FPI June - July 2011 Issue

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The

Financial Planner Supporting Excellence in Financial Planning

How much risk can your client take? Risk proÀling may not provide the answer

Sustainable growth opportunities Your client’s bucket list Employer owned policies FPI members can claim 2 CPD points for this issue Official Journal of the Financial The Financial Planner Planning Institute of Southern Africa

June/July 2011 June/July 2011 R30.00 (incl. VAT)

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The Financial Planner

June/July 2011

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Foreword

“A nation without a conscience is a nation without a soul. A nation without a soul is a nation that cannot live.� Sir Winston Churchill

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he words spoken by Sir Winston Churchill ring true, not only when it concerns the societal nature of nations, but also in reference to the structures within nations. It strikes at the heart of industry and commerce, and PRUH VSHFLĂ€ FDOO\ LW VSHDNV WR WKH SURIHVVLRQV WKDW GULYH LQGXV try and commerce. 7KH Ă€ QDQFLDO VHUYLFHV LQGXVWU\ KDV VLQFH WKH LQWURGXFWLRQ RI WKH )$,6 $FW EHHQ IDFHG ZLWK QXPHURXV UHJXODWRU\ FKDOOHQJHV Fit and Proper requirements and concepts such as “honestyâ€? DQG ´LQWHJULW\Âľ KDYH FRPH WR IRUH DV NH\ HOHPHQWV RI FRPSOL DQFH ZLWK WKH ORRPLQJ GDQJHU RI D )LQDQFLDO 6HUYLFHV 3URYLGHU EHLQJ FKDOOHQJHG EHIRUH WKH )$,6 2PEXGVPDQ E\ D GLVJUXQ WOHG FOLHQW ,Q WKH SURFHVV RI FRPSO\LQJ ZLWK UHJXODWRU\ UHTXLUHPHQWV LW

The Financial Planner

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Phillip Kruger

FPI Standards Manager

June/July 2011

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Contents

Contents Sustainable growth opportunities Momentum’s Dr Kaniki explores the effect of the recession on the financial industry and clearly shows the important role it plays in stabilising the economy and in creating sustainable growth.

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Employer owned policies Employer owned policies have an as important a role to play as ever. Tiny Caroll, Glacier, explains the changes brought about by the Taxation Laws Amendment Act 7 of 2010. This is an area most misunderstood by Financial Planners and it will definitely benefit every planner to study this article.

Your client’s bucket list

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You might remember the wonderful movie, Bucket List, which rang true for most people. Kim Potgieter, Chartered Wealth Solutions, provides and interesting view on your clients’ own bucket list and how to go about using this concept in your planning process.

Perils of profiling Andrew Bradley, CEO of acsis, tackles a subject that has caused quite a bit of controversy in the past. He debates the question whether risk profiling actually provides any worthwhile information on a client’s appetite for risk and comes to the conclusion that it doesn’t. The Financial Planner

June/July 2011

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Contents

The

Financial Planner Publisher COVER Publications Street Address 80 Devilliers Way Glencairn, Cape Town Postal Address PO Box 2030 Sun Valley, 7985 Tel: 021 782 7601 Fax: 086 642 6263 Email: info@cover.co.za Editor Tony van Niekerk tony@cover.co.za Assistant Editor Kim Forbes kim@cover.co.za/083 453 7456 Advertising Manager Charlotte Haines charlotte@cover.co.za/082 600 7171 Layout & Graphic Design Wesley Chipps Administration & Subscriptions Jenna Chipps (info@cover.co.za) Editorial Board Mersey Booysen, Jenny Gordon, Jennifer Grefen, Harry Joffe, Leon Jordaan, Paul Kantor, Almo Lubowski, Johann Maree, Paul Rabenowitz, Jeffrey Wiseman. The Editorial Board serves in a voluntary and independent advisory/technical capacity. Members do not in any way represent their employer companies. The views expressed in this magazine do not necessarily represent those of its owners, publishers or editorial staff. Editorial comments sent to THE FINANCIAL PLANNER are subject to editorial change to suit the style of the magazine. All manuscripts, photographs and other similar matter are accepted on the understanding that no loss or damage is borne by the publisher, the editor or their personnel. Subscription rate: R165 per annum for six copies (bi-monthly), in South Africa. Over border and overseas rates on application. © 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers. Any unathorised reproduction of this work will constitute a copyright infringement, rendering liability both under civil and criminal law. ISN 1013-1507

The Financial Planning Institute

The Financial Planner

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Foreword Editorial New exam will be beneficial for business and customers Raimund Snyders Bubbling along and PIIGS flying Arno Lawrenz Investors continue to avoid equities Leon Campher Big offshore opportunities Michael King A bit about property Ian Brink SA life and disability insurance shortfall Peter Dempsey The elusive profession Johann Maree Lack of financial planning puts SA families at risk Justus van Pletzen Business valuation – Mind the gap Ricardo Texeira Regulatory exams – are you ready yet Why settle for 70% Hamish Leppan Special Trusts – an overlooked tax planning tool DavidWarneke Working longer than our parents Willem Loots Breaking trusts Francois van Gijsen Business Assurance concerns Harry Joffee Social Media marketing Dr Estelle v Tonder Insurance and the Consumer Protection Act Patrick Bracher Offshore markets for Pretirement savings Ralph Mupita Process driven advice Colin Long Divorce and compulsory purchase annuities Michelle Human FPI celebrates its 30th year of existence Annual Financial Planning Convention

June/July 2011

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Economy

Recession presents sustainable growth RSSRUWXQLW\ IRU š QDQFH LQGXVWU\ Dr Sheshi Kaniki, Senior Economist Momentum

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KH ODUJHVW LQGXVWU\ LQ 6RXWK $IULFD LV À QDQFLDO UHDO HVWDWH DQG EXVLQHVV VHUYLFHV KHUHDIWHU WKH À QDQFH industry). In 2010 this industry accounted for 19.2% of GDP. Among the important functions it plays are providing payment systems for economic transactions, mobilizing savings, channelling these resources to productive investment opportunities, disbursing credit to households and providing employment to about 1.6 million workers. Given its key role in the economy, it is important to assess the effect the recent recession has had on this industry.

,PSDFW RQ JURZWK VKDUH RI *'3 DQG FRQÀ GHQFH levels 3ULRU WR WKH UHFHVVLRQ WKH À QDQFH LQGXVWU\ ZDV JURZLQJ much faster than the economy as a whole. For instance, in the WKLUG TXDUWHU RI WKH À QDQFH LQGXVWU\ JUHZ E\ ZKLOH WKH HFRQRP\ JUHZ E\ 7KLV ZDV PDLQO\ D UHVXOW of the credit boom that took place during this period. Rising disposable income, low interest rates, loose credit conditions, and the resultant high growth rates in the property market contributed to the strong performance of the industry. During the post-recession period, the industry has H[SHULHQFHG D VLJQLÀ FDQW VORZ GRZQ LQ JURZWK 7KLV LV because households are struggling to reduce their debt, banks are hesitant to lend and more people are without jobs.

However, a repeat of the negative growth registered by the À QDQFH LQGXVWU\ LQ WKH À UVW DQG VHFRQG TXDUWHUV RI LV QRW H[SHFWHG XQGHU SUHYDLOLQJ FRQGLWLRQV 7KH HFRQRP\ LV H[SHFWHG WR JURZ LQ H[FHVV RI LQ DQG ZKLFK VKRXOG HQVXUH WKDW WKH À QDQFH LQGXVWU\ DOVR UHPDLQV LQ SRVLWLYH territory.

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Figure 2: Finance industry (% of GDP)

Source: Statistics South Africa

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June/July 2011

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Economy

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Source: South African Reserve Bank and Ernst & Young

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&RQFOXVLRQ The recent recession had a disproportionate negative impact RQ WKH À QDQFH LQGXVWU\ 'HVSLWH WKLV LW UHPDLQV WKH ODUJHVW LQGXVWU\ LQ 6RXWK $IULFD DQG SOD\V D QXPEHU RI LPSRUWDQW HFRQRPLF IXQFWLRQV ,W LV XQOLNHO\ WKDW WKH À QDQFH LQGXVWU\ ZLOO experience the rapid expansion it attained prior to the recession LQ WKH IRUHVHHDEOH IXWXUH 7KLV LV QRW QHFHVVDULO\ D EDG WKLQJ EHFDXVH LW PD\ EH PRUH FRQGXFLYH WR VXVWDLQDEOH HFRQRPLF JURZWK LQ WKH ORQJ UXQ

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Practice Management

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Economy

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here are many who question, having seen where global bond yields have fallen to, whether we are not currently in the midst of the greatest bubble the bond market has ever seen? After all, in mid -2007, the US 10 year bond yield was trading a touch above 5%,and now, barely three years later, it trades at around 2,6%, having already made a turn close to 2% in the immediate aftermath of the Lehman Brother’s collapse. By comparison, of course, Japanese Government 10 year bond yields have been mired at low levels for more than a decade, having never traded above 2% since 1999. What does this all mean, then, for the state of the global bond market? After all, Nouriel Roubini, now commonly known as Dr Doom for having correctly forecast the massive implosion in the US housing market as well as the subsequent efThe Financial Planner

fects on the state of health in the US banking system, recently termed Japan “an accident waiting to happen.â€? With a public debt to GDP ratio of around 200%, it has a debt burden higher even than that of Greece, Italy, Portugal, Ireland and Spain; and these countries are collectively called the PIIGS! The problem here is that Japan has probably been an accident waiting to happen for, at least, the last 10 years. Prior to that, in the late 1980s, it was also an accident waiting to happen, and the accident did happen – the Nikkei Dow at the time traded to a peak above 39000. Today, 20 years later, it is mired below 10000. 6R TXHVWLRQV SHUVLVW WKHQ Ă€ UVWO\ LI -DSDQ LV DQ DFFLGHQW ZDLW ing to happen, should one get out of the way now already? Secondly, whereto for the USA, whose debt dynamics, while not quite as burdensome as that of Japan’s, also beggars belief in its sheer size? Perhaps the key to understanding this is to recognize why Japan, if it is a problem, still has bond yields trading below 2%, with no end in sight. We are all familiar with the fact that -DSDQ UHPDLQV PLUHG LQ GHĂ DWLRQ GHVSLWH WKHLU EHVW HIIRUWV This makes a nominal bond yield of 2% a pretty good real UHWXUQ WR LQYHVWRUV LQ -DSDQ $V LW LV EUHDNHYHQ LQĂ DWLRQ IRU WKH QH[W \HDUV LQ -DSDQ SRLQWV WR LPSOLFLW LQĂ DWLRQ H[SHFWDWLRQV of close to -1% per year. If that were the case, bond investors end up with a 3% real yield! In addition to this, we need to understand that Japan, too, has tried using Quantitative Easing in order to resurrect their HFRQRP\ EDQNLQJ V\VWHP DQG LQĂ DWLRQ 7KLV DIWHU PDVVLYH Ă€ V cal stimulus all through the latter part of the 1990s and into the 2000s– leading, of course, to the incredible expansion in WKHLU GHEW *'3 SURĂ€ OH What we need to point out here is the reality of a Balance Sheet Recession there. The term, made popular by Richard Koo, an economist from Nomura, is based on the understanding that, in the case where the private sector, having overOHYHUDJHG LWVHOI LQWR Ă€ QDQFLDO DVVHWV DQG WKHQ VHHLQJ WKHVH DVVHWV GUDPDWLFDOO\ ORVH YDOXH ZLOO FKDQQHO FDVK Ă RZV LQWR D paying down of debt rather than being channelled into either consumption or investment. The multiplier effect of that means a potential implosion of economic growth. Here, of course, in a classical Keynesian response: it becomes the public sector’s responsibility to replace this lost private sector growth and LQYHVWPHQW 7KLV LV GRQH WKURXJK D PDVVLYH H[SDQVLRQ RI Ă€ VFDO stimulus – hence, the rapid increase in debt: GDP. With this stimulus comes the increasing burden – debt serviceability becomes an increasing problem over time. But, WKHUH DUH WZR URXWHV WR HDVH WKLV SDLQ Ă€ UVWO\ E\ FUHDWLQJ LQĂ D tion, and in so doing eroding the real value of debt over time; and, secondly, by keeping government bonds yields – also known as the government’s cost of capital – as low as possible. So, while Japan has managed to maintain bond yields at June/July 2011

7

Economy

super low levels for so long, it remains Roubini’s assertion that it is a matter of time before the burden becomes too great and debt investors force yields higher over time, leading, of course, to a predictable end. $V IDU DV FUHDWLQJ LQĂ DWLRQ LV FRQFHUQHG IRU -DSDQ WKDW seems to remain easier said than done. In a deleveraging ecoQRPLF SKDVH LW LV LQFUHGLEO\ GLIĂ€FXOW WR ´FUHDWHÂľ LQĂ DWLRQ 2QH route would be for them to devalue their currency, but when your major trading partner is the USA who is desperately trying to do the same, it become well nigh impossible to do so. 6R KDYLQJ DFNQRZOHGJHG WKH GLIĂ€FXOWLHV WKH\ IDFH LW UHPDLQV LQFUHGLEO\ GLIĂ€FXOW WR Ă€JXUH RXW ZKDW WKH WULJJHU ZRXOG

The Financial Planner

EH IRU WKLV HGLĂ€FH WKDW WKH\ KDYH FUHDWHG WR FROODSVH Let us then move on to the US, where we will keep the DQDO\VLV UHODWLYHO\ VLPSOH DQG VKRUW 6XIĂ€FH WR VD\ WKDW WKH 86 too, is faced with a Balance Sheet Recession, coupled with the commensurate deleveraging in the private sector. Correctly so, the public sector response in the form of a huge expansion RI Ă€VFDO GHĂ€FLWV KDV EHHQ PDVVLYH DQG LQ D GHYLDWLRQ IURP -DSDQ¡V VORZ UHVSRQVH UDWKHU LPPHGLDWH 86 ERQG \LHOGV WRR have collapsed, as indicated earlier. The likelihood is there, DV LQ -DSDQ WKDW WKH\ DUH OLNHO\ WR UHPDLQ PLUHG DW ORZ OHYHOV ZKLOH WKH 86 )HG DQG JRYHUQPHQW WU\ GHVSHUDWHO\ WR Ă€JXUH out a way to get through the deleveraging phase without seeing their banking system destroyed. In the same way as Japan though, the debt burden over time accumulates to the extent that similar solutions are required, and, in addition, a similar requirement of maintaining a low cost of capital for an extended period of time is an absolute necessity in order to keep debt service burdens at manageable levels. Unfortunately, the longer the Recovery takes, the higher the burden over time as the debt: GDP ratio expands. So yes, most certainly WKH WHPSWDWLRQ WR RSW IRU TXLFN Ă€[HV ZLOO UHPDLQ )RU WKLV UHDVRQ the likelihood of a rapid rise in bond yields over the short- to medium-term is not a strong possibility. Of course, markets do have a strange way of surprising, and if we are surprised in this respect, all we can say is, it will not be pretty. So, in a strange way, to answer the question of whether we are faced with a GHEW EXEEOH ZH FRXOG SUREDEO\ DQVZHU ÂŤ QRW XQWLO 3,,*6 Ă \

June/July 2011

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Estate Planning

A new dispensation for employer owned policies Tiny Carroll, an Estate Planner at Glacier by Sanlam Introduction The Taxation Laws Amendment Act 7 of 2010 (the Act) was promulgated on 2 November 2010. The Act introduces a new dispensation for “employer owned policiesâ€?, typically used to fund keyperson assurance and deferred compensation schemes. The bulk of the amendments apply with effect from 1 January 2011. While the Act introduces a totally new regime for new “employer owned policiesâ€? entered into after 1 January 2011, it KDV D VLJQLĂ€ FDQW UHWURVSHFWLYH HOHPHQW ZKLFK KDV FRQVHTXHQFHV for some existing “employer owned policiesâ€?. The impact of the changes on existing policies and the impliFDWLRQV IRU QHZ SROLFLHV ZLOO UHTXLUH WKH DWWHQWLRQ RI Ă€ QDQFLDO advisors and their clients. At a high level: R 6HFWLRQ Z ZKLFK GHDOV ZLWK WKH UHTXLUHPHQWV IRU WKH deductibility of premiums. The current section is deleted and replaced with an entirely new section 11(w). The amendments apply to both new and existing premiums with effect from 1 January 2011. A new provision, paragraph (mA) is introduced to tax the proceeds of certain policies’ proceeds on receipt instead of on cession of the policy. o The R30 000 exemption catered for in section 10(1)(x) is abolished but only with effect from 1 March 2011. o Section 7A (4A) which created the ability to apply the average rate formula to the taxable portion of the lump sum received by an employee is abolished. This is also with effect from 1 March 2011. The technical amendments are attached as Annexure A to this circular. The practical implication of the amendments set out above will be discussed against the background of the more typical employer owned policy arrangements.

