aligning their interests with your interests. The fund manager of the future shall spend 80% on cuttingedge risk technology and 20% on staff.

The fund manager of the future shall be explicitly rewarded to lower your costs and remove unnecessary risk from your portfolio creating much more desirable payoff trough uncertain times.

An excerpt of content presented at the Absa Wealth and Investment Management conference held in Johannesburg on 25 June 2015.

Traditional fund management businesses still invest about 80% of their resources in human capital despite the fact that humans are not capable of processing more than two or

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&

retirement and investment

risk

The volatile relationship between

...calls for client education

By Franscois van Gijsen, CFP® Director, Legal Services, Finlac Risk and Legal Management

I

recently assisted a number of clients in preparing documents for claims against their investment advisors at the Office of the Ombud for Financial Services Providers. The individuals in question had made investments, through the intermediation of their financial advisors, in the Ponzi scheme of the late Herman Pretorius. While researching these matters I came across the recent determination by the Ombud in the matter of Bezuidenhout v Mogentale and Introvest 2000 CC. In the Bezuidenhout-case the clients approached the Ombud for assistance after they lost their investment in a company providing bridging finance to the clients of conveyancing attorneys. The investment was made on the assurance of their financial

34

advisor: 1) that the investment was low risk; 2) on the promise that they would earn between 15% and 22% interest per annum on their investment; and 3) on the understanding that the investment was regulated by the Financial Services Board (FSB). The similarities between the stories of my own clients and that of the Bezuidenhout’s are striking. Incidentally, in March 2015 the Ombud’s office published seven determinations on its website and they were all investment related. It would seem that the investment arena is rife with scams, bad advice and dissatisfied clients.

Unskilled As a financial advisor, when I hear of these matters, I feel frustrated. After all, why did the clients not confirm that the company offering the investment was indeed registered with the FSB? How on earth could they think that an investment that offers them such high returns is safe? Do they not know that “if it looks too good to be true then it is too good to be true”? And, in those moments when I am not actively challenging the thought it is easy to blame it all on their greed. Easy to do, but not always fair.

As financial advisors we should remember that our clients do not have the same financial background as we do and they, frequently, lack even the knowledge that we would deem to be most basic on which to base their investment decisions. Research has shown that those with limited knowledge in a domain frequently do not realise the extent of their lack of skill which leads them to make regrettable errors and robs them of the ability to realise it1.

Consider that markets in South Africa have, for a number of years now, provided very high returns. By way of example: the Allan Gray Balanced Fund has since its inception on 01 October 1999 provided an annual return to its investors, with a percentage of 18.9 per annum, provided of course that they remained invested over that period.2 The Nedgroup Investments Property Fund returned an average percentage of 25,2 per annum over the past three years to February 2015 and a percentage of 43,4 over the past year.3 If clients constantly hear of such returns why then would they consider a promise of between 15% and 22% to be exceptionally high or unreasonable? Furthermore, there has not been a significant downturn in the market

1 Kruger, J and Dunning, D; Journal of Personality and Social Psychology 1999, Vol. 77 no. 6. at 1132.

2 Allan Gray Balanced Fund Fact Sheet as at March 2015.

3 Nedgroup Investments Property Fund Fact Sheet as at February 2015

&

returns

since the financial crises of 2008. Clients confronted with an investment proposal detailing performance, in graph form, for the past five years will have to make their investment decision without the benefit of seeing the effect on the proposed investment of such a significant market fluctuation, nor its return to the norm. The recent past has effectively blinded them to investment risk and reasonable returns.

The need for education

I would suggest that we, as CERTIFIED FINANCIAL PLANNER® professionals, need to educate our clients and the public regarding risk, especially market risk. This should then be linked to what a reasonable expected investment return is given the accepted risk. However, this is easier said than done.

It is normal practice for financial advisors to avail themselves of risk profile questionnaires in order to determine an investor’s risk tolerance before proposing a portfolio that attempts to reconcile the client’s investment goals with their appetite, or lack thereof, for volatility. Based on these results the client is classified, for example, as conservative, moderate or aggressive. If we ignore for the moment the impact of a client’s needs in terms of growth for his portfolio, I would suggest that risk questionnaires are of limited use.

Such profiling questionnaires provide us only with a measure of how clients view themselves and their appetite for risk. This view may well be way off the mark as it is influenced by personal experience, financial aspirations, emotion and psychology and the client may well be unaware of such bias on his part. However, as financial advisors it is our duty to provide our clients with advice and not merely to pander to their views of themselves.

It is trite that investors are bullish in bull markets and bearish in bear markets.

Financial advisors would do well in bullish times to encourage their clients to consider whether their appetite for risk is not inflated as a result of the prevailing circumstances. Merely explaining that an

investment is “moderate” or “aggressive” does not prepare the client for the reality of an investment losing value due to market fluctuations nor does it inform him of the extent to which such a loss of value can happen. It also does not prepare clients for the length of time that it may take their investment to return to previous levels or for the emotional discomfort that the loss or the wait for a return to previous levels may entail.

Quantifying risk Over these past weeks I have become convinced of the need to quantify a proposed investment’s risk into rands and cents terms or at the very least as a percentage for clients. One of the standard measures of risk is the “standard deviation” of an investment. This is a statistical measure of how much an investment is likely to deviate from its expected return. The term “volatility” is often used instead of the more technical “standard deviation”.4 Perhaps if we could help clients to understand that an investment with a specific performance goal, say CPI plus 4%, could entail a negative return of say 15% in any one year, while still providing the required return over the proposed investment term, they would be less eager to embrace market risk when initially making an investment and also less likely to withdraw their investment during times of market volatility and negative performance. In this way there is at least a chance that the financial advisor can convince his clients to remain invested after a significant downturn in the market and not to turn a notional loss into an actual loss by withdrawing their investments.

Investing in equities requires a lot of trust on the part of clients uneducated in investment matters. Guido et al. show that differences in trust across individuals and countries help explain why some people invest in stocks, while others do not.5 Better education about the stock market, specifically in regards to risk and returns, will then assist advisors in reducing the negative effect that a failure to invest in equities has on our client’s wealth creation. In particular it should help to delay

4 Goodall, B; Investment Planning Par 3.4.

5 Guiso, Luigi et al; "Trusting the Stock Market," Journal of Finance 63(6), 2557-2600 6 Kahneman, D, Knetsch, J and Thaler, H (1990), “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy, 98 (6), 1325–48.

clients, if not deter them completely, from commuting their notional losses to actual losses by selling their investments during times of lower or negative growth.

Protecting the advisor-client relationship As CERTIFIED FINANCIAL PLANNER® professionals we, undoubtedly, have an ethical obligation to educate our clients regarding risk and reasonable returns in order to safeguard them against schemes such as those mentioned above. Therefore we also need to ensure that we find the investments most suited to their needs and their appetite for investment risk. However, there is another more personal reason for such education.

As can be expected investors are strongly loss-averse. In fact research has shown that people’s psychological experience of losses is twice as powerful as their experience of gains.6 I believe that clients, when not prepared for the psychological turmoil resulting from experiencing investment losses, at best, experience them as a failure on the part of their financial advisor and, at worst, experience them as a breach of their trust. Whichever, the experience undermines their relationship with their advisor and facilitates the poaching of the client by others. Inevitably the loss of faith in the investment also increases the likelihood of clients selling their investments and realising their losses thereby confirming for them the aforementioned negative conclusions. These conclusions will, in the ordinary course of events, lead to a greater distrust of equity investments on the part of the client and a reticence to invest in equities in future thereby limiting their potential investment returns, and their wealth creation, in the future.

I believe a little education would go a long way towards helping our clients. At the very least I believe it would make the uncertainties attendant on equity investments easier for them to bear. And, if forewarned is indeed forearmed then it may just save our relationships with our clients and ease our burden of settling nerves during times of market volatility.

35

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retirement and investment

worldThe fundamentals of a

retirement and investment planning value proposition

A

By Anton Swanepoel, CFP® Director, Amity Wealth

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sound way of introducing this topic is to consider the normal meaning of those key words that may not necessarily speak for themselves. Value proposition is defined as an idea or a plan of action that is suggested or problem or task to be dealt with1 while being mindful of how much it is worth compared with its price.2 The purpose of this article is therefore to identify the key components of a world-class advisor's plan of action for clients who retire on condition that it offers value for money.

The basics To compete with the best advisors in the world, you must accept that world-class advisors go far beyond their knowledge and experience. World-class advisors are experts in their field and they are obsessed with building, establishing and maintaining trusted relationships with their clients. As a result, being professionally qualified to guide their clients in respect of the taximplications of their retirement plan, they need to fully understanding the client’s life goals and financial planning needs.

Therefore being able to explain to the client whether their retirement and investment plan is attainable through a realistic cash flow model are all skills that are assumed to be

1 See Oxford Advanced Learner’s Dictionary, p 1166 2 See Oxford Advanced Learner’s Dictionary p 1631

class in place at entry level. The main objective of a retirement specialist advisor is to assist clients to understand and achieve their life goal objectives – as well as managing their expectations. However without the aforementioned basic components, it will simply be impossible to do so.

Own the relationship The two essential ingredients in any advisor-client relationship are trust and a sound financial strategy. It is important to understand that you do not own a relationship through a financial product.

Without trust, any advisor is irrelevant and without a sound financial plan the advisor is reduced to a mere on-line commodity.

The value of the initial plan Word-class advisors ensure that they design a sound, comprehensive financial plan based on the client’s life plan and that the client’s investments are built around that specific plan. A comprehensive plan includes a comprehensive understanding of client needs and objectives. It’s important to do a financial SWOT analysis, an overall financial strategy, tax implications around the retirement plan, the required return over the investment term, emergency fund, cash flow liquidity requirements, realistic cash flow projections, risk profile of the client3, appropriate asset allocation and portfolio construction, appropriate fund selection, tax implications pertaining to the recommended solutions, beneficiary nominations, estate duty implications and a will.

The value of ongoing reviews and monitoring of the plan When clients trust their advisor and buys into the strategy designed around meeting

3 See The Industry White Paper On Risk Profiling (2014) 4 Rob Knapp: The Supernova Advisor, John Wiley & Sons, Inc., p79

the client’s life plan, the advisor-client relationship is elevated to a long-term trusted partnership. By definition, this means that the retirement and associated investment plan has to be monitored and reviewed. It is in this process that world-class advisors generally set themselves apart from the rest. Too many advisors only create a sale when they sign up a new client, instead of entering into a long-term trusted advisor partnership with the client. They work hard to be appointed as the advisor, but neglect the quality of client contacts thereafter, simply because of a lack of structure in their business.

World-class retirement- and investment advisors do not only focus on getting the client on board. They see it only as the beginning of a life-time relationship and they position their role as someone capable of designing a sound strategy and someone who will be with their client and their family every step of the way. As a result, a world-class value proposition would include a valued client experience during the initial planning stage and at least one comprehensive intensive annual review for as long as it takes. Where average advisors get together with their clients to discuss their investment returns and the markets, world-class advisors do a lot more work to ensure that their clients are still on their way to meet their life goals through their holistic financial strategy.

There is a big difference between merely discussing returns of the funds and being able to show the client whether he or she is on their way to meet their life goals. The funds are only the vehicles through which the financial strategy and ultimately the client’s life goals can be achieved. There are thousands of investment instruments that investors can choose from, but not all will fit in with the client’s specific strategy. The

strategy should always dictate the strategic asset allocation of the investment portfolio and the selection of funds.

World-class advisors build their value around the quality of the strategy, effective implementation of the strategy, the ongoing monitoring of the strategy and ongoing client mentoring. These advisors proactively position one big client review meeting once a year, which is designed to give their clients peace of mind in knowing that their affairs are comprehensively reviewed annually and that any changes in their personal and financial circumstances will be well considered. This review will include everything that were considered during the previous year. This implies that even their will is reviewed annually, because when personal or financial circumstances change, it may impact their plan on various levels, all of which deserve careful consideration.

Off course world-class advisors do not only engage with their clients once a year. Many, if not most, send out branded consolidated quarterly investment reports to their clients.

Their service model also often includes an investment review meeting every other six months. However, everything revolves around that one comprehensive, annual financial plan review meeting. Every one of these interactions are scheduled proactively and forms part of the total client value offering at the outset.

Service excellence Great service is a basic business imperative.

Everyone wants (and deserves) first-class service4. For world class advisors, prompt, accurate and efficient client communication is non-negotiable. Every client interaction is seen as an opportunity to cement the trusted relationship.

39

retirement and investment

Retirement Suitable Investment Planning for

By Gerda van der Linde Executive Director, Institute of Behavioural Finance

By Paul Resnik Co-founder, FinaMetrica

I

nvestment suitability in retirement financial planning involves recommending investments that are likely to meet a client's goals in good times and bad. Creating a financial plan for your client is in most cases far from a scientific endeavour and retirement planning can be the most challenging time of all, given factors such as: people’s shortened work life time horizon, reduced income capacity, debt burden and extended family obligations.

However, there are processes that should be followed to ensure that

40

any advice given is suitable. Fundamentally, financial advisors need to show that the recommendation will have resolved any conflicts between the asset allocations consistent with risk required (how much risk a client need to take), capacity for loss(how much risk a client can afford to take) and risk tolerance(how much risk a client prefer to take). This will assist the financial advisors to obtain the client’s properly informed consent.

Financial advisors must start that discussion with the recognition that most clients: • Don't have sufficient or any money saved or invested to fund their future.

• Need a disciplined savings and investment regime going forward.

• Aren't fully insured, so it's possible that any savings strategy needs to be supplemented by increased insurance to guarantee their goal will be met despite illness, accident or death.

Financial advisors must also recognise that many clients will have a different retirement experience than that of recent generations.

Their clients will likely: • Live longer.

• Have higher spending expectations.

• Have greater multi-generation support obligations.

• Need or prefer to work part-time.

• Need to access moneys that are currently locked into the equity in their home earlier rather than later in their planning.

So what is a suitable portfolio recommendation taking into account these factors?

In the accumulation phase, investors over the last 28 years have been rewarded for their patience by sticking with a strategic asset allocation. There's good reason to argue that a similar strategy will work in the future.

management of the investor's behaviour. No investor should be surprised by the length and depth of their portfolio's falls. At worst, they may be disappointed that their portfolio did not do better. While the past is not a precursor of the future, it is still a useful framing tool.

A basic step to assessing what is a suitable strategic asset allocation for clients is to measure the risk tolerance of clients.

If we specifically look at the last 28-year history of portfolio downside volatility of a typical 50% growth and 50% defensive asset portfolio in South Africa we see:

Behavioural research has shown us that individuals value profits and losses differently. We know that: • For some people, a loss of R1000 may need a gain of as much R5000 to compensate.

• Those with a lower risk tolerance need to be encouraged to take a longer term (delay retirement) and more goals oriented perspective.

• Portfolio performance reviews should be no more regular than annually, with primary attention given to the likelihood of achieving long-term goals rather than any focus on short-term bad news which can trigger fear-based selling.

Each client is different and therefore individual assessments of risk tolerance need to be made separately.

In South Africa, the risk tolerance of the population is in line with that measured in other nations; the average risk tolerance is 54 and the monthly averages are as shown below. The variability in South Africa’s monthly average scores are due to the smaller sample sizes as compared to the other countries where there are over a few thousands a month.