1. Application to Keyperson assurance Keyperson assurance refers to policies taken out on the life/lives of key individuals in the organisation to protect itself against losses it would sustain in the event of the sudden death, disability or severe illness, of that individual. When dealing with Keyperson assurance, it is necessary to distinguish

The Financial Planner

between conforming and non-conforming policies. 1.1 Conforming policies Conforming policies are structured so that they conform to WKH UHTXLUHPHQWV RI VHFWLRQ Z :KHUH WKH SROLF\ LV D FRQ forming policy the premiums would be tax deductible for the employer. Because the premiums were deductible the proceeds will be taxable. After 1 January 2011 the premiums will only be deductible ZKHUH WKH SROLF\ PHHWV WKH UHTXLUHPHQWV RI WKH QHZ VHFWLRQ 11(w)(ii). Where an existing keyperson policy does not meet the reTXLUHPHQWV RI WKH QHZ VHFWLRQ Z LL WKH SUHPLXP GHGXF tions will be lost. This will typically happen where: D WKH SROLF\ KDSSHQV WR KDYH DFTXLUHG D FDVK RU VXUUHQGHU value, or (b) where the employer agrees to cede the policy to the employee on his/her retirement, because the employer no longer has a need for the cover. The concern with this situation is that, despite the fact that the premiums will not be deductible after 1 January 2011, the proceeds will still be taxable because the premiums were deductable in the preceding tax years. 1.2 Non-conforming policies Because of the potentially enormous tax bill on the receipt of the proceeds of a conforming policy, it became common practice to structure keyperson assurance on a non-conforming basis. This was achieved by incorporating a provision in the policy contract which breached the provisions of section 11(w); for example, the contract would allow for the substitution of the life insured. Because the premiums were not deductible, the proceeds were tax-free. For keyperson assurance entered into after 1 January 2010, it will still, in theory, be possible to create a non-conforming policy merely by adding a cash or surrender value of R1 to the policy – as contrived as this may seem. The concern for existing non-conforming keyperson policies is that, while the policy may still be non-conforming in terms of the old section 11(w), it may now inadvertently comply with the new section 11(w)(ii), causing the premiums to become tax deductible. This would mean that the proceeds of the erstwhile non-conforming policy will become taxable on receipt by the employer.

Example 2QH RI WKH VHULRXV FRQVHTXHQFHV RI WKLV ELW RI OHJLVODWLRQ FDQ be illustrated by the following example: Company X recognises that it will be detrimentally affected

June/July 2011

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Estate Planning

by the death of their chief rocket scientist, Dr Know. In order to protect itself, the company takes out a policy for R2 000 000 on the life of Dr. Know. The policy is a pure life policy, but structured on a non-conforming basis. Prior to 1 January 2010, no premiums were deductible. The company pays one premium after 1 January 2011, being R750. Dr Know dies two days later. The proceeds of the policy are now included in the company’s gross income. The company pays R560 000 in income tax. Because of the unanticipated tax bill, the compaQ\ LV SODFHG XQGHU HQRUPRXV ÀQDQFLDO VWUDLQ

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he impact of the changes on existing policies and the implications for new policies will require WKH DWWHQWLRQ RI ÀQDQFLDO advisors and their clients.� 2. Application to deferred compensation schemes Deferred compensation schemes were popular as arrangements in terms of which employers offered to reward certain key employees whose services the wished to retain. The R30 000 tax-free lump sum (discussed earlier) was never updated WR NHHS SDFH ZLWK LQà DWLRQ DQG DV D UHVXOW GHIHUUHG FRPSHQsation schemes lost their attractiveness over time to the extent that they have been virtually extinct for a number of years now. The motive behind the sudden plethora of legislation aimed at deferred compensation schemes now, instead of in its heyday, is therefore questionable.

Deferred compensation schemes after 1 January 2011 The employer’s position Premiums will no longer be deductible for the employer unless the employee is taxed on the equivalent value. The policy proceeds will be included in the employer’s gross income in terms of paragraph (m). The payment to the employee of the proceeds will not be tax deductible for the employer because of the new section 23(p). The employee’s position The tax consequences for the employee will differ dependLQJ RQ ZKHQ WKH EHQHÀW LV UHFHLYHG DQG ZKHWKHU WKH EHQHÀW takes the form of a lump sum or cession of the policy. $ OXPS VXP EHQHÀW UHFHLYHG E\ WKH HPSOR\HH SULRU WR 0DUFK Where the lump sum is received prior to 1 March 2011, it The Financial Planner

will qualify for the R30 000 tax-free concession provided for in section 10(1) (x). The balance, to the extent that it complies with the requirements of section 7A(4A), may be taxed in terms of the average rate formula. $ OXPS VXP EHQHÀW UHFHLYHG E\ WKH HPSOR\HH DIWHU 0DUFK Where the lump sum is received after 1 March 2011 the lump sum will be taxed at the recipient’s marginal rate without WKH EHQHÀW RI DQ\ WD[ FRQFHVVLRQV :KHUH WKH HPSOR\HU FHGHV WKH SROLF\ WR WKH HPSOR\HH SULRU WR 0DUFK Where an existing deferred compensation policy is ceded prior to 1 January 2012 the tax position of the employee will EH WKH VDPH DV IRU OXPS VXP EHQHÀWV DV VHW RXW DERYH :KHUH WKH HPSOR\HU FHGHV WKH SROLF\ WR WKH HPSOR\HH DIWHU 0DUFK EXW SULRU WR -DQXDU\ Where an existing deferred compensation policy is ceded after 1 January 2012, the policy’s cession value will be exempt from tax in the hands of the employee on taking cession. The receipt of the policy by the employee is exempt in terms of the new exemption created in terms of the new section 10(1)(gF). +RZHYHU DV VRRQ DV WKH EHQHÀWV DFFUXH XQGHU WKH SROLF\ the policy proceeds will be taxable in the hands of the recipient - on the date of receipt, without any tax concessions. The amount will be taxed at the recipient’s marginal rate. (The cession value will be included in the employer’s income in terms of paragraph (m) as a disposal. The employer will not be able to claim any relief on the disposal to the employee).

3. Certain buy and sell arrangements While not that common, companies sometimes structure buyand-sell arrangements on the basis of so-called share buybacks. Provided that the requirements of the Companies Act are met, the company undertakes to buy the deceased shareholder’s shares on death. When the company acquires its own shares, those shares are cancelled and the value of the issued shares in the hands of the surviving shareholders is increased proportionately. Life assurance taken out in order to fund the purchase of the deceased shareholder’s shares will usually be structured as non-conforming keyperson assurance. Where this is the case, the premiums on these policies will remain “non-deductible� after 1 January 2010. The reason for this is that there is an arrangement in terms of which an amount under the policy will be recoverable by the deceased’s estate, being the purchase price paid for the shares. The proceeds should thus remain tax free. On the other hand, where the policy has been structured as a conforming policy so that the employer may claim the tax deduction on the premium, the premium will not be deductible after 1 January 2011 because it will not meet the requirements of the new section 11(w)(ii). The proceeds will, however, remain taxable.

4. Certain unapproved group life schemes Group life schemes structured outside the retirement fund June/July 2011

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Estate Planning

environment will possibly be caught up in the new tax dispensation. Typically, these “unapprovedâ€? arrangements provide cover on the death or disability of an employee. The employer usually funds the contributions and claims a tax deduction. After 1 January 2011, the employer will not be able to claim a deduction unless the employee is taxed on an equivalent amount. Where the employee is taxed on the premium and the proceeds are payable to: o an employee/director or a connected person of that employee/director o the estate of the employee/director, or o any person who is wholly or partially dependant on the employee/director o the proceeds do not fall within the parameters set by paraJUDSKV P DQG P$ RI WKH GHĂ€QLWLRQ RI JURVV LQFRPH DQG should thus be tax-free.

Comment It is understandable that there should be a matching of GHGXFWLRQV DQG WKH WD[DWLRQ RI EHQHĂ€WV UHFHLYHG DV D FRQsequence of the deductions. In this regard, the amendments have merit; however, the retrospective nature of the amendments, and the serious implications they have for arrangements which have been common practice for many years, seem unduly harsh. Financial advisors will have to take cognisance of the amendments in order to assist their clients who, in many instances, will have arranged their affairs in accordance with the then prevailing tax practices. In many instances, the additional taxes will create shortfalls in life cover and/or retirement provision.

Annexure A The technical amendments 1. Section 11 (w) : Tax deductibility of premiums Section 11(w) as we currently know it is deleted and replaced by an entirely new section 11(w). The new section comes into effect on 1 January 2011. In future, premiums on employer owned policies will ony qualify for a tax deduction in two situations: Section 11 (w) (i) : Where the employee is taxed on the premium A premium will be deductible for the employer where the expense incurred by the employer in respect of the premium is included in the employee/director’s income. There is no limit on the deduction. Section 11 (w)(ii) : Pure life cover policies where only the HPSOR\HU EHQHÀWV A premium will also be deductible where the policy meets with all of the requirements of section 11(w)(ii). In terms of this section premiums will only be deductible where: (a) The employer is insured against any loss occasioned by the death, disability or severe illness of the employee/director. (b) The policy is a pure, risk policy with no cash or surrender value. (c) The policy is not the property of anyone other than the The Financial Planner

employer at the time of premium payment. The policy may, however, be ceded as security for a debt of the taxpayer. This is subject to the condition that the creditor is not one of the following: - an employee/director or a connected person in relation to that employee/director, - the estate of the employee/director or - any person who is wholly or partially dependant on the employee/director. (d) No transaction, operation or scheme exists in terms of which any amount recoverable under the policy or an equivalent amount or in place of that amount will be made over by the employer, to - an employee/director or a connected person in relation to that employee/director - the estate of the employee/director or - any person who is wholly or partially dependant on the employee/director. Again there is no limit on the amount that may be deducted as a premium. 2. Proceeds : Taxable (Paragraph (m) and (mA) of gross Income) Under the new regime the rule that where a premium is deductible, the proceeds will be taxable still applies in the case of: - old section 11(w) policies, and - policies where the premiums are deductible or become deductible in terms of the new section 11(w)(ii). It appears as though the proceeds of policies in respect of which the premiums are deductible under the new section 11 (w)(i) will be tax free provided that they accrue to the employee/director etc. and not the employer. To give effect to this new dispensation, paragraph (m) has been amended slightly, and a new paragraph (mA) is introGXFHG LQWR WKH GHĂ€QLWLRQ RI JURVV LQFRPH LQ VHFWLRQ RI WKH Act. Because the new section comes into operation on 1 January 2011 it means that the rules will apply to existing policies, both conforming and non-conforming from that date. It is the application of these provisions to existing policies which is most concerning. 2.1 Paragraph (m) : “Proceedsâ€? received by the employer will be taxable Where any premium paid, in respect of a policy owned by an employer on the life of an employee/director, is or was deductible in any year of assessment, then any amount received by or accrued to the employer: XQGHU WKH SROLF\ SROLF\ EHQHĂ€W ZKHWKHU PDWXULW\ GHDWK RU disability) - upon surrender of the policy - disposal of the policy, or - by way of any loan or advanced granted by the insurer on the strength of the policy will be included in the gross income of the employer in terms of Paragraph (m). This provision is subject to the following. Provided that: (i) The amount included in the employer’s gross income may be reduced by any loan or advance on security of the policy June/July 2011

11

Estate Planning

previously included in the taxpayer’s gross income (ii) Where a paid-up policy has been issued in place of a terminated policy they will be regarded as being the same policy (iii) Where a lump sum is paid to the employer the lump sum can be reduced by the premiums paid by the taxpayer but which did not qualify for a deduction, and (iv) Paragraph (m) does not apply to amounts received by persons other than the taxpayer (employer) subsequent to the cession of the policy to that person, if the policy is - A pre-1 January 2011 section 11(w) policy, or - A post-1 January 2011 section 11(w)(ii) policy. (These policies are covered by paragraph (mA) below) 2.2 Paragraph (mA) : Proceeds of policies ceded to an employee/director etc. Paragraph (mA) includes, in the gross income of any person other than the employer, any amount that is received by or accrued to that person, subsequent to the cession to that person, of a: - pre-1 January 2011 section 11(w) policy, or - post-1 January 2011 section 11(w)(ii) policy. This amount may be reduced by the amount of deductible premiums which were not deducted because they exceeded the allowable deduction in a year of assessment. This provision comes into operation on 1 January 2011 and applies to all amounts received or accrued after that date. 3. The abolition of certain tax concessions 3.1 Section 10(1)(x): R30 000 tax-free lump sum Section 10(1)(x) is abolished with effect from 1 March 2011. This section allowed for a R30 000 tax-free concesVLRQ RQ OXPS VXP EHQHÀWV UHFHLYHG E\ DQ HPSOR\HH IURP DQ employer under certain conditions. 3.2 Section 7A(4A) : Application of the average rate formula Section 7A(4A) is abolished with effect from 1 March 2011. Section 7A(4A) allowed for the application of average rate IRUPXOD WR OXPS VXP EHQHÀWV LQ H[FHVV RI 5 XQGHU FHUtain conditions.