Depth of Fall

Started Falling

Mths in Fall

Mths to Recover

Recovery

-18.4% -16.4% -13.5% -12.3% -5.9% -4.7% -4.5% -4.1% -3.9% -3.7%

Sept 87 Apr 98 Dec 01 May 08 Jul 90 Dec 94 Jan 04 Aug 86 Jan 01 Jul 97

4 4 16 9 2 1 5 1 2 4

8 5 5 5 4 1 1 3 0 1

Sept 88 Jan 99 Sept 03 Jul 09 Jan 91 Feb 95 Jul 04 Dec 86 Mar 01 Dec 97

The analysis was done on a monthly basis for an asset allocation comprising 10% cash, 30% fixed interest, 10% international fixed interest, 35% South African equities and 15% international equities. Total return indices were used as proxies for asset sector performance. No allowance was made for tax or fees. The asset allocation was rebalanced annually.

Average Risk Tolerance Score 70

Risk Tolerance Score

65 60 55

US

50

UK

45

AUS / NZ

40

ZA

35 30 Jan 11

Jan 12

Jan 13

When dealing with a couple, the risk tolerance of both partners needs to be measured and taken into account in retirement planning, with males on average being slightly more risk tolerant than females; the male average in South Africa at 57 and the female average at 50. If the portfolio is substantially inconsistent with that of a low risk tolerant partner in a couple, there is a high likelihood of unhappiness given market corrections are inevitable and they will occur several times during the rest of their investment life. There should, therefore, be ample evidence that the portfolio selected has some likelihood of meeting the long-term goals of both partners.

While a risk tolerance test alone does not replace the essential discussion between clients and their advisors about, how much investment risk should be adopted in a financial plan, the result is important to that discussion and in deciding on a suitable portfolio.

Jan 14

Jan 15

So what messages can we share with investors about the history of the portfolio?

• 2007-08 was neither the deepest nor the longest fall in the last 28 years.

It was in fact the fourth deepest.

• The 2000 'Tech Wreck' took 16 months to bottom out, and it took only five months to recover to the same valuation.

• All of the corrections recovered their previous highs and went on to new highs.

• All of the ten recoveries were less than 10 months in duration, creating a challenge for those seeking to time entry to the market.

• Nine of the ten falls were less than 10 months providing a similar challenge to those seeking to time exits from the market.

Part of this discussion involves the framing of investment expectations to take into account future market volatility. This is critical to the

41

retirement and investment

Buy and Hold Baloney?

How often have we heard market commentators touting that it’s all about “time in the market” and that we should ignore short-term market fluctuations in return for all but certain long-term riches. This is the convention or keystone which binds the asset management and advice business, but does it really hold?

3) The debt trap is expanding US national debt has surpassed 100% of GDP and the Bank of Japan national debt comfortably exceeds 200% of GDP. In household terms, that is expenditure greater than earnings.

By Paul Nixon, CFP® Head, Technical Marketing and Distribution Support, Barclays Global Investments and Solutions

A

s investors we are locked in the eternal struggle of balancing our desire to accumulate or grow our wealth (greed) and the fear it may disappear. Leading United States (US) investment analyst, John Mauldin postulates that living in a post global financial crisis world has created a “new normal”, a world where: 1) Central bankers continue to crank up the printing presses; the US Fed, European Central Bank and Bank of Japan have more than doubled the combined size of their balance sheets.

2) Yield is becoming more and more elusive, particularly in real terms with the inflation risk of additional liquidity created by monetary expansion on the one hand and threat of deflation on the other.

42

According to Mauldin, “The "new normal" means that "buy and hold" just isn't a viable investment strategy anymore. Many tried-and-true investment strategies will unfortunately saddle investors with subpar returns, sleepless nights, and delayed retirements.”

So, why doesn’t buy-and-hold, hold?

Fundamentally, believers are making the following implicit assumptions: 1) There are no good or bad times to buy stocks, now is always a good time; and 2) Stock returns are totally unpredictable, if they weren’t we would always choose a good time to buy. The efficient markets hypothesis (EMH) links neatly to this, recall that if EMH holds, markets would follow a random walk (Malkiel, 1973).

Let’s deal with the second point first, those who have studied probability theory will recognise that when two events occur independently (such as stock market returns in any given year followed by another year), the probability of these events occurring consecutively is found simply by multiplying the probabilities of each independent event together. Mathematically, multiplying two percentages (numbers less than one) together will always result in a smaller number (lower risk). US stock market

research reveals a 90% probability of S&P 500 returns in the short term between -22% and 30%, stated otherwise, a 10% chance markets will dip more than 22% in a given year. Chances of this happening two years consecutively however are 10% x 10% or 1%. Proponents of buy-and-hold argue that risk reduces as time passes. For probability theory to stand however, the events (stock market returns) must be random. Research however reveals that market returns are not random and are predictable albeit to a very limited degree.

Those investing $1 in US stocks every single year over the past 100 odd years experienced a range of real returns depending on how long they held the assets, 90% of the time returns were within the range of 5% above average and 5% below average (Smithers et al, 2004). The phenomenon of Siegel’s constant reveals that long-term (1900 – 2009) real stock returns average out to approximately 6.5% plus costs across 19 developed market economies (including South Africa). Ending up with less than $1 only happened 5% of the time (95% chance of positive return) and corresponded with a time horizon of 14 years. This is represented by the inner shaded band of the diagram. The outer band shows what the range of variation should be if buy-and-hold were true. Had returns been entirely random, you would have needed to wait 30 years to have a 95% probability of getting at least some positive return.

So, if buy-and-hold were true, stocks would have

Log Scale

Real value of $1 invested with reinvested dividends

100

10

1

10

20

30

Number of years invested in stocks Source: Adapted from Smithers et al, 2004: A Practical History of Financial Markets.

been far more risky, perhaps even too risky for long-run investors (Smithers et al, 2004).

Secondly, history clearly shows that there were indeed bad years to buy stocks. If we take 100 odd years of returns, place them in order of average return over a range of different horizons and pick the 10 worst, reality bites. For all but one of the 10 year periods, subsequent returns were negative at 10 years and well below the benchmark of Siegel’s constant even at 20 years. The bad starting years had effects that took a long time to disappear and at horizons longer than one year, in only one case did

subsequent returns exceed the benchmark.

Bad years were therefore uniformly bad (Smithers et al, 2004).

It was John Maynard Keynes who is quoted as saying, “The long run is a misleading guide to current affairs. In the long run we are all dead.� Keynes reminds us neatly that models quoting 100 or 200 year stock returns mean little to investors who have

investment goals tied to much shorter time horizons. In fact, even 40 years is far too long, regular savers would need 80 years to have the equivalent exposure, for example, the first annual cash flow of a 40-year retirement annuity is the only one exposed to a 40 year horizon, the second is exposed to 39 years and so on.

So, where does this leave us? We support research which reinforces the fact that over 90% of investment returns are derived from the asset allocation decision. We need to believe in risk management; that is getting investors to their respective goals taking the least amount of risk possible through a well-diversified investment portfolio.

Long-term goals are an integral part of the wealth management, but in a post- Retail Distribution Review (RDR) world, we need to show more value to clients than regurgitating literature that holding stocks for 100 years virtually eliminates risk. Furthermore, we need to recognise that clients are not robots; they are emotional beings where fear and panic threatens the realisation of financial goals. The journey matters.

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We Challenge You! CFP® Professional Competency Challenge Status Examination The exam was approved at the FPI board meeting held in November 2014 After discussions with members, education partners, students, Financial Planning Standards Board (FPSB) and various other role players in the financial services industry, the CFP® Professional Competency Challenge Exam was approved at the FPI board meeting on 28 November 2014.

Requirements to gain access to the CFP® Professional Competency Challenge Exam The challenge exam is offered to individuals who hold certain advanced degrees or professional credentials, but have not completed one of the FPI approved qualifications.

FPSB as the licencing authority for the CFP® designation, approved that FPI may accept specific professional credentials as fulfilling the education requirement for CFP® certification. Furthermore, FPI may extend the availability of the Challenge Exam to individuals that are performing in senior positions in the industry, but that does not necessarily hold the prescribed qualification of study. FPI has the right to determine the types of qualifications it will accept for challenge status. FPI will be required to verify the qualifications and credentials of candidates for the challenge status with appropriate oversight bodies.

(Adapted from: FPSB Certification Standard)

The following designations will be considered when allowing for Challenge Status exams with a minimum of 10 years’ client facing financial planning experience as a pre-requisite:

Designation

Awarded by / registered with

Underlying qualification

Master Tax Practitioner

South African Institute of Tax Practitioners (SAITP)

Postgraduate Diploma in Tax Law, M Com (Tax), LLM (Tax)

CA(SA)

South African Institute of Chartered Accountants (SAICA)

B Com Hons (Acc)

Registered Auditor

Independent Regulatory Board for Auditors

Postgraduate degree /diploma accredited by SAICA

Admitted Attorney with relevant qualification

Law Society South Africa or General Council of the Bar of SA

Postgraduate degree equivalent to NQF Level 8

CFA Charter holder

Chartered Financial Analyst Society

CFA Level 3

Apart from awarding access to the challenge exam to any of the above designation holders, the following qualifications will also allow access to the challenge exam:

Qualification

Experience

Bachelor of Laws (Only if registered on NQF Level 8 with 480 credits)

10 years client facing financial planning related experience

Postgraduate diplomas in: • Finance banking and investment management • Financial management • Investment banking/planning • Insurance law • Taxation • Tax strategy and management

10 years client facing financial planning related experience

PAGE 1 OF 2

Qualification

Experience

B Com Honours in the following specialisation areas: • Accounting or Financial Accounting • Actuary / Actuarial sciences • Auditing • Banking • Economics • Finance or Financial Management • Financial analysis and portfolio management • Financial taxation or Taxation • General • International trade and finance • Investment Management • Monetary and Financial Economics

10 years client facing financial planning related experience

Masters degrees in business and or finance related areas

10 years client facing financial planning related experience

Doctorate degrees in business and or finance related areas

10 years client facing financial planning related experience

While individuals may be highly qualified in a specialised area of financial practice, it does not necessarily guarantee their success on the CFP® Professional Competency Examination. FPI could encourage candidates seeking to sit for the CFP® Professional Competency Examination via challenge status to consider completing an examination review course or reviewing the currency and completeness of their education against the FPI’s Financial Planning Topic List. Challenge status candidates may benefit from retaking courses or taking additional courses to improve currency and mastery of specific topic areas.

The challenge exam will be exactly the same exam that the current candidates write as the Professional Competency Exam.

Challenge status exams are limited to two lifetime opportunities. If the candidate is not successful in passing the exam, it will become a requirement that the person must enrol at an FPI Approved Educational Provider to complete the Postgraduate Diploma in Financial Planning or the B Com Honours in Financial Planning.

How to apply to write the exam In order for any candidate to be considered for the CFP® Professional Competency Challenge Status Examination, they are required to submit: • A motivational letter; • Certified copy of their identity document; and • Certified copies of the qualifications which allow them access to the exam.

Contact us If you have any questions, please feel free to contact our membership department: Office: (011) 470-6000 or 086 1000 384 (FPI) Email: membership@fpi.co.za

retirement and investment

Goals Based

Investing operandi. A cursory examination of how the investment industry is actually structured, assessed, and rewarded suggests that investing to meet a specific client requirement is fairly low on the continuum of considerations.

By Anne Cabot-Alletzhauser, Head, Alexander Forbes Research Institute

This time it’s personal Asset management can be particularly powerful. Give an asset manager a funding requirement, a time frame, and an indication of how much certainty the investor requires of meeting that target and a fund manager can generally deliver what’s required, assuming that those goals are realistic. Turn that requirement into a performance race i.e. demand that the fund manager outperform their competitors in perpetuity, and outcomes become decidedly more random. Bottom line: a goals-based framework has a much higher probability of fulfilling client needs than a performancebased framework.

And yet, as an industry, the performance race is deeply entrenched as our modus

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If the goals-based investment strategy is so powerful in re-enforcing all the right behaviours from both the service provider and the client, and goals-based investing is so effective in terms of rebuilding a critical level of trust and customer-centricity, then why is it that the concept has taken so long to gain traction?

Over the last 15 years, goals-based investing periodically appears on our doorstep and then, ever so quietly, the enthusiasm for it wanes. The two most notable time periods occurred in the wake of the two financial crises of that decadeplus period: post the 2002-2003 market collapse, and then again, just after the global financial crisis. Today, it is creeping back into our vocabulary as a viable way forward, but unless we understand what stands as an impediment to adapting a goals-based framework, it will remain in concept form only.

in the US. Trust fund companies clearly saw their fiduciary responsibility from a goal’sbased perspective. Typically the two goals they would try to address would be: how do you provide the dependent with their basic income requirements for day-today survival and then how do we structure the residual funds to maximise the transfer of wealth to the next generation.

To solve for these very different goals, two portfolios were structured. The first would use fixed income to match the cash flow requirements of the dependent. The second portfolio was structured around higher risk growth assets that typically reflected the specific investment interests or risk appetite of the family or individual.

But regulatory enhancements at the end of 1970s, now meant that investing could now expand the wealthy and out to the man on the street. The mutual fund (unit trust) industry could now offer safe access to the markets to literally anyone.

How did we get here in the first place?

To service this exponentially expanding market, the industry needed to commoditise solutions and simplify answers. While effectively unit trusts allowed for the commoditisation of the investment strategy, tailoring solutions to meet a specific client requirement couldn’t be commoditised. Essentially technology became the limiting factor.

“Goals-based-investing” actually bears a striking resemblance to the type of trust fund management practices that were employed by wealthy families in the 1950 to 1970s

The unitisation framework employed by a unit trust made it next to impossible to provide any form of cash flow matching or liability driven type of solution to this broad

mass of investors meant that the only means asset managers had to compete was on a performance basis.

Today, these impediments are slowly melting away. Technology and asset strategy breadth have evolved to the point where we can potentially offer individualised, cost-effective solutions that both dynamically assess an individual’s asset/liability shifts and then create the right investment mix to meet those funding goals over the required timeframe.

But while the way is now there, we still, as an industry, need to deal with the will.

In truth, perhaps the ultimate culprit as to why the goals-based concept failed after their two post-crash attempts was the fact that both crashes were followed by massive rallies. Why bother change out of a good thing (or at least a highly profitable

one for the industry), if the performance game is actually working? In this sense, the consumer was just as guilty for opting for the “hope the manager wins” option as the service provider was.

So therein lays the challenge. If goals-based investing is ever to reclaim its place as the most viable strategy to meet client needs, effectively the asset management business model needs a complete overhaul. Bottom line: if the consumer is actually the one we care about here, it must come right.

What needs to happen?

• The advisory and asset management framework must change in tandem.

It’s not enough to ask clients what their investment goals are and then simply shoe-horn their assets into performance- base unit trusts with the hope these strategies just might deliver what’s required. The investment vehicles themselves must change so that targets have a higher probability being met (see the dynamic solutions described above).

• The regulatory environment needs to support these types of solutions and

not confound their delivery. While TCF rightly requires us to put clients’ requirements first (and ensure that investments are appropriate), asset class constraints, and risk questionnaire and performance reporting requirements that service the conventional performancebased model only are hugely problematic.

• Performance measurement needs to change dramatically. Technological innovations now mean that we can cost effectively provide even the smallest investor with some notion as to whether they are meeting their investment goals and if not, what types of interventions could take place. The place and time for an effective “robo-adviser” solution has most decidedly come.

• Overall, the industry needs to rethink how they are helping their clients set the right expectations and then manage continuously to those expectations.

When all is said and done, HOPE is not an investment strategy. While top performance is simply not attainable on a sustainable basis, meeting a specific goal should be. Let’s get our clients to where they need to go!