Comment Taken together, the abolition of sections 10(1)(x) and 7A(4A) means that lump sums received from an employer will, in future, be taxable in full at the employee’s marginal rate. 7KH H[SHFWDWLRQ WKDW WKHVH EHQHÀWV ZRXOG EH WD[HG LQ DFFRUdance with the scales applicable to retirement fund lump sum EHQHÀWV KDV QRW PDWHULDOLVHG 3.3 Section 23(p): No deduction in respect of lump sum payments to employees After 1 January 2011 an employer will not be able to claim deduction in respect of an amount paid to - an employee/director or a connected person in relation to that employee/director - the estate of the employee/director, or - any person who is wholly or partially dependant on the employee/director where that amount was funded, directly or indirectly by a long-term assurance policy. The Financial Planner

Comment Deferred compensation schemes were based on the premise that lump sums received by the employer and paid over to the employee would be tax neutral. On the one hand the amount would have been included in the employer’s gross income in terms of paragraph (m). While on the other, the employer would have been able to claim a tax deduction in terms of VHFWLRQ D RQ WKH EHQHÀW SDLG WR WKH HPSOR\HH LQ WHUPV RI an employment contract or established practice. Section 23(p) now blocks the tax deduction in respect of the lump sum paid to the employee. 3.4 Section 23(q): No deduction in respect of policies ceded to employees An employer will not be able to claim a tax deduction in respect of a pre-1 January section 11(w) policy ceded to: - an employee/director or a connected person in relation to that employee/director - the estate of the employee/director, or - any person who is wholly or partially dependant on the employee/director. This section comes into operation on 1 January 2011 but only applies to policies ceded after 1 January 2012.

Comment The effect of this provision on the employer is the same as in the case of section 23(p) above. For the employee the tax consequences will differ depending on the date of the policy cession. In this regard see the discussion of section 10(1) (gF) below. 3.5 Section 23B(4): No deduction for premiums other than in terms of section 11(w) This new section makes it clear that an employer will not be able to claim a deduction in respect of policy premiums under section 11(a) (general deduction formula) where: (a) the employer is the policyholder, and (b) the employer is insuring itself against any loss occasioned by the death, disability or severe illness of the employee/director. 4. A new exemption : Section 10(1)(gF): Employee exempt on receipt of ceded policy The Act introduces a new exemption in the form of section 10(1)(gF). The exemption applies where a pre-1 January 2011 section 11(w) policy is ceded, to: - an employee/director or a connected person of that employee/director - the estate of the employee/director, or - any person who is wholly or partially dependant on the employee/director. The receipt of the policy by the cessionary will be exempt from tax. The exemption comes into effect on 1 January 2011 but only applies to policies ceded after 1 January 2012. Note: This provision does not mean that the proceeds on the policy will escape tax. The proceeds will fall into the gross income of the cessionary in terms of paragraph (mA) of the JURVV LQFRPH GHĂ€QLWLRQ XSRQ WKHLU UHFHLSW June/July 2011

12

Investment

Investors continue to avoid equities, EXW SRXU ELOOLRQV LQWR ¹ [HG LQWHUHVW

Leon Campher, CEO of the Association for Savings and Investment South Africa

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13

Investment

Offshore versus domestic

'HVSLWH WKH ODUJH SRUWLRQ RI DVVHWV SDUNHG LQ À[HG LQWHUHVW funds, the CIS industry through its equity portfolios holds apSUR[LPDWHO\ RI WKH -6(·V 5 WULOOLRQ PDUNHW FDSLWDOLVDWLRQ ZKLFK HTXDOV DURXQG 5 ELOOLRQ $W WKH HQG RI WKH LQGXVWU\ RIIHUHG IXQGV

Best of both worlds for investors $QRWKHU LQQRYDWLRQ RI WKH &,6 LQGXVWU\ ZDV WKH DVVHW DOORFDWLRQ IXQG 'RPHVWLF DVVHW DOORFDWLRQ IXQGV LQYHVW DFURVV WKH HTXLW\ ERQG PRQH\ DQG SURSHUW\ PDUNHWV ZLWK WKH DVVHW PDQDJHU GHFLGLQJ KRZ PXFK PRQH\ WR LQYHVW LQ HDFK DVVHW FODVV 7KHVH IXQGV KDYH EHFRPH SRSXODU ZLWK LQYHVWRUV DQG DGYLVHUV DOLNH VLQFH WKH\ SURYLGH GLYHUVLÀFDWLRQ DFURVV DVVHW FODVVHV ZLWKLQ RQH IXQG ZLWK DQ H[SHUW IXQG PDQDJHU GHFLGLQJ RQ WKH DSSURSULDWH PL[ )XQGV UDQJLQJ IURP ORZ HTXLW\ WR KLJK HTXLW\ H[SRVXUH DUH DYDLODEOH ZLWKLQ WKH DVVHW DOORFDWLRQ FODVV $W WKH HQG RI ODVW \HDU WKH GRPHVWLF DVVHW DOORFDWLRQ VHFWRU KHOG RI LQGXVWU\ DVVHWV ,QYHVWRUV ZKR FDQQRW VWRPDFK WKH YRODWLOLW\ RI D JHQHUDO HTXLW\ IXQG EXW ZKR ZDQW FDSLWDO JURZWK FRXOG FRQVLGHU LQYHVWLQJ LQ DQ DVVHW DOORFDWLRQ IXQG WKDW PDWFKHV WKHLU SURÀOH %XW LQYHVWRUV ZKR ZDQW WR DFKLHYH LQÁDWLRQ EHDWLQJ UHWXUQV RYHU WKH ORQJ WHUP PXVW OHDUQ WR PDLQWDLQ D VWHDG\ HTXLW\ H[SRVXUH HYHQ LI LW LV WKURXJK DQ DVVHW DOORFDWLRQ IXQG DV SDUW RI D ZHOO GLYHUVLÀHG SRUWIROLR 7KH RQO\ ZD\ WR PD[LPL]H UHWXUQV LV E\ FRQVWUXFWLQJ D VROLG ZHOO GLYHUVLÀHG SRUWIROLR ZLWK D WUXVWHG ÀQDQFLDO DGYLVRU DQG WKHQ VLWWLQJ RXW WKH EDG WLPHV The Financial Planner

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14

Investment

Big offshore opportunities for advisors

Michael King, Director: Sales (Africa)

S

LJQLĂ€ FDQW HDVLQJ RI H[FKDQJH FRQWUROV FUHDWHV QHZ EXVLQHVV RSSRUWXQLWLHV IRU Ă€ QDQFLDO DGYLVRUV New Reserve Bank rules allow South Africans to invest up to R4 million per person per year offshore. The new dispensation comes during a period of prolonged rand strength, creating a timing opportunity should the rand lose ground in the year ahead. Franklin Templeton Investments South Africa reports an increase in offshore business, with business volumes positioned for long-term growth. We believe new South African Reserve Bank rules could prompt a wide-ranging reappraisal of offVKRUH GLYHUVLĂ€ FDWLRQ E\ UHWDLO LQYHVWRUV ² JRRG QHZV IRU DGYL sors looking to develop a strong offshore product offering. The local team of analysts and investment professionals is close to investor sentiment on international markets as it foThe Financial Planner

cuses exclusively on the parent company’s extensive suite of offshore funds. As advice professionals are aware, many retail investors remain cautious about offshore exposure following past disappointments; however, the old reticence has begun to recede. Now we’ve witnessed a major relaxation of foreign exchange controls by the Reserve Bank, de-facto acceptance WKDW RIIVKRUH GLYHUVLĂ€ FDWLRQ LV SUXGHQW 7KLV LQ LWVHOI LV VXIĂ€ FLHQW to prompt an offshore rethink by many members of the investing public. We view the Reserve Bank announcement as a tipping point with important implications for advisors who are concerned about the narrow focus of many client portfolios. A new client mindset is becoming apparent and believes clients are increasingly receptive to the business case for offshore exposure. Many investors now acknowledge the inherent risk of total FRPPLWPHQW WR D ORFDO PDUNHW ² WKH -6( ² UHSUHVHQWLQJ OHVV than 1% of global market capitalisation. At the same time, we see growing interest in Asian equities, VSHFLĂ€ FDOO\ &KLQD DQG $VLDQ JURZWK IXQGV $QRWKHU WUHQG LV WRZDUG RIIVKRUH Ă€ [HG LQFRPH SURGXFWV +HUH WKH LQYHVWRUV IDOO LQWR WZR FDWHJRULHV ² WKRVH ORRNLQJ IRU D SUXGHQW RSWLRQ VXS SRUWHG E\ RIIVKRUH GLYHUVLĂ€ FDWLRQ DQG WKRVH ZKR KDYH VHULRXV concerns about a sudden market correction. The investor rethink has only recently begun and that advisors will have to engage in continued market education. After a period of neglect, offshore products have become a potential growth area. Rand strength underlines the opportunity, whether in Asia, the BRIC countries, the USA or Europe. But this is much more than a currency play. It’s a strategic opportunity – for advisors as well as their clients. June/July 2011

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Investment

A bit about property‌ Ian Brink, Glacier by Sanlam

F

or many of us, investing in property refers to the purchase of a home to live in, or for the more fortunate, a second or third property to rent out or use as holiday accommodation. Purchasing property is an integral part of wealth creation. Yet owning physical property is only one means of gaining exposure to this unique asset class, and essentially only exposes the homeowner (or the investor) to a VSHFLÀ F DUHD RI WKH SURSHUW\ LQYHVWPHQW VSHFWUXP WKDW LV WKH residential property market. Moreover, the returns derived from owning a home, which presumably is appreciating in value over time, are unrealized unless the property is sold, and even then, usually the return derived from selling one’s SULPDU\ SURSHUW\ LV XVHG WR À QDQFH D QHZ SULPDU\ UHVLGHQFH )HZ SHRSOH VHOO WKHLU RQO\ KRPH DQG PRYH LQWR D UHQWHG à DW simply to realize a capital gain! For those who purchase secondary properties or speculate LQ UHVLGHQWLDO SURSHUW\ WKH FRVWV RI À QDQFLQJ WKH SURSHUW\ together with the general illiquidity associated with physical property can make this type of investing particularly GDXQWLQJ 7KH EX\ WR UHQW VWUDWHJ\ DOVR KDV LWV RZQ GLIÀ FXOWLHV not least of which is the fact that residential rental rates can EH LQà XHQFHG E\ QXPHURXV H[RJHQRXV IDFWRUV 'HVSLWH WKH IDFW that real estate agents usually facilitate the managing of the property on the owner’s behalf, it is the owner who ultimately remains responsible for the upkeep and maintenance of the property, and also shoulders the burden of any unrecoverable damage which may be incurred. Like with all other markets, prices of residential properties à XFWXDWH GHSHQGLQJ RQ WKH VXSSO\ 7KDW VDLG UHVLGHQWLDO property has been kind to investors with decent returns over the past decade and a bit. Between the beginning of 1997 and the middle of 2007 median property prices as measured according to Standard Bank’s mortgage book increased by 330% in nominal terms. Median house prices according to ABSA’s mortgage book over the same period increased by 415%.

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The performance of the residential property market is, to a large degree, a function of the interest rate environment, WKH À QDQFLDO KHDOWK RI SHUVRQDO EDODQFH VKHHWV DV ZHOO DV WKH FRQÀ GHQFH ZKLFK WKH DYHUDJH SHUVRQ KDV LQ WKH ORFDO HFRQRP\

June/July 2011

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Investment

When individual balance sheets are strong and there are expectations of strong economic growth going forward, individuals are more inclined to take on extra debt which translates into extra demand for residential property and higher prices. Similarly, when interest rates are low or there are expectations of declining interest rates going forward, individuals will be more inclined to take on debt in order to purchase new or more expensive homes. Albeit that investing in residential property is implicit to most of us who aspire to owning our own homes, investing in listed property does provide another means of getting exposure to the property market. The listed property universe may be divided into three broad categories, namely PUTs (Property Unit Trusts), PLSs (Property Loan Stocks) and Property Companies. PUTs, like all other local unit trusts, are registered under CISCA – the Collective Investment Schemes Controls Act of 2002. Where they differ from ordinary unit trusts is that WKH\ DUH OLVWHG RQ WKH -6( 7KHUH DUH FXUUHQWO\ ÀYH 387V which jointly have a market cap of approximately R30bn. Since inception in 1969, the legislation surrounding PUTs has become more relaxed, especially with regards to gearing levels. Gearing levels in a PUT are dictated by its trust deed ZKLFK VSHFLÀHV WKH DPRXQW RI ERUURZLQJ DV D SURSRUWLRQ RI the fund’s holdings. The gearing levels in local property unit trusts are much lower than their international counterparts. ,QLWLDOO\ 387V ZHUH RQO\ DOORZHG WR LQYHVW LQ À[HG SURSHUW\ however, with the loosening of the legislation surrounding PUTs, WKH\ DUH QRZ EHLQJ DOORZHG WR LQYHVW LQ QRQ À[HG SURSHUW\ (listed property) as well. Only retained income is taxed inside WKH 387 WKH LQFRPH ZKLFK LV GLVWULEXWHG WR WKH LQYHVWRU LV RQO\ taxed in the hands of the unit holder. As a consequence of this tax legislation, all income is paid out to the investor either biannually or quarterly. Income distributions from PUTs are regarded as interest – and taxed accordingly. PLSs were born during an era when PUT legislation was still fairly restrictive. Unlike PUTs at this time (early 1980s), PLSs were allowed to borrow funds, and could also invest in listed property. PLSs are companies which invest exclusively in property. Like all other companies, they are subject to the Companies Act of 1973. There are 13 PLSs which jointly