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retirement and investment

Preserving

Wealth Retirement An international perspective for South African resident The one constant in our industry is the overriding desire by private clients to protect and preserve their wealth. In this article we explore the use of international retirement structures and their role in providing a holistic solution for South African resident clients.

By Rex Cowley, Co-founder, Overseas Trust and Pension

The domestic wealth trap I find it surprising that most financial planning in South Africa addresses the issue of wealth protection and retirement provision almost exclusively from a domestic perspective. This inwardly focused approach ignores the real, and increasingly detrimental, effects that the fiscal and social policies of South Africa have on residents’ wealth.

One of the implications of domestic bias is brought home when looking at the impact of a devaluing Rand on the purchasing power of a South African from a global perspective.

In 2011 a South African traveling in the United States of America (USA) could have bought two Big Mac’s for R50.00 with two sides of fries. Today, four years later, the

48

same R50.00 would only get you a small fries based on 2011 prices (Source: BIG Mac Index). The reality is a devastating devaluation of the purchasing power of the Rand to US Dollar of 78% since June 2011 to June 2015, excluding inflation.

It’s clear that South Africans are not looking at the bigger picture and considering their global purchasing power or their place as global citizens. This is evidenced when considering research from the World Wealth Book 2014 which shows that the typical high net worth South African has only 6% of their wealth outside of the country. This compares to their western peers who hold 35% to 45% of their wealth in non-domestic assets and further demonstrates the domestic wealth trap at work in South Africa.

I can assure readers that our foreign peers desire to protect their clients’ wealth is no different from ours. The difference is foreign planning incorporates non-domestic solutions in order to meet a client’s financial needs and mitigate domestic political and economic risk.

To leave or not to leave…?

The big dilemma for many South Africans is ‘to leave or not to leave’ South Africa. The basic human desire for financial certainty and the peace of mind that is gained from knowing that one’s family’s financial future is secure has played a key role in fuelling emigration.

For others it’s the implications for the succession of wealth from one generation to the next as its common place for South African families to have children resident outside of South Africa.

However, to sustain any resemblance of the quality of the life left behind or to ensure that assets passed to beneficiaries actually make a difference to their lives, two points are of vital importance.

First, such assets retain their purchasing power at a global level and second that this wealth is fully protected from domestic and cross boarder issues such as probate, double taxation and claims by other parties.

Financial Need

Asset Protection

Probate, Estate and Succession

Building Wealth

Investment and Currency

Access and Benefit Payments

Taxation

Enter the International Retirement Plan (IRPs) Certain IRPs address these issues head on and are best considered in the context of a domestic retirement arrangement but without the many restrictions placed on them. Yes, IRPs may not prove as tax efficient as domestic options but they address issues in terms of asset protection, risk mitigation, succession planning, access to hard currency and true international non-Rand investments. Hence IRPs should not be overlooked by financial advisors given the role they play in protecting wealth and providing financial certainty. For clients this comes down to peace of mind which is hard found via other solutions.

Comment

Features

A contribution to an IRP results in a change of ownership to a non-South African resident structure and a move outside the legislative confines of South Africa.

This results in:• Protection from political risk and changes to government policy • Protection from claims against a client’s personal wealth • Protection from changing domestic tax or social policy

Holding foreign assets in your own name generally results in cross boarder tax issues and complications on death due to foreign probate rules. Leaving behind costly and complicated arrangements for the family to unwind.

An IRP can mitigate these issues: • No local or foreign estate and probate procedures • Avoids executor fees and the need for foreign wills • Assets transfer at death is almost immediate • No need to bring funds back to South Africa • Total flexibility in determining beneficiaries

IRPs provides an unconstrained environment to build your clients’ international wealth.

An IRP could provide your client the freedom to invest globally without restricting the type of investments or currency.

Retirement benefits can be tailored in terms of the quantum and timing with no restriction.

No tax relief is available on contributions to an IRP however their tax characteristic are similar to domestic retirement arrangements and are sought after before and during retirement.

• No limit to the value you can accumulate subject to exchange control

• IRPs can be funded in any currency or by assignment or in specie transfer of assets

• Foreign investments include collectives, listed and unlisted shares, alternative investments, life products, bonds and cash

• No constraint on portfolio type or construction • Access to a hard currency to hedge against Rand risk • Not subject to asset swap rules or regulation 28 • Up to 100% benefit from 50 years of age • No restriction on amount or frequency of benefit payment • Access up to 40% of the plan assets, by way of a loan, prior to age 50 (exchange control applies if the loan is to be repaid from South African assets)

• • • •

Contributions do not attract donations tax Income and gains roll up tax free No tax on the return of contributions Capital gains and or income tax payable only when distributed at personal rates • No estate duty on unvested funds

Conclusion IRPs provide peace of mind and certainty to clients and their families in respect of non-domestic wealth as clients can breathe easy as the unknown become known. IRPs take away the complexity of holding foreign assets and associated cross boarder issues while mitigating the political risks impacting on South African wealth and ensuring quick and painless transfer of wealth on the passing of a loved one.

IRPs may not be appropriate for all clients but given their role in wealth protection and retirement provision they should at the very least be considered by South African financial advisors in the same way that they are considered by our contemporaries in the broader global financial planning community.

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retirement and investment

Tax on retirement fund

lump sum benefits

Pen alty to p due with rior draw rece al ived

1. Background The income tax on lump sum benefits from retirement funds are taxed on an aggregation basis. When a lump sum is received or accrues to a person from a retirement fund, the taxable portion of the lump sum (“the current lump sum”) is aggregated with the following amounts that accrued or were received prior to that lump sum: (i) retirement fund lump sum withdrawal benefits received by or accrued to that person on or after 1 March 2009; (ii) retirement fund lump sum benefits received by or accrued to that person on or after 1 October 2007 and (iii) “severance benefits” received by or accrued to that person on or after 1 March 2011.

By Marius Botha, CFP® FPI Harry Brews' Award winner 2015 and Financial Planning Facilitator and Trainer

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Tax is then calculated on the aggregate according to the rates applicable to the current lump sum. Thereafter the above amounts [(i), (ii) and (iii) above], that were received or that accrued prior to the current lump sum, are aggregated and the tax on the aggregate of these amounts is calculated using the same rates. The difference between the two amounts is the amount of tax payable on the current lump sum. The tax tables setting out the applicable rates are as per Annexures A and B.

2. Penalty due to pre-retirement withdrawal benefit If a taxpayer receives a retirement fund withdrawal benefit, and prior to that received an amount or amounts as stated in (i), (ii) and (iii) above, his R500 000 tax-free portion (taxed at 0%) is effectively reduced. The following example illustrates how this comes about.

Example: Jake retires from a retirement annuity fund (RA) on 1 July 2015. The total value of his interest in the fund is R2 100 000. He decides to take the maximum of one-third (R700 000) as a lump sum and the remaining R1 400 000 as a “living annuity”.

Prior to this he resigned from a provident fund in April 2014.

He took the entire withdrawal benefit of R500 000 in cash. He paid tax of R85 500 [(R500 000 –R25 000)0.18] on the lump sum.

3. Conclusion

The tax due on the R700 000 lump sum benefit that he receives on 1 July 2015 is as follows: Retirement fund lump sum benefit from RA (July 2015) Plus: Prior Retirement fund lump sum withdrawal benefit Aggregate

where in terms of the employment contract the employee is paid a severance payment of say one weeks’ salary for each year of service that the employee had with the employer. A severance benefit is also included in the “aggregation process” and the rate of tax is contained in a separate tax table that applies to severance benefits only. The rates are exactly the same as the rates for retirement fund lump sum benefits (the first R500 000 at 0%). The 2016 rates have been published in section 7 of the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill 2015 that was issued

by National Treasury on 25 February 2015. They are unchanged from the previous year.