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comprise a market cap of approximately R90bn. Each unit of a PLS is essentially comprised of a portion of equity in the underlying property portfolio together with a portion of debt (a loan to the company). The investor earns interest on his/her loan to the company which is funded from the rental collections on the property portfolio net of the administration, maintenance and other running costs. Dividends paid out on the equity portion of the unit are usually small in comparison to the debenture (loan) interest payments. Similar tax rules apply to PLSs as to PUTs, and as such, the interest earned on the investment is taxed in the hands of the investor and not the company. Listed Property companies differ from PUTs and PLSs in a QXPEHU RI ZD\V )LUVWO\ WKH\ DUH WD[HG RQ ERWK WKHLU SURĂ€WV and their distributions. Secondly, listed property companies are not compelled to distribute all their net income. Lastly, listed property companies are allowed to buy shares in other listed property companies and are not forced to invest directly in physical assets. Listed property companies are also subject to the Companies Act of 1973. Listed property has distinct advantages over residential property when used purely for investing purposes. Listed property companies are listed on the JSE, and trade similarly to ordinary equities. As with equities, one is able to gain exposure to a property portfolio without purchasing the properties in their entirety. This means that the investor does not need to lay out large amounts of capital (as in the case of purchasing a residential property) nor does the investor need to raise a mortgage ERQG LQ RUGHU WR Ă€QDQFH WKH SURSHUW\ Since there is an active market for listed property shares, they are a lot more liquid than physical property and may be disposed of a lot quicker without incurring large transaction costs or paying high sales commissions. Listed property also KDV GLYHUVLĂ€FDWLRQ EHQHĂ€WV RYHU SK\VLFDO SURSHUW\ LQ VR PXFK as the property portfolios are usually comprised of a mixture of property types (retail, industrial and commercial) and also SURYLGH JHRJUDSKLF GLYHUVLĂ€FDWLRQ ² WKDW LV PD\ EH VSUHDG out over a fairly large area unlike a residential property ZKLFK LV XVXDOO\ FRQĂ€QHG WR D VLQJOH JHRJUDSKLF DUHD Historic performance is usually a poor indicator of future performance. That said, listed property has historically provided investors with handsome rewards. Since inception (April 2002) till the end of September 2010, the listed property index has delivered a return of 726% (28,3% annualized) compared to the ALSi which delivered a return of 238% (15,4% annualized) and the ALBi which delivered a return of 168% (12,3% annualized). The returns derived

June/July 2011

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Investment

from listed property are twofold. Like shares, the value Name: of the underlying FTSE/JSE Africa SA List Prop property portfolio (SAPY) J253T may appreciate (or FTSE/JSE Africa All Share depreciate) over J203T time. This increased ALBI Total Return - Beassa (decreased) value in (ALBI) the underlying portfolio in turn contributes to an increase (decrease) in the value of the property units. It’s important to note that, like with equities, there may be irrational periods of over and under pricing of the units. The second source of the return on listed property is the yield which is derived from the portfolio. This yield is essentially funded by the rental stream derived on the properties as well as interest earnings. A major advantage which listed property has over other asset classes is the relative stability of the yields which they provide (see the graph below). This stability results out of the fact that the rental incomes are usually tied down by lease agreements which lock in tenants over a period of time. Moreover, these lease agreements usually have a built in escalation clause which ensures that the collected rental stream escalates at a PLQLPXP RI LQà DWLRQ 7KH RQXV RI PDQDJLQJ WHQDQW FRQWUDFWV and maintenance of the property portfolios are delegated to specialized property management companies, which means that the listed property investor is not burdened with the administration and maintenance of the properties. $QRWKHU VLJQLÀFDQW FKDUDFWHULVWLF RI OLVWHG SURSHUW\ LV EHVW illustrated by looking at its correlation to other asset classes – VSHFLÀFDOO\ HTXLWLHV DQG ERQGV VHH WKH WDEOH EHORZ 2YHU WKH period from the inception of the listed property index (April 2002) till the end of September 2010, the correlation of the

The Financial Planner

Performance

Annualised Performance

Annualised Standard Deviation

Standard Deviation (Monthly)

729.99%

28.26%

17.561

5.069

238.93%

15.44%

18.758

5.415

168.44%

12.32%

6.669

1.925

listed property total return index with the ALSi and the ALBi was 30% and 60% respectively. This speaks to the usefulness RI OLVWHG SURSHUW\ DV D PHDQV RI SRUWIROLR GLYHUVLÀFDWLRQ $OVR it’s interesting to note that the volatility of listed property over the same period was marginally less than the ALSi, despite having outperformed both equities and bonds. This observation is by no means attempting to make the case for listed property as an alternative to investing in other asset classes, since the results of such analysis are usually subject to end-point bias. Rather, what does become apparent, is the importance of this unique asset class when FRQVWUXFWLQJ D GLYHUVLÀHG SRUWIROLR

References 1) Moodley-Isaacs, N., 2009. How to invest in listed SURSHUW\ >RQOLQH@ $YDLODEOH DW KWWS ZZZ SHUVĂ€Q FR ]D index.php?fSectionId=&fArticleId=5152692 [Accessed 22 September 2010]. 2) Brown, M. 2010. Listed property: The fourth asset class, [online] Available at: < http://www.mg.co.za/article/201005-07-listed-property-the-fourth-asset-class> [Accessed 20 September 2010]. 3) Catalyst, 2010. Listed property sector monthly overview, [online] Available at: < http:// www.catalyst.co.za/domestic/ reports/reports2010/ monthlyreportSep2010.pdf> [Accessed 30 September 2010] 4) Botha, J., 2010. South Africa: Residential Property Report, [online] Available at: < http://ws9.standardbank. co.za/sbrp/LatestResearch.do> [Accessed 20 September 2010] 5) Association of Property Unit Trusts, 2010. Property Unit Trusts, [online] Available at: www.put.co.za [Accessed 20 September 2010] Association of Property Loan Stocks, 2010. Property Loan Stocks & Tax Information, [online] Available at: http:// www.propertyloanstock.co.za/ [Accessed 20 September 2010] June/July 2011

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Planning

South African life and disability insurance shortfall remains critical DYHUDJH IDPLO\ ZRXOG KDYH WR FXW OLYLQJ H[SHQVHV VLJQLĂ€ FDQWO\ if the main earner of a household dies or becomes disabled. Apart from a general belt-tightening exercise, this may also PHDQ VHOOLQJ WKH IDPLO\ KRPH DQG VDFULĂ€ FLQJ D GHFHQW HGXFD tion for the children.

How big is the gap?

Peter Dempsey, the deputy CEO of ASISA

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uring the course of next year, approximately 160 000 South African income earners are expected to die, while an estimated 52 000 earners will suffer total and permanent disability. This means that, in addition to grappling with the loss of these income earners, more than IDPLOLHV ZLOO IDFH XQH[SHFWHG À QDQFLDO KDUGVKLS WKLV year, brought about by South Africa’s massive life and disability insurance gap. New research conducted on behalf of the Association for Savings and Investment South Africa shows that the average South African income earner is underinsured by R600 000 in the event of death and by R900 000 in the event of disability. On average South African earners are underinsured by 62% for death and 60% for disability. This means that the

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7KH À UVW LQGHSHQGHQW VWXG\ DLPHG DW PHDVXULQJ 6RXWK $I rica’s life and disability insurance shortfall was conducted in 7KH DVWRQLVKLQJ À QGLQJ ZDV WKDW 6RXWK $IULFDQ HDUQHUV were grossly underinsured by an estimated R10-trillion. For the 2010 study, again conducted by True South Actuaries & Consultants, but, this time, in partnership with the UNISA Bureau of Market Research, more detailed data was available on personal income than in 2007. It was also possible to eliminate individual earners with no need for insurance. As a UHVXOW WKH À QGLQJV RI WKH VWXG\ DUH HYHQ PRUH UHDOLVWLF than those in 2007. The 2010 Life and Disability Insurance Gap Study shows that South Africa’s 12,4-million income earners between the ages of 16 and 65 are underinsured by R18,4-trillion. The insurance gap was calculated separately for death and disDELOLW\ DQG LV GHÀ QHG DV WKH GLIIHUHQFH EHWZHHQ WKH LQVXUDQFH need and the actual cover. The death insurance gap is R7,3trillion and the disability insurance gap is R11,1-trillion. Given the fact that it was possible to interrogate data in much greater detail this year and factoring in the growth in earnings over the past three years since the last study was conducted, we conclude that the insurance gap has not necessarily widened. The insurance gap is likely to have remained static in real terms over the past three years, which is positive given the tough economic conditions that South Africans had to endure for the past couple of years. What this means is that consumers did not rush out and increase their levels of life and disability insurance since the last study was done in 2007. This is understandable given the JOREDO À QDQFLDO FULVLV DQG WKH UHFHVVLRQ WKDW IROORZHG %XW WKLV also means that people held on to the life and disability protection cover they had. This is positive and consistent with the lower policy lapse rates we have seen in the industry.

Where is the biggest gap? While the R18,4-trillion life and disability insurance gap shows that South Africans are in trouble as far as life and disability protection is concerned, the number is so large that it becomes meaningless unless it is unpacked and made relevant to individual consumers.

June/July 2011

19

Planning

Especially middle- to high-income earners are usually quick to dismiss these statistics, believing mistakenly that low-income earners are likely to be the only group hard hit by the loss of an earner due to death or disability. 7KLV WKLQNLQJ LV IXQGDPHQWDOO\ à DZHG 2XU UHVHDUFK VKRZV that consumers earning more than R16 700 a month will leave WKHLU IDPLOLHV ZLWK WKH ELJJHVW ÀQDQFLDO VKRUWIDOO ZKHQ WKH\ GLH or become disabled. The higher an earner’s income bracket, the more life cover is required to maintain living standards. The Life and Disability Insurance Gap Study also shows that while consumers earning less than R3 000 have a life cover shortfall, the reverse is true for disability insurance. This is because of the Government disability income grant which, due WR LWV À[HG DPRXQW QDWXUH LV YHU\ HIIHFWLYH DW UHSODFLQJ ORVW income in the lower income brackets.

Disability

Personal Income per month aĹŒer tax

Insurance Need

Actual Cover

Insurance Gap

R0-R3 000

R235 744

R284 346

- R48 602

R3 000-R5 800

R777 277

R325 728

R451 548

R5 800-R8 300

R1 270 763

R385 047

R885 716

R8 300-R16 700

R2 227 830

R621 934

R1 605 896

R16 700+

R5 309 603

R2 103 374

R3 206 229

Closing the gap Closing the life and disability insurance gap would require South African earners to spend on average an additional 2,4% a year of their personal income on life cover (R35-billion) and 1,5% a year on disability cover (R15-billion).

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he only group of people who have VXIĂ€FLHQW OLIH FRYHU DFFRUGLQJ WR WKH VWXG\ DUH KLJK LQFRPH HDUQHUV ROGHU WKDQ Âľ

Monthly net income for each of the segments: Segment 1 R0R3 000; Segment 2 R3 000-R5 800; Segment 3 R5 800-R8 300; Segment 4 R8 300-R16 700; Segment 5 R16 700+ 7KH RQO\ JURXS RI SHRSOH ZKR KDYH VXIĂ€FLHQW OLIH FRYHU DFcording to the study are high income earners older than 55. This is because this group has generally saved enough money and KDV RIWHQ DOVR EHQHĂ€WHG IURP JURXS OLIH FRYHU WKURXJK \HDUV RI PHPEHUVKLS RI DQ HPSOR\HU¡V SHQVLRQ IXQG 2Q WKH GLVDELOLW\ VLGH KRZHYHU WKLV JURXS DOVR Ă€QGV LWVHOI XQGHULQVXUHG The following offers a snap shot of the life and disability insurance gap for individual earners, segmented per income group.

Personal Income per month aĹŒer tax

Insurance Need

Actual Cover

Insurance Gap

R0-R3 000

R133 372

R7 318

R126 054

R3 000-R5 800

R483 301

R65 628

R417 674

R5 800-R8 300

R800 628

R167 138

R633 490

R8 300-R16 700

R1 408 200

R431 635

R976 565

R16 700+

R3 325 942

R1 802 173

R1 523 768

The Financial Planner

If earners do not close the current insurance gap, the averDJH KRXVHKROG ZLOO EH IRUFHG WR FXW H[SHQGLWXUH E\ DERXW D third should the earner die or become disabled. The alternative would be to increase the monthly earnings of the household after the death or disability of an earner by an average of R3 177 on death or R4 696 on disability. For many families this will present a challenge. In addition, WKLV ÀJXUH ZLOO EH KLJKHU RU ORZHU GHSHQGLQJ RQ WKH DFWXDO income bracket of the earner whose income has been lost due to death or disability.

About the Gap Study )UDQFRLV +XJR ([HFXWLYH 'LUHFWRU DW 7UXH 6RXWK $FWXDULHV and Consultants, says the study only considered data relevant to South Africa’s 12,4-million citizens between the ages of 16 and 65 who were earning a regular income. He points out that the study took a conservative approach, taking into consideration only the levels of life and disability cover required to maintain ongoing household spending after the death or disability of an earner and then only for WKH SHULRG XS WR WKH HDUQHU¡V LQWHQGHG UHWLUHPHQW GDWH 2QH RII FRVWV VXFK DV IXQHUDO FRVWV H[HFXWRU IHHV HVWDWH GXW\ DQG FDSLWDO JDLQV WD[ ZHUH WKHUHIRUH H[FOXGHG DV ZHUH SRVW UHWLUHPHQW OLYLQJ H[SHQVHV The primary source of information for determining the insurance need was household income, household expenditure and personal income data as provided by UNISA’s Bureau of Market Research (BMR). Additional information was sourced from life companies, which provided statistics of total payouts should all policyholders with life cover die and should all policyholders with disability cover become totally and permanently disabled.