700 000 500 000 R1 200 000

Tax on aggregate (retirement lump sum benefit rates – Table B below Less: Tax on Prior withdrawal

R184 500

Tax payable on the RA lump sum benefit

R184 500

0

If in April 2014 Jake did not take the cash withdrawal, but decided to transfer his withdrawal benefit to a provident preservation fund, and subsequently retired from both the preservation provident fund and the retirement annuity fund on 1 July 2015, the aggregate of the two lump sums would also have been R1 200 000 (the growth on the provident preservation fund has been ignored for this purpose).

The tax payable would also have been the same (R184 500).

By taking the previous withdrawal benefit, Jake has paid a total of R270 000 (R184 500 + R85 500) in tax. This is R85 500 more than what he would have paid had he transferred the withdrawal benefit to a preservation fund and thereafter retired from both the funds in July 2015. Why R85 500? In the case of the withdrawal benefit the first R25 000 is taxed at 0% and in the case of a retirement fund lump sum benefit the first R500 000 is taxed at 0%. The difference between the two tax free amounts is R475 000 (R500 000 – R25 000). The R85 500 represents 18% of this difference (0.18 × 475 000 = R85 500).

The actual tax that was paid on the withdrawal benefit was at withdrawal benefit rates. For the purposes of the reduction of the tax on the aggregate the tax on it is calculated at retirement fund lump sum rates. The entire “prior” retirement fund withdrawal lump sum of R500 000 falls in the 0% band. No credit is given is given for the tax actually paid on the prior amount. The amount between R25 000 and R500 000 is now taxed at 18% so that the only portion that was taxed at 0% is the first R25 000 of the withdrawal benefit when it was received. One can say that Jake has lost the R500 000 tax-free amount and only got R25 000 tax-free (at 0%).

It follows that if a person takes a cash withdrawal benefit from a retirement fund and then at a later date receives a “severance benefit”, the same “penalty” applies. If we use the same facts as in the example above, but assume that the payment on 1 July 2015 is a severance benefit (rather than a retirement fund lump sum withdrawal benefit), the same amount of tax is payable as in the example above. It follows that Jake still only gets R25 000 taxed at 0%. It is hard to believe that this was also intended to apply against a “severance benefit”. A person who loses his employment and is forced to use his retirement fund withdrawal benefit because he has no other source of income, does not really have a choice as to whether to take the cash withdrawal. It would have been more just if the tax on the “prior” amounts, that is deducted from the tax on the aggregate, were to be the actual amount of tax previously paid.

Annexure A Table for retirement fund lump sumwithdrawal benefits (2016 tax year) Not exceeding R25 000

18% of taxable income above R25 000

R660 000 to R990 000

R114 300 plus 27% of taxable income above R660 000

R990 000 and above

R203 400 plus 36% of taxable income above R990 000

Annexure B Table for retirement fund lump sum lump sum benefits (2016 tax year) Not exceeding R500 000

This, it is said, was intended to serve as a disincentive against not preserving retirement benefits on resignation from the fund.

If this is so the disincentive should only be used against benefits received from retirement funds. Currently it is also used against ‘severance benefits”. A typical “severance benefit” is a payment made by the employer to an employee on his or her retrenchment

0% of taxable income

R25 000 - R660 000

0% of taxable income

R500 000 – R700 000

18% of taxable income above R500 000

R700 000 to R1 050 000

R36 000 plus 27% of taxable income above R700 000

R1 050 000 and above

R130 500 plus 36% of taxable income above R1 050 000

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retirement and investment

ALPHA One of the key competencies in showing value to clients is a financial planner’s tax knowledge. By applying our knowledge of income tax, capital gains tax (CGT) and estate duty, financial planners are able to assist clients with legally structuring their financial affairs to minimise the amount of tax that they pay and enhance their investment returns.

T

his service has been named Tax Alpha and is defined as: “It’s the value that is added to a client's financial plan by optimizing sound tax strategies. If "alpha" is the return generated by an advisor's skill in picking and managing investments, then "tax alpha" protects that return and generates a boost by making sure that taxes don't eat away more of a client's wealth than absolutely necessary.” 1

Tax strategies

By David Kop, CFP® Head, Advocacy and Consumer Affairs, Financial Planning Institute (FPI)

Some of the tax strategies traditionally employed include:

Determination of ownership structure The tax effects of owning an investment in a particular ownership structure will be compared and a recommendation made as to which particular structure will provide the

best tax benefits. While seemingly simple there are anti avoidance provisions that must be considered. The tax benefits then need to be weighed against the administration costs and client objectives. It is also key to ensure that the structure is not rigid and can be unwound when legislation changes that make the structure ineffective, such as the current debates that are taking place around trusts and their tax treatments.

Timing of capital gains This is particularly important for an investor who is drawing or about to start drawing income on a portfolio. The timing of the withdrawals is critical in order to make best use of the annual exemption for CGT. The suggestion here is not to sell an underperforming asset to create a tax loss, and then immediately repurchase the assets.

In fact this transaction is ineffective due to paragraph 42 of the 8th Schedule to the Income tax Act.

1 www.accountingtoday.com

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Tax effective portfolio rebalancing Where the client’s investment is being managed according to a tactical asset allocation strategy, the timing and trigger point of the rebalancing needs to be managed. Any measures implemented to reduce the tax effects of rebalancing would add value to the client.

Effective utilisation of the relevant tax deductions and exemptions An analysis of the deductions (e.g. retirement annuity) and exemptions (e.g. annual interest exemption) available to a client is undertaken to ensure that these are fully utilised.

Asset location and withdrawal sourcing The purpose of this article is not to focus on the above strategies but on two others namely asset location and withdrawal sourcing.

Research undertaken by Morningstar in 2012 entitled “Alpha Beta and now…… Gamma” measured the effect of these two strategies.

The finding was that by implementing asset location and withdrawal sourcing strategies a client’s income can be increased by 8.5% in retirement. This translated to an additional return of 0.52% per annum.

So what is asset location?

“Asset location is a tax minimisation strategy that takes advantage of the fact that different types of investments get different tax treatments. Using this strategy, an investor determines which securities should be held in tax-deferred accounts and which securities

should be held in taxable accounts in order to maximize after-tax returns”.2 An asset location strategy requires that the target asset allocation is not applied per product, but rather to a client’s portfolio as a whole. The implementation requires that highly taxed asset classes, such as cash, bonds and property, are allocated to tax free savings account, tax deferred products, such as retirement annuities or endowment polices depending on the client’s tax profile and liquidity requirements. On the other hand asset classes, such as equities, are allocated to the less tax efficient products, such as collective investment schemes (CIS).

As an example a client with R1,000,000 to invest and a tactical asset allocation of 60% in equities and 40% in cash, bonds or property would allocate the funds as follows: • R 600,000 allocate to a taxable account (such a s a collective investment scheme or direct equities) • R 400,000 allocated to a tax favourable product (depending on the clients tax rate, liquidity requirements and need an objectives this may take the form of a retirement annuity, tax free savings account or endowment policy) It is key to note that an asset location strategy does not replace the tactical asset allocation strategy, but rather enhances it.

A word of caution Asset location is a concept that has been applied in the United States, and the data is based on USA data. The purpose of this

article is just to introduce the concept. It is acknowledged that more work and research is needed with South African data.

Withdrawal sourcing Tax alpha can be delivered by the correct structuring of a client’s income drawn. The suggested sequence for compiling the income required is: • Draw the minimum required from a Living annuity The growth and income within a living annuity is tax free. Income is only taxed on the withdrawal amount. The principle would be to draw the minimum required on the annuity.

• Draw the cash flows from taxable products As tax is payable on the earlier of receipt or accrual the interest and dividend accruals on taxable products should be drawn when accrued.

Capitalising these returns will increase the tax payable in the long run.

• If capital needs to be drawn time the capital gains/losses When drawing capital the investments should be analysed in terms of the tax effect.