June/July 2011

20

Planning

Your client’s Bucket List

­ DQ LQYDOXDEOH DLG IRU ¹ QDQFLDO SODQQHUV

Kim Potgieter, Chartered Wealth Solutions

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Bucket List is a list of all the goals you want to achieve DQG GUHDPV \RX ZDQW WR IXOÀ O EHIRUH \RX ¶NLFN WKH EXFNHW· (QFRXUDJLQJ \RXU FOLHQWV WR FUHDWH WKHLU RZQ Bucket List FDQ EH DQ LQYDOXDEOH WRRO LQ WKH À QDQFLDO SODQQLQJ SURFHVV A Bucket List KHOSV IRFXV QRW RQO\ \RXU PLQG EXW DOVR WKDW RI \RXU FOLHQW 'R \RX NQRZ ZKDW JRDOV \RX KDYH DFKLHYHG LQ WKH last six months and do you know what goals you will achieve LQ WKH QH[W VL[ PRQWKV" $OO WRR RIWHQ ZH JHW FDXJKW XS LQ RXU GD\ WR GD\ DFWLYLWLHV DQG GRQ·W WDNH D VWHS EDFN WR UHYLHZ SDVW VXFFHVVHV RU SODQ IXWXUH JRDOV 7KH REMHFWLYH RI FUHDWLQJ D Bucket List is not to create some NLQG RI UDFH DJDLQVW WLPH RU WR LQVWLO D IHDU RI GHDWK 7KH ZKROH SRLQW RI D Bucket List is to maximise every moment of The Financial Planner

RXU H[LVWHQFH DQG WR LQVSLUH XV WR OLYH RXU OLIH WR WKH IXOOHVW ,W·V a reminder of all the things we want to achieve in our time on HDUWK VR WKDW LQVWHDG RI ZDVWLQJ RXU WLPH LQ SRLQWOHVV DFWLYL WLHV ZH GLUHFW RXU HQHUJ\ WRZDUGV ZKDW PDWWHUV PRVW WR XV ,W LV WKH SUHSDUDWLRQ WKDW OD\V WKH JURXQGZRUN IRU PDJLF WR EHJLQ (QFRXUDJLQJ \RXU FOLHQWV WR FUHDWH WKHLU Bucket List will give \RX D GHWDLOHG LQVLJKW LQWR WKHLU GUHDPV DQG DPELWLRQV ,W ZLOO KHOS \RX DFFXUDWHO\ LGHQWLI\ ZKDW LV WUXO\ LPSRUWDQW WR \RXU FOLHQW DQG VXEVHTXHQWO\ \RX FDQ WDLORU WKHLU À QDQFLDO SODQ WR VXSSRUW WKHLU OLIHORQJ DPELWLRQV <RX WKHQ EHFRPH PRUH WKDQ VLPSO\ WKHLU À QDQFLDO DGYLVRU \RX EHFRPH WKHLU Bucket List À QDQFLDO IDFLOLWDWRU 7KLV ZLOO WDNH \RXU FOLHQW DGYLVRU UHODWLRQ VKLS WR DQRWKHU OHYHO DQG UHVXOW LQ D WUXO\ PHDQLQJIXO À QDQFLDO SODQ IRU \RXU FOLHQW $ FOLHQW ZKR IHHOV KH RU VKH KDV EHHQ WUXO\ XQGHUVWRRG LV DOVR PRUH OLNHO\ WR EH D OR\DO FOLHQW IRU OLIH $Q H[DPSOH RI WKH YDOXH RI UHYLHZLQJ D FOLHQW·V Bucket List LV D FOLHQW LQ KHU PLG IRUWLHV ZKR UHFHQWO\ FDPH WR VHH PH 6KH ZDV FOHDULQJ 5 SHU PRQWK DQG KHU ELJJHVW ZLVK ZDV ¶RQH GD\· WR JR RYHUVHDV DV VKH KDG QHYHU OHIW 6RXWK $IULFD 6KH KDV WZR WHHQDJHG FKLOGUHQ DQG XSRQ UHYLHZ ZH GLVFRY HUHG VKH ZDV VSHQGLQJ XQQHFHVVDULO\ RQ IULYRORXV LWHPV ZH KDYH LPSOHPHQWHG D SODQ ZKHUHE\ VKH VDYHV D VHW DPRXQW RI PRQH\ HDFK PRQWK DQG ZLWKLQ WZR \HDUV VKH ZLOO KDYH HQRXJK WR PDNH KHU GUHDP D UHDOLW\ :KHQ \RXU À QDQFLDO SODQ UHVRQDWHV ZLWK ZKDW WKH FOLHQW WUXO\ ZDQWV LW LV HDVLHU WR PDNH WKH QHFHVVDU\ VDFULÀ FHV LQ RUGHU WR DFKLHYH ZKDW WKH SODQ VHWV RXW IRU WKH FOLHQW 7KH EHDXW\ RI ZRUNLQJ ZLWK FOLHQWV DQG WKHLU %XFNHW /LVWV LV WKDW DV À QDQFLDO SODQQHUV ZH DUH LQ D XQLTXH SRVLWLRQ DV ZH KDYH WKH LQVLJKW LQWR WKHLU À QDQFLDO VWDQGLQJ WR NQRZ ZKLFK items on the Bucket List DUH LPPHGLDWHO\ DFKLHYDEOH DQG ZH FDQ DOVR DGYLVH À QDQFLDO VWUDWHJLHV WR HQVXUH WKDW RWKHU PRUH FRVWO\ GUHDPV DUH RQH GD\ UHDOLVHG

Guidelines for helping clients make their Bucket List Many clients resist making a Bucket List VLPSO\ EHFDXVH WKH\ GR QRW NQRZ ZKHUH WR VWDUW $ JRRG VXJJHVWLRQ LV WKDW WKH\ EX\ D QRWHERRN RU RSHQ D À OH RQ WKHLU FRPSXWHU DQG GLYLGH LW LQWR VHFWLRQV VXFK DV ´7UDYHOµ ´$FFRPSOLVKPHQWVµ ´)DPLO\µ ´)LQDQFLDOµ DQG ´2WKHUµ ,QVWUXFW WKHP WKHQ WR MRW GRZQ UDQGRPO\ DQ\ LGHDV WKH\ KDYH WKH WULFN LV QRW WR VHOI FHQVXUH WKHPVHOYHV DQG IRU WKHP WR ZULWH GRZQ DQ\WKLQJ QR PDWWHU KRZ XQUHDOLVWLF IRU H[DPSOH WKH\ PD\ ZULWH GRZQ XQGHU ¶$FFRPSOLVKPHQWV· WKDW WKH\ ZDQW WR OHDUQ )UHQFK DQG OLYH LQ )UDQFH 7KLV PD\ WXUQ RXW WR EH XQUHDOLVWLF DQG LPSUDFWLFDO EXW WKH\ FRXOG HQG XS OHDUQLQJ June/July 2011

21

Planning

French at a local language school followed by a summer spent living in the South of France. Goal accomplished! Some questions clients can ask themselves to get the ball rolling are: ‡ :KDW LI \RX ZHUH WR GLH WRPRUURZ" :KDW ZRXOG \RX ZLVK \RX FRXOG GR EHIRUH \RX GLH" ‡ :KDW KDYH \RX DOZD\V ZDQWHG WR GR EXW KDYH QRW \HW GRQH" ‡ :KDW ZLOO \RX GR LI \RX KDYH XQOLPLWHG WLPH PRQH\ DQG UHVRXUFHV" ‡ $Q\ FRXQWULHV SODFHV RU ORFDWLRQV \RX ZDQW WR YLVLW" ‡ :KDW DUH \RXU ELJJHVW JRDOV DQG GUHDPV" ‡ :KDW GR \RX ZDQW WR VHH LQ SHUVRQ" ‡ :KDW DFKLHYHPHQWV GR \RX ZDQW WR KDYH" ‡ :KDW H[SHULHQFHV GR \RX ZDQW WR KDYH IHHO" ‡ $UH WKHUH DQ\ VSHFLDO PRPHQWV \RX ZDQW WR ZLWQHVV" ‡ :KDW DFWLYLWLHV RU VNLOOV GR \RX ZDQW WR OHDUQ RU WU\ RXW" ‡ :KDW ZRXOG \RX OLNH WR VD\ GR WRJHWKHU ZLWK RWKHU SHRSOH" 3HRSOH \RX ORYH" )DPLO\" )ULHQGV" ‡ $UH WKHUH DQ\ VSHFLĂ€ F SHRSOH \RX ZDQW WR PHHW LQ SHUVRQ" ‡ :KDW GR \RX ZDQW WR DFKLHYH LQ WKH GLIIHUHQW DUHDV 6RFLDO /RYH )DPLO\ &DUHHU )LQDQFH +HDOWK \RXU ZHLJKW RU Ă€ WQHVV OHYHO DQG 6SLULWXDO" I advise clients to listen to their heart if they are struggling WR NQRZ ZKDW WKH\ ZDQW WR GR ,I LW MXVW ÂśIHHOV ULJKW¡ QR PDWWHU KRZ VWUDQJH DQ LGHD LW PD\ VHHP LW XVXDOO\ LV ULJKW Every person’s Bucket List is unique. It is a living document that clients should constantly be adding new ideas to and hopefully also regularly crossing off achievements. It is also vital that clients actually write down their Bucket List. :ULWLQJ goals down is a proven technique for turning goals into reality. Sharing them with others will also help cement a commitment to the goals and helps bring others into the process if necessary. You may also want to advise clients to have public and private goals. Suggest that they keep quiet about the private ones. Financial goals are often ones that are wise to keep

SULYDWH %XW PDNH VXUH WKDW WKH\ FHOHEUDWH WKHLU SULYDWH DF FRPSOLVKPHQWV VXFK DV WKH FUHDWLRQ RI D 5 PLOOLRQ QHVW HJJ DV PXFK DV WKH\ ZRXOG WKHLU SXEOLF RQHV VXFK DV FOLPELQJ 0RXQW .LOLPDQMDUR $QG ZKLOH LW LV DOZD\V D JRRG LGHD WR GR D %XFNHW OLVW DV D FRXSOH FOLHQWV VKRXOG EH PDGH DZDUH WKDW WKH\ do not have to have ‘matching’ Bucket Lists as everyone is an LQGLYLGXDO Ă€ UVW DQG D VSRXVH RU SDUWQHU VHFRQG :KHQ ZRUNLQJ ZLWK Ă€ QDQFLDO DGYLVRUV , RIWHQ UHFRPPHQG WKDW WKH\ Ă€ UVW FUHDWH WKHLU RZQ Bucket List. By going through WKLV H[HUFLVH WKHPVHOYHV WKH\ ZLOO VHH Ă€ UVWKDQG KRZ LOOXPLQDW ing the process is and how the creation of a Bucket List can be a great tool in uncovering hidden goals and dreams. They can then start introducing the concept of a Bucket List into their practice. The creation of a Bucket List should ideally be part of the initial discovery meeting with new clients but it can also be introduced during annual update meetings with established clients.

Finally, keeping a Bucket List alive Once your client has presented you with his or her Bucket /LVW there are several things you can do to ensure the Bucket list is kept alive. )LUVWO\ HQFRXUDJH WKHP WR SODFH WKHLU Bucket List where WKH\ FDQ VHH LW DOO WKH WLPH IRU H[DPSOH RQ WKHLU IULGJH VHW as wallpaper on their computer or pinned to a notice board above their desk. 6HFRQGO\ DGYLVH WKHP WR VKDUH WKHLU OLVW ZLWK WKHLU IULHQGV DQG IDPLO\ KRSHIXOO\ LQVSLULQJ WKHP WR FUHDWH WKHLU RZQ OLVWV By sharing their list they also create accountability for making their list happen. /DVWO\ UHPLQG FOLHQWV WR UHYLHZ WKHLU Bucket List regularly. 7R VXP XS KHOSLQJ FOLHQWV FUHDWH WKHLU Bucket List can bring a QHZ GLPHQVLRQ DQG DGG GHSWK DQG UHOHYDQFH WR \RXU À QDQ FLDO SODQQLQJ SURFHVV KHOSLQJ \RX FRQQHFW ZLWK \RXU FOLHQW LQ D GHHSHU PRUH PHDQLQJIXO ZD\ The saying goes the best way to predict your future is to invent it – and a Bucket List can help you do just that!

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The Technology Leader

June/July 2011

22

Practice Management

Andrew Bradley, acsis Chief ([HFXWLYH 2IÀ FHU The global war on terror has given rise to some contentious SROLFLHV QRQH PRUH VR WKDQ WKH SROLF\ RI SURÀ OLQJ LQGLYLGX DOV EDVHG RQ TXLWH GXELRXV FULWHULD $V ZH DOO NQRZ WKLV KDV UHVXOWHG LQ D QXPEHU RI GLVDVWURXV DQG RIWHQ HPEDUUDVV LQJ FRQVHTXHQFHV ,Q D VLPLODU YHLQ WKH ZDU RQ EDG À QDQFLDO DGYLFH KDV VHHQ PDQ\ À QDQFLDO SODQQHUV FRQGXFWLQJ WKHLU RZQ IRUP RI SURÀ OLQJ ² ULVN SURÀ OLQJ 7KLV SUDFWLFH LV DOVR EDVHG RQ GXELRXV FULWHULD DQG KDV UHVXOWHG LQ VRPH GLVDVWURXV À QDQFLDO FRQVHTXHQFHV IRU WKRVH ZKR KDYH LQYHVWHG WKHLU PRQH\ EDVHG SXUHO\ RQ WKHLU DSSDUHQW ULVN DSSHWLWHV ,Q PDQ\ FDVHV ULVN SURÀ OLQJ KDV UHVXOWHG LQ SRYHUW\ UDWKHU WKDQ SURVSHULW\ 5LVN SURÀ OLQJ LV QRW QHZ WR WKH À QDQFLDO VHUYLFHV DQG À QDQ FLDO SODQQLQJ LQGXVWULHV 6LQFH UHJXODWLRQV UHTXLUH WKDW À QDQFLDO SODQQHUV XQGHUVWDQG WKHLU FOLHQWV· ULVN SURÀ OHV YDULRXV VHUYLFH SURYLGHUV KDYH GHYHORSHG TXHVWLRQQDLUHV WR KHOS SODQQHUV GHWHUPLQH WKHLU FOLHQWV· SURÀ OHV 7KHVH TXHVWLRQQDLUHV YDU\ IURP EHLQJ YHU\ VLPSOLVWLF WR TXLWH LQWULFDWH DQG VRSKLVWLFDWHG +RZHYHU ULJKW DFURVV WKH VSHFWUXP DOO RI WKHVH TXHVWLRQQDLUHV DUH IXQGDPHQWDOO\ Á DZHG 7KH PRVW REYLRXV VKRUWFRPLQJ LV WKH W\SH RI TXHVWLRQV FRQWDLQHG LQ D W\SLFDO TXHVWLRQQDLUH 7KH IRO The Financial Planner

ORZLQJ TXHVWLRQ LV D FODVVLF H[DPSOH ¶,I \RX ERXJKW D QHZ FDU ZRXOG \RX D LQVXUH LW IXOO\ E LQVXUH LW ZLWK D VPDOO H[FHVV F LQVXUH LW ZLWK D ODUJH H[FHVV RU G QRW LQVXUH LW DW DOO"· :KLOH WKLV W\SH RI TXHVWLRQ LV PHDQW WR DVVHVV D FOLHQW·V LQ YHVWPHQW ULVN WROHUDQFH WKH UHDOLW\ LV WKDW LW SURYLGHV YHU\ OLWWOH LQVLJKW LQWR D FOLHQW·V DSSHWLWH IRU ULVN +RZ D FOLHQW GHFLGHV WR LQVXUH D FDU LV SUREDEO\ PRUH LQGLFDWLYH RI FDVK Á RZ LVVXHV DQG KLV KHU DVWXWHQHVV DQG OHYHO RI VRSKLVWLFDWLRQ ,Q WKLV ZD\ FODVVLI\LQJ VRPHRQH DV D FRQVHUYDWLYH LQYHVWRU VLPSO\ EH FDXVH KH VKH ZRXOG IXOO\ LQVXUH D FDU GRHV QRW PDNH VHQVH ,W KDV QRWKLQJ WR GR ZLWK \RXU DSSHWLWH IRU ULVN ,Q IDFW FKRRV LQJ WR LQVXUH D FDU LV MXVW VHQVLEOH $QRWKHU W\SH RI TXHVWLRQ RIWHQ IRXQG LQ ULVN TXHVWLRQQDLUHV LV ¶+DYH \RX HYHU KDG DQ\ H[SRVXUH WR D HTXLWLHV E OLVWHG SURSHUW\ F ERQGV DQG G FDVK" 2QFH DJDLQ WKLV TXHVWLRQ KDV YHU\ OLWWOH WR GR ZLWK ULVN DQG LV SUREDEO\ PRUH DERXW HGXFDWLRQ DFFHVVLELOLW\ DQG RU UHVRXUFHV ,W PLJKW JLYH DQ LQGLFDWLRQ RI VRSKLVWLFDWLRQ EXW QRW ULVN 5LVN TXHVWLRQQDLUHV DOVR RIWHQ FRQWDLQ TXHVWLRQV WKDW WHVW FOLHQWV· PRRGV RU IHHOLQJV RQ FHUWDLQ LQYHVWPHQW LVVXHV 7KHVH TXHVWLRQV DUH SUREDEO\ WKH PRVW GDQJHURXV DV WKH\ VR licit whimsical answers that will change as regularly as the ZHDWKHU DQG WKH ULVLQJ DQG IDOOLQJ RI LQYHVWPHQW PDUNHWV )RU H[DPSOH ZKHQ PDUNHWV DUH SHUIRUPLQJ ZHOO FOLHQWV· SHUFHS WLRQV PD\ EH PRUH SRVLWLYH UHVXOWLQJ LQ WKHP EHLQJ FODVVLÀ HG June/July 2011

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Practice Management

as aggressive. Similarly, when markets are declining, more FOLHQWV DUH XVXDOO\ FODVVLÀ HG DV FRQVHUYDWLYH 6R LQ HVVHQFH reading anything meaningful into these kinds of questions is pointless. In fact, these perceptions will drive an investor to do the wrong thing at the wrong time. It is abundantly clear that risk questionnaires do not establish anything meaningful about clients’ investment risk apSHWLWHV DQG UHTXLUHPHQWV %XW GHVSLWH WKLV PDQ\ À QDQFLDO planners continue to use the results from these questionnaires to categorise their clients and then invest their money into PDWFKLQJ ULVN SURÀ OHG LQYHVWPHQW SRUWIROLRV WKDW LV FRQVHUYD tive, balanced/moderate or aggressive portfolios, to name but a few categories). Each of these portfolios has very speFLÀ F DVVHW DOORFDWLRQV ZKLFK GHWHUPLQH WKH XOWLPDWH UHWXUQ WKH investor will achieve over time. In this way, an investor’s return is actually dictated by his/her risk category. The sad reality is that this has no relevance to the investor’s needs. Worse still, ULVN SURÀ OHG SRUWIROLRV GR QRW SURYLGH LQYHVWRUV ZLWK D FOHDU idea of what level of returns they can expect. This does not leave clients any the wiser or better off for having completed WKH ULVN SURÀ OH TXHVWLRQQDLUH To illustrate the point, acsis conducted research with over 1000 people and recently updated this research among an The Financial Planner

additional 200 individuals who attended a presentation at a QDWLRQDO Ă€ QDQFLDO SODQQLQJ FOXE 7KH FOXE DLPV WR HGXFDWH SHR SOH RQ D EURDG UDQJH RI Ă€ QDQFLDO SODQQLQJ DQG LQYHVWPHQW UH lated issues. Those who attend are interested in their personal Ă€ QDQFHV DQG EHOLHYH WKDW WKH\ KDYH D JRRG XQGHUVWDQGLQJ RI Ă€ QDQFLDO DQG LQYHVWPHQW PDWWHUV DFVLV JDYH HDFK DWWHQGHH DQ LQYHVWPHQW SURĂ€ OH IRUP ZKHUH they had to indicate whether they considered themselves to be either aggressive, balanced or conservative in their investment approach. They were then asked to write down the annual return that they would expect to earn from an investment strategy that was managed according to their selected investment SURĂ€ OH WKDW LV DJJUHVVLYH EDODQFHG RU FRQVHUYDWLYH The answers to these questions were interesting and extremely diverse. The ‘aggressive’ investors expected returns from as low as 4,5% to as high as 25%. ‘Balanced’ investors expected returns ranging from 3% to 25%, while the socalled ‘conservative’ investors expected returns from 3% to 20%. The results show that there is very little realism and even less logic in these expectations. In all instances, the returns at the top end of the scale are far too high. Although these returns could possibly be achieved in an exceptional year, they are GHĂ€ QLWHO\ QRW VXVWDLQDEOH &RQYHUVHO\ WKH ERWWRP HQG UHWXUQV DUH UHDOLVWLF DQG HYHQ RQ WKH ORZ VLGH LQ D ORQJ WHUP LQĂ DWLRQ ary environment of about 6%. It is clear that most of these investors do not have a realistic investment framework upon which to base their expectations and will almost certainly be disappointed by their investment returns. This proves that ULVN SURĂ€ OLQJ EDVHG RQ IULYRORXV VHQWLPHQW ZKLFK UHVXOWV LQ DQ LQYHVWPHQW SRUWIROLR WR PDWFK WKH SURĂ€ OH LV GRRPHG WR IDLO ,W has no meaningful framework or frame of reference for investors. This is not a trivial matter and has far-reaching consequences when combined with the fact that the prevailing investPHQW HQYLURQPHQW VLJQLĂ€ FDQWO\ LQĂ XHQFHV FOLHQWV¡ ULVN SURĂ€ OHV *HQHUDOO\ PRUH LQYHVWRUV DUH FODVVLĂ€ HG DV EHLQJ DJJUHVVLYH during bull markets and conservative during bear markets. So when markets are running, many ‘conservative’ investors could become disappointed with the returns generated from their portfolios compared to the returns from the market. Similarly, when markets decline, ‘aggressive’ investors may not be prepared for the negative returns they might experience. Inevitably, these situations result in investors constantly moving between the various risk categories and portfolios. This only guarantees ongoing underperformance as investors move in and out of markets at the wrong times by buying high and selling low. This strategy only succeeds in destroying wealth. In conclusion, one of the greatest indictments against risk SURĂ€ OLQJ LV WKDW WKH UHWXUQV SURGXFHG E\ ULVN SURĂ€ OHG SRUWIROLRV KDYH QR UHOHYDQFH WR ZKDW FOLHQWV DFWXDOO\ UHTXLUH WR PHHW WKHLU RQJRLQJ OLIHVW\OH UHTXLUHPHQWV 6R ZKLOH LJQRUDQW FRPIRUW LV EOLVV WKH UXGH DZDNHQLQJ ZLOO HYHQWXDOO\ KDSSHQ DQG ZKHQ LW GRHV LW IRUFHV FOLHQWV WR PDNH VLJQLĂ€ FDQW FKDQJHV WR WKHLU OLIHVW\OHV RIWHQ DW WLPHV WKH\ GR QRW ZLVK WR GR VR ,W LV WKHUHIRUH YLWDO IRU Ă€ QDQ cial planners to take heed of this and ensure that their clients’ ORQJ WHUP OLIHVW\OH JRDOV DQG QRW ULVN DSSHWLWHV GULYH WKHLU LQYHVW PHQW GHFLVLRQV June/July 2011

24

Practice Management

The elusive profession DGYLVRU DQG ZHDOWK PDQDJHU DV LI WKH\ ZHUH DOO LQWHUFKDQJH DEOH $V DGYLVRUV VWUXJJOH WR LGHQWLI\ WKHPVHOYHV WKH À QDQFLDO VHUYLFHV HQYLURQPHQW FRQWLQXHV WR EHFRPH PRUH VRSKLVWLFDWHG LQGXVWU\ FRPSHWLWLRQ DQG LQQRYDWLRQ LV PRUH UHOHQWOHVV DQG UHJXODWRUV WLJKWHQ WKHLU FRQWUROV XQGHU LQFUHDVLQJ PHGLD DQG FRQVXPHU VFUXWLQ\ 7R PDNH PDWWHUV ZRUVH WKH FRQVXPHU KDV ORVW FRQÀ GHQFH LQ À QDQFLDO PDUNHWV DQG LQVWLWXWLRQV LQ WKH ZDNH RI WKH UHFHQW À QDQFLDO PHOWGRZQ 7KLV LV MXVW D JOLPSVH RI ZKDW À QDQFLDO DGYLVRUV DUH XS DJDLQVW DV WKH\ PRYH LQWR WKH VHFRQG GHFDGH RI WKH VW FHQWXU\ 7KH PHVVDJH LV FOHDU PDNH WKH FKDQJH EHIRUH FLUFXPVWDQFHV IRUFH DGYLVHUV WR FKDQJH RU « MXPS VKLS 7KH ZRUOG RI À QDQFLDO DGYLFH LV QRW JRLQJ WR EHFRPH OHVV FRPSOH[ \HW WKHUH LV D VLPSOH SDWK WR VXFFHVV $V À QDQFLDO DGYLVRUV WKHLU HPSOR\HUV DQG HYHQ FOLHQWV LQFUHDVLQJO\ UH DOLVH WKH SDWK OLHV WKURXJK FRQWLQXRXV OHDUQLQJ WR GHYHORS WKH VWDQGDUGV RI TXDOLW\ DQG LQWHJULW\ DOLJQHG ZLWK WKH LQFUHDVLQJ SURIHVVLRQDOLVDWLRQ RI WKH LQGXVWU\ 0HGLFDO SUDFWLWLRQHUV PXVW EH LQ SRVVHVVLRQ RI D PHGLFDO GRFWRUDWH MXVW DV D ODZ\HU PXVW SRVVHVV D OHJDO GHJUHH RU DQ DFFRXQWDQW PXVW KDYH D & $ RU HTXLYDOHQW +ROGHUV RI WKHVH TXDOLÀ FDWLRQV LUUHVSHFWLYH RI WKHLU PHPEHUVKLS RI ERGLHV DUH UHFRJQLVHG DV SURIHVVLRQDOV DQG DUH HQWLWOHG WR SXUVXH WKHLU FDUHHUV 7KH VDPH RXJKW WR EH VDLG DERXW À QDQFLDO SODQQHUV 7KHUH LV QR GRXEW WKDW WR FRQWLQXH WR SXUVXH D FDUHHU LQ À QDQFLDO VHUYLFHV À QDQFLDO DGYLVRUV ZLOO QHHG WR REWDLQ DQ DSSURSULDWH GHJUHH IURP D UHFRJQLVHG HGXFDWLRQ LQVWLWXWLRQ DQG WKHQ EH HQWLWOHG WR UHFRJQLWLRQ DV D SURIHVVLRQDO

Why study?

Johann Maree,The Institute of Practice Management

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n troubled times such as we are experiencing, clients QHHG SURIHVVLRQDO À QDQFLDO DGYLFH RQ KRZ WR SODQ IRU WKHLU À QDQFLDO IXWXUHV DQG DOVR SURWHFW WKHLU DVVHWV This PHDQV DQ LQFUHDVLQJ GHPDQG IRU FRPSUHKHQVLYH À QDQFLDO DQDO\VLV DQG TXDOLÀ HG À QDQFLDO DGYLVRUV 5HVHDUFK GRQH LQ ERWK WKH 86$ DQG $XVWUDOLD LQGLFDWHV WKDW RSSRUWXQLWLHV IRU À QDQFLDO DGYLVRUV DUH SUHGLFWHG WR JURZ DW RYHU LQ WKH QH[W \HDUV 7KHUH LV QR UHDVRQ WR EHOLHYH WKDW VLPLODU RS SRUWXQLWLHV H[LVW IRU À QDQFLDO DGYLVRUV LQ 6RXWK $IULFD LQ WKH VDPH SHULRG 7KH SURIHVVLRQDO UHDOLW\ RI WRGD\·V À QDQFLDO DGYLVRU LV VWLOO XQFHUWDLQ ZLWK UHJXODWRUV FRQVXPHUV DQG WKH PHGLD XVLQJ WLWOHV VXFK DV EURNHU À QDQFLDO SODQQHU À QDQFLDO DGYLVRU LQYHVWPHQW The Financial Planner

7KHUH DUH PDQ\ UHDVRQV ZK\ DGYLVRUV VKRXOG LQYHVW LQ DW WDLQLQJ DQG PDLQWDLQLQJ UHOHYDQW À QDQFLDO GHVLJQDWLRQV UH JDUGOHVV RI ZKHUH WKH\ DUH LQ WKHLU FDUHHU F\FOH )LUVW DQG IRUHPRVW WKH\ RZH LW WR WKHLU FOLHQWV 7R VHUYH DQG DGYLVH FOLHQWV LV D FDOOLQJ RI WKH KLJKHVW QDWXUH 7R EH SDLG IRU WKH DGYLFH WKH\ JLYH DQG WKH ZRUN WKH\ GR UHTXLUHV DGYLVRUV WR EH XS WR GDWH ZLWK À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À QDQFLDO HGXFDWLRQ SURYLGH DQ LQYDOXDEOH VHDO RI TXDOLW\ VRXJKW E\ ERWK FOLHQWV DQG HPSOR\HUV )RU FRQVXPHUV WKH À QDQFLDO DGYL VRU·V FUHGHQWLDOV DUH D YDOLGDWLRQ RI WKHLU VHUYLFH TXDOLW\ WKHLU June/July 2011

26

Practice Management

integrity and their ability to act in the best interests of clients. For employers, the designations of both current and future employees are an objective measure of their professionalism LQ ERWK WHFKQLFDO DQG LQFUHDVLQJO\ HWKLFDO DVSHFWV RI À QDQFLDO planning. )LQDOO\ À QDQFLDO GHVLJQDWLRQV DUH WKH VHDO RI SURIHVVLRQDOLVP received and maintained through continuous learning activities. ,W DOVR DVVLVWV LQ EXLOGLQJ WUXVW DQG FRQÀ GHQFH WKDW LV FULWLFDO WR FKDQJLQJ WKH FRQVXPHU·V SHUFHSWLRQ WRZDUGV WKH À QDQ cial services industry. The professionalisation of the industry through establishing common standards and norms across the board will help address the real concerns of consumers about the security of their money and the soundness of the advice they are given. Along with technical knowledge, the standards DOVR H[WHQG WR WKH HWKLFDO YDOXHV RI À QDQFLDO DGYLVHUV ZKR must recognize their duty to their clients and the integrity of WKH À QDQFLDO VHUYLFHV LQGXVWU\ :LWK RYHU À QDQFLDO DGYLVRUV DFWLYHO\ HQJDJHG LQ À QDQFLDO VHUYLFHV LQ 6RXWK $IULFD consumers expect the standardisation and professionalisation RI À QDQFLDO DGYLFH DORQJ ZLWK UHJXODWRU\ UHTXLUHPHQWV WR SUR WHFW WKHP IURP WKH ULVNV RI LOO LQIRUPHG PLVJXLGHG RU XQHWKLFDO advice. Research at The Institute of Practice Management indicates that the majority of these advisors above have not progressed WKHLU 14) TXDOLÀ FDWLRQ :H KDYH PXFK ZRUN WR GR DV D

FRPPXQLW\ LI ZH ZLVK WR H[SHGLWH RXU VWDQGLQJ DV D SURIHV sion.