Conclusion While it may seem simple to implement the above strategies the reality is that the timing and analysis is quite key. A client’s objectives and asset allocation should not be negatively affected by a tax strategy. The tax strategy is there for support these critical areas and should be considered as a value add and not the starting point of a decision.

2. www.investopedia.com

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retirement and investment

@

Tax Retirement Adding Value for Clients

Recent changes to the Income Tax Act have created a number of challenging opportunities for a professional financial planner to add value for client’s at retirement.

T

By Nico van Gijsen, CFP Managing Director, Finlac Risk and Legal Management

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®

his article in no way claims to be an in depth analysis of the ITA as it impacts on retirement benefits, but rather it is a sharing of ideas to stimulate thought on ways that we as professional financial planners can limit investment risk, in this case specifically tax risk, for clients.

The remaining two thirds of the retirement interest must be used to purchase an annuity, which is taxed as income at normal rates up to a marginal rate of 41%.

This begs the question, how much should be withdrawn as a lump sum and how should it be re-invested to gain the best tax advantages for the client?

At retirement from a pension fund, a retirement annuity fund or a pension preservation fund (and from 1 March 2016 from a provident fund or provident preservation fund) the net of any lump sum is included in gross income. Currently up to R500 000 of this amount is taxed at 0%, the next R200 000 at 18%, the next R350 000 at 27% and above this at 36%.

It is trite that the maximum tax free amount should be commuted. It can be used to: • Settle debt. At a credit rate of 12% and a marginal tax rate of 30%, this can be seen as a “tax free investment return” of 17.14%.

• Supplement income that the investor will be earning from a compulsory life

or living annuity. Income as capital withdrawals from this is source is tax free for example from a discretionary unit trust investment vehicle, a unit trust fund. Therefore the investor does not have to structure his or her total income need from a taxable source (a compulsory annuity) but can structure his/her income in such a way that he/she earns some of the income from a tax free source (if a suitable investment vehicle is used) and from a taxable source in terms of legislation (a compulsory life or living annuity).

The rationale is tax efficient income provision.

• Using the interest exemption of R34 500 per annum (for clients over 65 years of age). At a return of 6% per annum (typical current money market return) an amount of R575 000 can be invested tax free. This is equal to a taxable investment (tax rate 30%) return of 8.57%.

• Investing the maximum amount (R30 000 per annum) in the new Tax Free Investment. This will effectively provide a double tax benefit in that together with the tax free lump sum already received, the growth in this investment is also tax free, as is the eventual pay-out of the investment.

This can be done annually out of the growth in the interest exempted

investment mentioned above. By donating R30 000 per annum to a spouse the tax free savings amount can be doubled. Donations between spouses is exempted from donation tax and the deeming provisions of the ITA cannot apply as there is no tax payable in the Tax Free Investment that can be “deemed”.

Taking more than the tax free amount and paying the tax thereon, may provide further opportunity for more tax beneficial investments. Purchasing a voluntary annuity may provide such an option to create a more tax friendly source of post-retirement income. The voluntary annuity is paid partly as income and partly as capital. The capital element of the voluntary annuity is exempted from tax whereas with a compulsory annuity the full amount of the annuity is taxable.

In doing the calculation for a comparison one should take into account the tax payable on the lump sum against the marginal tax rate of the client on his or her annuity. As a general point of departure it would make sense to argue that if the client’s marginal tax rate on his annuity income will be higher than the rate of tax paid on the lump sum, then he or she should opt for the lump sum.

In all cases where the commutation of more than the tax free portion of the lump sum is

considered, one should, however, also take cognisance of the fact that the investment growth in a living annuity is exempt from tax . It would hardly make sense to take a bigger lump sum simply because the tax rate is favourable and then exposing the money to being taxed on the investment growth again.

A further consideration would be that since March 2014 non-deductible contributions to a pension fund and retirement annuity fund is exempted from income tax when paid out as a compulsory annuity (Contributions to provident funds will qualify as from March 2016 as members of provident funds were not before that date forced to purchase a compulsory annuity with a part of their retirement interest).

This means that by not taking the full available tax free amount as a lump sum, a client could receive a tax free, or partly tax free, income from a living annuity on the one hand, whilst at the same time benefiting from tax free investment growth in the fund itself on the balance of contributions that did not rank for deduction.

However, it is suggested that the minimum tax free amount of the lump sum should at least be equal to the proposed tax free or tax friendly investment options and debt settlement mentioned above.

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retirement and investment

from Policy Develop to implementation

The South African Qualifications Authority (SAQA) is shifting its focus from the development of policy to its implementation.

SAQA’s CEO Joe Samuels noted this momentous shift in his opening address at the SAQA Seminar, on Learning Outcomes held early in the year at the Sheraton Hotel in Pretoria.

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ment T

he purpose of the public seminar was to promote the smooth implementation of the National Qualifications Framework’s (NQF’s) level descriptors as learning outcomes.

Discussion groups focussed on the challenges of qualifications design and level descriptors and how appropriately applied, aligned and carefully written learning outcomes are becoming the preferred and most logical route for meeting those challenges.

Representatives from professional bodies, Quality Councils, Department of Higher Education and Training, educators, academic planners and quality assurance practitioners from both the public and private education and training institutions attended the seminar.

Delegate participation was passionate, robust and highlighted the following needs: • capacity building to facilitate application of SAQA policies; • greater collaboration amongst higher education institutions; • transparency in assessment and related activity; and • improved integration of Professional Bodies into the process of qualifications development.

This event was a platform for the education, training and development stakeholders to engage and critically reflect on how the NQF describes learning achievements. It provides a broad indication of the types of learning outcomes and assessment criteria appropriate to a qualification at a particular NQF level.

“Reforms in education are about having a highly skilled and qualified workforce to aid the economy,” said guest speaker Stephen Adam, a European based qualifications design and learning outcomes thought leader.

Learning outcomes are knowledge, skills, competences and values that a learner can demonstrate after a learning experience.

There is a need to develop a common understanding in the use of learning outcomes. Learning outcomes can also be used in evaluating foreign qualifications.

Adam highlighted the numerous benefits of a learning outcomes based approach. Learning outcomes clarify and establish standards; enable more accurate international comparisons; provide transparency for more objective judgements; facilitate a rethink of the curriculum to make fit-for-purpose qualifications; highlight the relationship between learning, delivery and assessment; enhance student-centred learning and employability; strengthens quality assurance mechanisms; and improves articulation between sub systems and facilitates better use of credits and credit allocation.

Even so, there are a number of challenges that come with the learning outcomes based approaches. “It takes many years to change an educational culture and this is made more

difficult as disruptive technologies and new providers further challenge the ‘who, what, how, where and when’ learning can take place and be recognised,” Adam said.

According to Adam challenges come about as a result of inconsistent and incorrect application of learning outcomes.

Outcomes based qualifications need to provide clear, unambiguous and explicit statements of competences that show the ability of the bearer of a qualification.

The challenge remains ensuring that learning outcomes are explicit statements of competences permeating all facets of the NQF. This challenge requires the education, training and development sector to be consistent in implementing the learning outcomes approach. South Africa is ahead of the game but consistent implementation is required for ordinary citizens to fully reap the benefits of the NQF. *Biographical Note: Stephen Adam, an eminent researcher and academic, has been centrally involved in the development and application of learning outcomes associated with higher and vocational education reform across the globe. His work includes research and studies on behalf of several European governments, national agencies, the European Union, the Council of Europe and United Nations Educational, Scientific and Cultural Organization (UNESCO).

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Company Profiles 58

Amity Wealth W

e enable independent financial advisors to build and grow efficient and sustainable businesses.

Our offering supports advisors to deliver a consistent, valued client experience.

Our company: Amity Wealth is a business network for independent financial advisors. We are an authorised financial services provider (FSP 29661) and an independent, privately owned discretionary investment management- and support services company that provides

a comprehensive value proposition to professional independent financial advisors.