7KH UHWXUQ RQ À QDQFLDO LQYHVWPHQW ,QYHVWLQJ LQ FRQWLQXRXV OHDUQLQJ SD\V RII QRW RQO\ IRU À nancial advisers, but for employers and clients as well. For À QDQFLDO SURIHVVLRQDOV LW LV DERXW SRVLWLRQLQJ VWUDWHJLFDOO\ IRU VXFFHVV )RU FRQVXPHUV DQG À QDQFLDO LQVWLWXWLRQV WKH UHWXUQ RQ LQYHVWPHQW LV WKH LQWHJULW\ RI WKH À QDQFLDO VHUYLFHV HQYLURQPHQW and the improved industry reputation and consumer trust.

:KHUH WR IURP KHUH" ,I À QDQFLDO DGYLVRUV GR QRW PDQJH WKH FKDQJH UHTXLUHG WKH\ ZLOO LQ IDFW EH WDFLWO\ DJUHHLQJ WKDW WKH UHJXODWRUV ZLOO QHHG WR FRQWLQXH WR HQIRUFH WKH FKDQJHV UHTXLUHG IRU LQGXVWU\ SURIHV VLRQDOLVDWLRQ 6R LQVWHDG RI À JKWLQJ WKH UHJXODWLRQV DGYLVRUV QHHG WR VWDUW VHWWLQJ QHZ VWDQGDUGV RI SURIHVVLRQDOLVP WKHPVHOYHV 7KLV EULQJV XV WR WKH RWKHU PDMRU HQDEOHU RI WKH WKLQNLQJ LQ WKLV DUWLFOH RXUVHOYHV 'DUH , TXRWH 3RJR ZKR VDLG ´:H KDYH PHW WKH HQHP\ DQG WKH\ DUH XVµ" :H KDYH PDGH PXFK SURJUHVV RYHU WKH \HDUV EXW WKHUH LV VWLOO DQ HQRUPRXV DPRXQW RI ZRUN WKDW PXVW EH GRQH EHIRUH ZH FDQ SURFODLP WKDW À QDQFLDO SODQQLQJ LV D SURIHVVLRQ :H PXVW FRQWLQXH WR ZRUN RQ WKH HGXFDWLRQDO VWDQGDUGV LQGXVWU\ SURIHVVLRQDOLVDWLRQ DQG PRVW LPSRUWDQWO\ RXUVHOYHV

Life is about making choices .... choose a Post Graduate Programme at the Faculty of Law Potchefstroom Campus of NWU, South Africa in the Research Unit: Development in the South African Constitutional State!

Master of Laws (LLM) Programmes (Full time & Part time) in:

Contact details Anita.Stapelberg@nwu.ac.za Tel: +27 18 299 1952

Estate Planning Import and Export Law Environmental Law and Governance (also M Phil) Labour Law Comparative Child Law (only full time in collaboration with Justus Liebig University, Giessen Germany) Mini-dissertation in the field of your choice. Also LLM (Research dissertation) and LLD (Thesis) Prerequisite: Baccalaureus Legum (LLB)

The Financial Planner

June/July 2011

27

Planning

/DFN RI š QDQFLDO SODQQLQJ SXWV 6RXWK $IULFDQ IDPLOLHV DW ULVN RI š QDQFLDO KDUGVKLS

Justus van Pletzen, COO at the Financial Intermediaries Association of Southern Africa

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ODFN RI SURSHU À QDQFLDO SODQQLQJ KDV EHHQ FLWHG DV RQH RI WKH NH\ UHDVRQV IRU WKH PDVVLYH XQGHULQVXU DQFH SUREOHP IDFLQJ 6RXWK $IULFDQV According to a new study conducted on behalf of the Association for Savings and Investment South Africa, South Africa’s 12,4-million income earners between the ages of 16 and 65 are underinsured for life and disability cover by a huge R18,4-trillion. This is up from R10-trillion in 2007, though ASISA says this can be attributed to growth in earnings and the fact that more detailed date was available rather than a widening gap. :KLOH DIIRUGDELOLW\ DQG DFFHVV WR À QDQFLDO VHUYLFHV SURGXFWV are major issues when it comes to insurance, a lack of regular À QDQFLDO SODQQLQJ VKRXOG QRW EH XQGHUHVWLPDWHG DV D NH\ UHD son why so many South Africans have inadequate cover in the The Financial Planner

event of death and disability. “To the majority of consumers insurance is often still regarded as a grudge purchase. Many consumers are still of the opinion that the unforeseen such as death, disability and dread disease only happen to others.â€? This is illustrated by the fact that the study shows that consumers earning more than R16 700 a month will leave their IDPLOLHV ZLWK WKH ELJJHVW Ă€ QDQFLDO VKRUWIDOO ZLWK WKH DYHUDJH gap between the level of cover they have and the level of cover their families would need to maintain their lifestyle, of R1,52m for death and R3,2m in the event of disability. People often assume that higher income earners will be Ă€ QDQFLDOO\ DVWXWH HQRXJK WR HQVXUH WKH\ KDYH WKH ULJKW GHJUHH of life and disability cover in place in the event of a tragedy; however, this study shows that this is simply not the case. Often we see clients taking out cover at the start of their career, but forgetting to update it in line with their changing circumstances. We can go through many life changes in just a few years – salary increases, marriage, having children – and these are all stages at which consumers should review their Ă€ QDQFLDO QHHGV ,W¡V FULWLFDO WKDW DOO FRQVXPHUV WDNH WKH WLPH WR VSHDN WR WKHLU Ă€ QDQFLDO DGYLVRU WR DVVHVV SURSHUO\ WKH DSSUR priate level of cover in order to maintain their lifestyle or that of their family in the event of death or disability. The recent ASISA study found that more than 212 000 famiOLHV LQ 6RXWK $IULFD ZLOO IDFH Ă€ QDQFLDO KDUGVKLS RYHU WKH QH[W year due to the death or disability of a breadwinner. 'HDOLQJ ZLWK WKLV NLQG RI WUDJHG\ LV GLIĂ€ FXOW HQRXJK EXW LI D IDPLO\ LV IRUFHG LQWR Ă€ QDQFLDO KDUGVKLS DW WKH VDPH WLPH WKH consequences are frightening. The last thing a grieving spouse wants to do is think about downsizing their home, selling their car or having to remove their children from a good school and SODFH WKHP LQWR D PRUH LQH[SHQVLYH LQVWLWXWLRQ While the study is a shocking reality check for many South Africans, it is positive news that consumers didn’t appear to FDQFHO WKHLU H[LVWLQJ FRYHU RYHU WKH ODVW WKUHH \HDUV :H KDYH MXVW EHHQ WKURXJK D PDMRU Ă€ QDQFLDO FULVLV DQG UHFHVVLRQ VR WKH IDFW WKDW 6RXWK $IULFDQ FRQVXPHUV KHOG RQ WR WKHLU H[LVWLQJ OLIH cover is hugely positive and indicates that people are aware of the importance of having this cover in place. Financial intermediaries play an important role advising FOLHQWV ZLWK UHJDUGV WR WKHLU Ă€ QDQFLDO QHHGV EXW WKHUH LV VWLOO D huge responsibility for the industry to ensure that consumers do, in fact, have the necessary cover. We also welcome the Consumer Education Initiatives that the National Treasury is LQWURGXFLQJ QH[W \HDU DQG KRSH WKDW WKLV ZLOO VXSSRUW WKH LQGXV try in closing this huge gap. :H HQFRXUDJH DOO 6RXWK $IULFDQV WR VSHDN WR WKHLU Ă€ QDQFLDO advisor and identify exactly how much cover they should have in order to support their families should the worst happen. June/July 2011

28

Practice Management

Business valuations: mind the gap

Ricardo Teixeira, acsis Head of Business Management

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PDJLQH ZDNLQJ XS WR Ă€ QG \RXUVHOI RQ D GHVHUWHG LVODQG ZLWKRXW DQ\ ZD\ RI FRQWDFWLQJ DQ\RQH You don’t know where you are and, worse yet, no one else knows where you are or if you’re ever coming back. Now when you think DERXW \RXU Ă€ QDQFLDO SODQQLQJ SUDFWLFH EDFN KRPH GR \RX IHHO FDOP DQG FRQĂ€ GHQW WKDW EXVLQHVV ZLOO FDUU\ RQ DV XVXDO ZLWKRXW \RX RU DUH \RX FRQVXPHG E\ SDQLF" :LOO \RXU VWDII NQRZ ZKDW WR GR DQG KRZ WR GR LW ZLWKRXW \RXU GLUHFWLRQ" :KR ZLOO continue to service your clients in a way that is consistent with WKHLU H[SHFWDWLRQV" ,I \RX¡UH OLNH PRVW EXVLQHVV RZQHUV \RX¡G SUREDEO\ EH FRQFHUQHG DERXW ZKDW ZRXOG KDSSHQ WR \RXU SUDFWLFH LQ \RXU absence. Continuity is a key business risk faced by many indeThe Financial Planner

SHQGHQW Ă€ QDQFLDO SODQQHUV )URP P\ H[SHULHQFH DQG GLVFXV VLRQV ZLWK PDQ\ ORFDO Ă€ QDQFLDO SODQQHUV DURXQG EXVLQHVV FRQ tinuity, there seems to be a great deal of talk, but very little DFWLRQ :KLOH WKHUH DUH D IHZ NH\ UHDVRQV IRU WKLV WKH RQH WKDW VHHPV WR FURS XS RIWHQ LV WKH LVVXH RI GHWHUPLQLQJ YDOXH (YHU\ EXVLQHVV VXFFHVVLRQ WUDQVDFWLRQ LUUHVSHFWLYH RI WKH QDWXUH RI WKH WUDQVDFWLRQ ZLOO LQYROYH D SURFHVV RI YDOXLQJ D FOLHQW ERRN RU VKDUHV LQ D EXVLQHVV 7KLV LV D SRWHQWLDO PLQHĂ€ HOG as there is very often a mismatch between how much a seller H[SHFWV WR UHFHLYH DQG KRZ PXFK D EX\HU LV ZLOOLQJ WR SD\ .QRZQ DV WKH YDOXDWLRQ JDS WKLV DUHD LV RIWHQ WKH ELJJHVW VWXPEOLQJ EORFN WR EXVLQHVV FRQWLQXLW\ SODQQLQJ DV LW LV TXLWH subjective. :KHQ GHWHUPLQLQJ WKH YDOXH RI D SUDFWLFH RU FOLHQW ERRN WKH SULQFLSOH LV TXLWH VLPSOH D EX\HU ZLOO SD\ IRU D IXWXUH VWUHDP RI UHFXUULQJ FDVK Ă RZ IRU D QXPEHU RI \HDUV IRUZDUG 6R ZKLOH WKHUH DUH VHYHUDO PRGHOV WKDW FDQ EH DSSOLHG WR FDOFXODWH YDOXH WKH\ ZLOO DOO UHYHUW WR WKH SULQFLSOH RI YDOXLQJ D IXWXUH VWUHDP RI FDVK Ă RZ 'HWHUPLQLQJ WKH FDVK Ă RZ LV DQ HDV\ VFLHQWLĂ€ F FDOFXODWLRQ 6WDUW ZLWK WKH DQQXDO UHFXUULQJ QHW FDVK Ă RZV JHQHUDWHG E\ the client book (that is, total ongoing commissions and fees) DQG GHGXFW D UHDOLVWLF DPRXQW IRU WKH DQQXDO RSHUDWLQJ FRVWV WKDW ZLOO EH QHFHVVDU\ WR PDLQWDLQ WKH UHFXUULQJ FDVK Ă RZ LQWR the future (that is, the basic costs of maintaining, not growLQJ WKH DQQXDO UHFXUULQJ FDVK Ă RZ 7KH QHW DPRXQW ZLOO WKHQ UHSUHVHQW WKH IXWXUH VWUHDP RI DQQXDO FDVK Ă RZ WKDW D EX\HU LV OLNHO\ WR SODFH D YDOXH RQ However, it gets tricky when determining the number of \HDUV IRUZDUG WKDW D EX\HU ZLOO SD\ IRU WKLV IXWXUH VWUHDP RI FDVK Ă RZ 6LPSO\ SXW WKH QXPEHU RI \HDUV IRUZDUG LV WKH PXO WLSOH WKDW WKH EX\HU LV ZLOOLQJ WR SD\ DQG UHIHUV WR WKH QXPEHU RI \HDUV D EX\HU H[SHFWV WKH FXUUHQW FOLHQW ERRN WR FRQWLQXH WR RSHUDWH VXFFHVVIXOO\ 7KLV LV WKH HVVHQFH RI YDOXH WR D EX\HU DV WKHUH LV D ÂśWLSSLQJ SRLQW¡ EHWZHHQ KRZ PDQ\ \HDUV IRUZDUG D EX\HU LV ZLOOLQJ WR SD\ IRU D FDVK Ă RZ VWUHDP DV RSSRVHG WR JRLQJ RXW DQG RUJDQLFDOO\ JURZLQJ DQ HTXLYDOHQW FDVK Ă RZ stream. A seller, therefore, needs to be aware that there will EH D SRLQW ZKHUH D EX\HU¡V FDSLWDO ZRXOG EH EHWWHU GHSOR\HG LQ RUJDQLFDOO\ JURZLQJ D VLPLODU FOLHQW ERRN DQG FDVK Ă RZ VWUHDP DV RSSRVHG WR EX\LQJ DQ H[LVWLQJ FOLHQW ERRN Determining the number of years forward is easy for a busiQHVV WKDW LV OLVWHG RQ D VWRFN H[FKDQJH DV WKH SXEOLFDOO\ TXRW HG 3ULFH (DUQLQJV UDWLR ZRXOG SURYLGH D EHQFKPDUN PXOWLSOH )RU DQ XQOLVWHG EXVLQHVV WKH FDOFXODWLRQ EHFRPHV D ELW RI DQ art. So, in an effort to bring objectivity to the basis of deterPLQLQJ WKH PXOWLSOH D WKRURXJK XQGHUVWDQGLQJ RI ZKDW GULYHV June/July 2011