Financial advisors that join our network are typically people who are passionately independent and who consistently look for ways to improve their value proposition and service to clients.

Since January 2009 more than 50 independent advisors have partnered with us and currently the Amity network has in excess of R8 Billion of total in assets under management. Our team provides support services to thousands of clients on behalf of our independent advisor partners.

Our offering: • • • •

A complete wealth management solution Investment research and consulting A business management solution An integrated compliance solution

Contact us: Tel: 087 353 2599 Email: info@amitywealth.co.za Website: www.amitywealth.co.za

Barclays Barclays Global Investments and Solutions is a global centre of excellence for investments.

W

e are custodians of the investment philosophy, our core belief being that portfolio returns are firmly rooted in asset allocation.

Our hubs in London, New York, Singapore and Johannesburg ensure consistency in investment advice by building and managing the asset allocation of core portfolios, providing an approved set of products and partners from which to solution clients, ensuring thorough due diligence is conducted on approved partners and

supporting the advice value chain with a team of investment specialists and technical marketing specialists to construct appropriate client solutions.

While our Johannesburg operation is fairly new, our London behavioural finance unit stands alone in incorporating behavioural finance theory practically into client investment solutions.

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FPSB

FPSB exists to benefit the global community seeking financial planning.

F

inancial Planning Standards Board Ltd. (FPSB), owner of the international CERTIFIED FINANCIAL PLANNER® certification programme outside the U.S., is a nonprofit association that manages, develops and operates certification, education and related programmes for financial planning organisations so that they may benefit the global community by establishing, upholding and promoting worldwide professional standards in financial planning. FPSB’s commitment to excellence.

And is represented by the marks of professional distinction – CFP®, CERTIFIED FINANCIAL PLANNER® and , also known as the CFP® Marks.

FPSB works in conjunction with its members to develop and promote rigorous international competency, ethics and practice standards for CFP® professionals in member territories to ensure that consumers looking for qualified financial planners understand and value CFP® certification.

The needs of consumers of financial planning guide FPSB’s activities. FSPB is committed to working through its member network to establish relationships with regulators, consumer advocates, educators, employers, trade associations and other standards-setting bodies so that financial planning can emerge as a distinct globallyrecognised profession that will benefit the global community.

Founded in 2004, FPSB has a nonprofit member organisation in the following 26 territories: Australia, Austria, Brazil, Canada, Chinese Taipei, Colombia, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel, Japan, Malaysia, New Zealand, the Netherlands, the People’s Republic of China, the Republic of Korea, Singapore, South Africa, Switzerland, Thailand, Turkey, the United Kingdom and the United States.

At the end of 2014, there were nearly 160,000 CFP® professionals worldwide.

Belmore Financial

B

elmore Financial, LLC was launched in 2013 by Kate Holmes, CFP®, fulfilling her desire to continue pushing the industry forward. At Belmore, we believe your financial plan should be as nimble as your life plan, and we focus first on helping you discover what you want your life to look like, before diving into the financial side. We believe everyone should have access to quality financial

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advice regardless of their assets, net worth or location. Therefore, we work with all clients virtually for a flat fee or ongoing monthly subscription and don’t manage assets or sell financial products. We work through all aspects of your financial life over time, revisiting and adjusting as necessary. We stay on top of developments in financial technology to make our virtual relationships as seamless as possible. Our authentic approach to each client, based

on where they’re at in life, their goals and dreams, and casual interactions via phone and video in the comfort of their own home create meaningful, long-lasting relationships.

Alexander Forbes A

lexander Forbes is a specialised financial services group headquartered in South Africa focusing on employee benefits solutions for institutional clients, and financial well-being and retail financial solutions for individual clients, in particular employees of the Group’s institutional clients.

The Group’s primary clients span both the private and public sector market segments, including employers, retirement, health, investment and other special purpose funds on the institutional side, and individual members and beneficiaries of these funds, as well as the wider individual market, on the retail side.

The main services provided by the Group include retirement funds and asset consulting, actuarial, investment and administration services, employee risk benefits and healthcare consulting, personal lines insurance, individual financial advisory and multi-manager investment solutions.

Alexander Forbes’ principal geographic focus is in South Africa, where it has been operating since 1935, sub-Saharan Africa, the UK and other selected jurisdictions which have employee benefits legislative frameworks similar to South Africa.

Finametrica Our Risk Profiling system has gained international recognition as world's best practice.

F

inaMetrica is an Australian based company which provides best practice psychometric risk tolerance testing tools and investment suitability methodologies to financial advisers in 23 countries. FinaMetrica is regarded by many as the world's pre-eminent independent supplier of risk tolerance tests.

FinaMetrica has completed more than 800,000 tests for over 6,000 advisers since its launch in 1998.

The availability of a web-based psychometric test of risk tolerance adds a new dimension

to Behavioural Finance research and the existence of a growing database of completed risk and demographic questionnaires provides a unique resource for researchers.

The Institute of Behavioral Finance is an independent research and training institution aimed at the study and promotion of the behavioral finance discipline. Our mission is to add value and enhance the professional status of the investment sector in South Africa and in so doing serving the interests of financial planners and clients.

By incorporating the work of knowledgeable

researchers and academics, the Institute tries to find better explanations for investor decision-making and market anomalies.

The Institute of Behavioral Finance South Africa has been appointed by FinaMetrica on an exclusive basis to market and promote the licensing of the FinaMetrica Risk Profiling System in South Africa and the other SADEC countries.

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FPI’s member dIscount Programme that can save you money and add real value to your membershIP

beneFIt

value

Free subscription to the LexisNexis online Financial and Legislation News

R2 000

Free CPD webinar programme that awards up to 15 CPD points including ethics

R1 500

A 50% discount on your SAIT membership

Up to R1 715

Industry publications subscription savings per annum

Over R1 000

RubberstampSA Commissioner of Oaths stamps ordered online

20%

Member discount on FPI CPD events

An average 20%

Astute Financial Services Exchange provides preferential rates on their services to all FPI members

7% per transaction

also: 1. As a member you qualify for preferential rates on your indemnity insurance with Southern Cross Risk Management (Pty) Ltd 2. Your membership fees are tax deductible

So you see, the value clearly outweighs the investment...

beneFIts

cost

Download a full copy at www.fpi.co.za or email membership@fpi.co.za to request a hard copy of the value proposition brochure.

What you paid for What you could be paid out

If you’re diagnosed with a serious condition, we could offer you the choice to receive either just a lump-sum pay-out or a lump-sum plus regular monthly pay-outs, and further monthly pay-outs if you don’t recover – increasing your pay-out up to 200% of your cover amount.

Only BrightRock’s needs-matched life insurance recognises that the same serious illness or injury could have a very different financial impact on different people. That’s why we offer a product with the flexibility to meet your individual needs should you face additional expenses after an illness or injury. If you’re diagnosed with a serious condition, we could offer you the choice to receive either just a lump-sum pay-out or a lump-sum plus regular montly pay-outs – increasing your pay-out up to 200% of your cover amount.

Get the first-ever needs-matched life insurance that changes as your life changes.

Speak to your financial adviser or visit www.brightrock.co.za for more.

BrightRock Life Ltd (Registration number: 1996/014618/06) is an authorised financial services provider and registered insurer. Terms and conditions apply.

Get the most comprehensive cover formost you and your family Get the comprehensive cover for you and your family

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JOIN DISCOVERY LIFE NOW JOIN DISCOVERY LIFE NOW

Speak to your financial adviser To get a quote: SMS ‘Years’ to 48030 | www.discoverylife.co.za

Speak to your financial adviser

Discovery Life is an authorised financial services provider. Registration number 1966/003901/06.

To get a quote: SMS ‘Years’ to 48030 | www.discoverylife.co.za Discovery Life is an authorised financial services provider. Registration number 1966/003901/06.