29

Practice Management

value in the eyes of a buyer is required. In essence, there are certain areas within a business that buyers will attach value to. Once they review these areas, they will either pay a premium or expect a discount based on a benchmark comparLVRQ WR RWKHU VLPLODU Ă€QDQFLDO SODQQLQJ EXVLQHVVHV ,W¡V OLNH YDOXLQJ D KRXVH XVLQJ WKH ÂśFRPSDUDWLYH PDUNHW DQDO\VLV¡ PHWKRG Consider two houses in a security complex. They are built WR WKH VDPH VSHFLĂ€FDWLRQV RQ H[DFWO\ WKH VDPH VL]H RI ODQG Both were built in 1990 and the only difference is that one was refurbished in 2010. Part of the refurbishment included a QHZ EDWKURRP NLWFKHQ DQG WKH DGGLWLRQ RI D VZLPPLQJ SRRO If both of these houses were up for sale, it would be obvious ZKLFK RQH ZRXOG IHWFK WKH KLJKHU SULFH 7KH VDPH SULQFLSOH ZRXOG DSSO\ WR YDOXLQJ D Ă€QDQFLDO SODQQLQJ EXVLQHVV %XW XQOLNH ZLWK D KRXVH LW¡V QRW DOZD\V HDV\ WR understand what aspects within a business would drive its value. Far too often, many business owners overcapitalise RQ DUHDV WKDW ZRQ¡W QHFHVVDULO\ EH VHHQ DV D YDOXH DGG WR D SRWHQWLDO EX\HU VR WKH\ GRQ¡W UHFRYHU WKHLU FRVWV %UDQGLQJ LV an example of this. While it is important for any business to HVWDEOLVK D JRRG EUDQG LQ RUGHU WR DWWUDFW DQG PDLQWDLQ FOLents, buyers may want to establish their own brands once they take ownership of the business so they will not see the value LQ WKH FXUUHQW EUDQGLQJ HIIRUWV ,W LV WKHUHIRUH YLWDO IRU EXVLQHVV owners to understand which factors drive the value of their businesses so that they can successfully focus their efforts on GHYHORSLQJ WKRVH DUHDV ,Q P\ H[SHULHQFH WKHUH DUH Ă€YH FRUH EXVLQHVV DUHDV WKDW GULYH YDOXH FOLHQW UHODWLRQVKLSV FOLHQW TXDOLW\ SODQQLQJ SURFHVV FOLHQW PDQDJHPHQW DQG PDQDJHPHQW LQIRUPDWLRQ $ UDWLQJ RI KRZ HDFK FRUH DUHD KDV EHHQ GHYHORSHG E\ WKH seller, on a relative comparison basis to other businesses, will REMHFWLYHO\ JXLGH D EX\HU LQ GHWHUPLQLQJ ZKHWKHU D SUHPLXP or discount should be paid for the business or client book beLQJ DVVHVVHG

Client relationships 7KH VLQJOH ODUJHVW FRQWULEXWLQJ IDFWRU WR FDSLWDO YDOXH LV D EX\HU¡V DELOLW\ WR WDNH RYHU WKH H[LVWLQJ FOLHQW UHODWLRQVKLSV The transferability of these relationships is therefore a key isVXH WKDW D EX\HU ZLOO FRQVLGHU ZKHQ YDOXLQJ D EXVLQHVV RU FOLHQW book. To maximise value, sellers will need to demonstrate that clients are not solely dependent on them for advice. They will need to prove that their clients are able to have relationships ZLWK DQ\ TXDOLĂ€HG DQG WUXVWHG DGYLVRU WKDW WKH\ LQWURGXFH WKHP WR 7KLV IDFWRU ZLOO JLYH EX\HUV FRPIRUW WKDW FOLHQWV DUH more likely to be retained after the seller exits the business.

Client quality We all believe that we have the best clients. While quality can be assessed on various scales of qualitative and quantiWDWLYH FULWHULD LQ WKH HQG D EX\HU¡V YLHZ RI TXDOLW\ LV DOO WKDW FRXQWV 7KHUHIRUH XQGHUVWDQGLQJ ZKDW D EX\HU ZRXOG SODFH YDOXH RQ LV WKH NH\ WR PD[LPLVLQJ WKH UDWLQJ D EX\HU ZRXOG DOlocate for client quality. For example, all clients may receive a premium level of VHUYLFH IURP D VHOOHU +RZHYHU D SRWHQWLDO EX\HU PD\ VHJPHQW KLV KHU FOLHQWV DQG WKH FRUUHVSRQGLQJ VHUYLFH OHYHOV ,W WKHUH-

The Financial Planner

fore stands to reason that the buyer would place a discount to value based on the quality of the client base since in his/her YLHZ WKH VHOOHU KDV RYHU VHUYLFHG WKH œ&¡ DQG œ'¡ FOLHQWV $V D result, these clients are likely to leave when they receive inferior service to that to which they have become accustomed.

Planning process 7KLV UHIHUV WR D EX\HU¡V DELOLW\ WR VWDQG LQ WKH VHOOHU¡V VKRHV DQG WR D ODUJH H[WHQW UHSOLFDWH WKH HQJDJHPHQW DQG DGYLFH experience the clients have come to expect. This does not LPSO\ WKDW D ÂśFKHFN ER[¡ DSSURDFK WR Ă€QDQFLDO SODQQLQJ LV UHTXLUHG ,QVWHDG LW UHIHUV WR D IUDPHZRUN IRU SURYLQJ DGYLFH WKDW WKH EX\HU FDQ HDVLO\ IROORZ ,Q WKLV ZD\ KDYLQJ DQ DGYLFH process that is consistently applied from client to client (albeit WKDW D SODQQHU DSSOLHV LW ZLWK KLV KHU RZQ OHYHO RI Ă DLU DQG SHUVRQDOLW\ ZLOO UHVXOW LQ D EX\HU SD\LQJ D SUHPLXP IRU D FOLent book or business.

Client management processes :KLOH WKH FOLHQW PDQDJHPHQW SURFHVVHV DQG PDQDJHPHQW LQIRUPDWLRQ GR QRW KDYH DV ODUJH DQ LPSDFW RQ YDOXH DV WKH DERYH PHQWLRQHG IDFWRUV WKH\ VWLOO GR KDYH D EHDULQJ RQ whether there is a premium or discount on a valuation relative to a comparable business. $Q DVVHVVPHQW RI FOLHQW PDQDJHPHQW SURFHVVHV ORRNV DW WKH ZRUN à RZ SURFHVVHV WKDW VHOOHUV KDYH DSSOLHG LQ VHUYLFLQJ WKHLU FOLHQWV 'R WKH DGPLQLVWUDWRUV KDYH D EXVLQHVV SURFHVV PDQXDO WKDW JXLGHV WKHP LQ KRZ WKH\ VHUYLFH FOLHQWV DQG KRZ WKH\ GR WKHLU MREV" &DQ D EX\HU UHSOLFDWH WKHVH ZRUN à RZ SURFHVVHV VR WKDW FOLHQWV¡ H[SHFWDWLRQV ZLOO FRQWLQXH WR EH PHW"

Management information ,Q RUGHU WR VHOO D EXVLQHVV Ă€QDQFLDO LQIRUPDWLRQ DQG UHFRUGV WKDW VXEVWDQWLDWH D VHOOHU¡V FODLPV RI YDOXH DUH UHTXLUHG 7\SLFDOO\ Ă€QDQFLDO VWDWHPHQWV ZKHWKHU DXGLWHG RU QRW DUH QRW RI PXFK UHOHYDQFH WR EX\HUV LI WKH\ DUH EX\LQJ D FOLHQW ERRN DV RSSRVHG WR VKDUHV LQ D FRPSDQ\ :KDW LV RI VLJQLĂ€FDQW LPSRUWDQFH WR EX\HUV LV WKH TXDOLW\ RI WKH Ă€QDQFLDO DQG QRQ Ă€QDQFLDO information. Ideally this would include the number of clients on record, the services they have received, how much the seller earns for these advice services, the revenue mix from the various advisory services offered (life, investments, EB, health, for exDPSOH D OLVW RI WKH ODUJHVW FOLHQWV DQG KRZ PXFK LQFRPH WKH\ JHQHUDWH DQG VR RQ $OWKRXJK WKLV IDFWRU \LHOGV D VPDOOHU UHODtive contribution to overall value, the quality of this informaWLRQ ZLOO GULYH D EX\HU¡V SHUFHSWLRQ RI WKH TXDOLW\ RI WKH FOLHQW ERRN WKDW KH VKH LV DVVHVVLQJ In conclusion, it is clear that sellers can actively drive the capital value of their businesses by focusing on each of the above core business areas. The key to addressing the valuation gap lies in understanding how a buyer will value the business, assessing the trade-offs and avoiding over-capitalising on those areas that do not drive value. In this way, the gap between a seller’s expectation and a buyer’s perception of value can be successfully bridged. This, in turn, will help many business owners overcome the biggest stumbling block to implementing a business continuity plan.

June/July 2011

30

Regulation

$ SURIHVVLRQDO š QDQFLDO VHUYLFHV VHFWRU

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y now, everyone in the industry seems to know about the Financial Services Board’s (FSB) regulatory examinations and is aware that they have to pass an DGGLWLRQDO H[DPLQDWLRQ RYHU DQG DERYH WKH TXDOLÀ FDWLRQ requirement. This awareness is obviously a positive state of affairs. However, these same people seem to view their awareness as the only positive aspect, and a widespread sense of negativity towards this examination prevails. In an attempt to try and understand this negativity, I tried in my own way to explore the piece of subordinate legislation from which this need arises. The legislation is, in its intent, designed to ensure that both consumer and the industry are protected. The legislation means to overhaul and SURIHVVLRQDOL]H WKH ZRUN RI WKH À QDQFLDO VHUYLFHV VHFWRU $V D UHVXOW À QDQFLDO VHUYLFHV SUDFWLWLRQHUV ZLOO KDYH registration in common with other recognized professions including medical and allied health services, legal practitioners, engineers and accountants. There is no question that the professionalization of the sector will ensure that its RIÀ FH EHDUHUV WRR DUH KHOG LQ WKH VDPH SUHVWLJLRXV OLJKW E\ the public in the future. Professionalization of the sector will also elevate the status of the individual practitioner working in the industry and will ensure that these true professionals will attract others aspiring to join it. This cycle of status and attraction certainly seems to apply across all other sectors with professional registration requirements. Status and esteem do not come easily however, and have to be worked for. Doctors, lawyers, engineers and accountants study for up to seven years and several write board exams to reach that stage. ,I \RX DOUHDG\ KDYH \RXU FUHGLWV RU D TXDOLÀ FDWLRQ \RX are almost there – you may only be one examination DZD\ ,I \RX VWLOO QHHG D TXDOLÀ FDWLRQ WKHUH DUH RQH \HDU FHUWLÀ FDWH SURJUDPPHV WKDW \RX FDQ VWXG\ WR UHDFK WKH EHQHÀ WV RI SURIHVVLRQDOLVP HDVLO\ DQG TXLFNO\ , EHOLHYH ZH should take the focus off the examination itself and shift it rather onto giving ourselves the best chance to be successful at the regulatory exam/s ahead and to contributing to the enhancement and development of the sector as a whole. This is not as daunting as it may seem. You can achieve success in these exams by following the steps below: 1. Get the course material. Milpark Business School has GHYHORSHG FRXUVH PDWHULDO VSHFLÀ FDOO\ IRU WKLV H[DPLQDWLRQ It is also available for free and can be downloaded from the INSETA website or purchased at a minimal cost from Milpark directly. 2. Work through the course material. The FSB advises candidates to spend at least three months preparing for the examination, so start as soon as possible. The good news is The Financial Planner

that you will no doubt already be familiar with some of the legislative content. Start making notes and tackle the book chapter by chapter. 7KH H[DPLQDWLRQ LV PXOWLSOH FKRLFH 7KH H[DP FRQVLVWV RI multiple choice questions (MCQs) and pass marks of 65% and 66% respectively are required. Practise answering MCQs to develop the skills needed. MCQ papers are not guessing JDPHV DQG FRQWDLQ QR SDWWHUQV 7KHUH DUH WHVW \RXUVHOI questions at the end of each chapter in the book. You may also purchase practice papers from MBS for extra practice. Practising is studying and may also be fun. 4. If you still believe that you require additional assistance due to the legislative technical nature of the content, you have the option to attend a workshop. A workshop may be just what you need to hone your studying and exam skills and HQVXUH H[DP UHDGLQHVV )LQDOO\ EH SRVLWLYH DQG FRQÀ GHQW DQG PDQDJH \RXU WLPH You have two hours for 50 MCQ’s in the representative exam. Make sure you plan accordingly and leave time at the end to focus on the tough questions. Answer the questions you are VXUH RI À UVW LQ WKDW ZD\ HQVXULQJ WKDW \RX JHW DV PDQ\ PDUNV DV SRVVLEOH XSIURQW Give this exam your best shot. Achieving success in this examination is a sure way of securing your future as a professional in this fascinating and rewarding sector. Ismail Sadek Executive Director Milpark Business School

About Milpark Business School Milpark Business School is an independent, private, registered provider of Higher Education (HE) and Further Education and 7UDLQLQJ )(7 TXDOLÀ FDWLRQV 7KH TXDOLÀ FDWLRQV RIIHUHG IRFXV RQ the niche areas of management and leadership, banking and À QDQFLDO SODQQLQJ DQG LQVXUDQFH 0LOSDUN KDV WZR FDPSXVHV LQ -RKDQQHVEXUJ DQG &DSH 7RZQ DQG DQ RIÀ FH LQ 'XUEDQ 0LOSDUN %XVLQHVV 6FKRRO LV UDWHG DV D /HYHO FRQWULEXWRU ZLWK EODFN VKDUHKROGLQJ 0LOSDUN %XVLQHVV 6FKRRO 3W\ /WG 5HJ 1R 5HJLVWHUHG ZLWK WKH 'HSDUWPHQW RI +LJKHU (GXFDWLRQ DQG 7UDLQLQJ 'R+(7 DV DQ +( ,QVWLWXWLRQ 1R +( 3URYLVLRQDO UHJLVWUDWLRQ ZLWK WKH 'R+(7 DV DQ )(7 SURYLGHU 1R )( YDOLG XQWLO 'HFHPEHU XQGHU WKH )XUWKHU (GXFDWLRQ DQG 7UDLQLQJ $FW 9LVLW ZZZ PLOSDUN DF ]D IRU LQIRUPDWLRQ DERXW 0LOSDUN %XVLQHVV 6FKRRO LWV FRXUVHV DQG TXDOLÀ FDWLRQV

June/July 2011

31

Retirement

Why settle for

70%? Hamish Leppan, HLC Financial Services

I

’ve been told I should plan to live on 70% of what I was earning when I retire. Does this ring a bell? Is it real? Why 70%? “Well,” I’m told, “your house will be paid for by WKHQ DQG \RXU NLGV ZLOO EH À QDQFLDOO\ LQGHSHQGHQW <RXU QHHGV DV D SHQVLRQHU ZLOO EH OHVV µ , GRQ·W WKLQN WKLV ULQJV WUXH 0\ KRXVH PD\ KDYH EHHQ SDLG IRU EXW GLG DQ\RQH PHQWLRQ WKH LQFUHDVH LQ UDWHV RU HOHFWULFLW\ FRVWV" 'LG WKH\ PHQWLRQ WKDW WKH NLGV PD\ VWLOO EH FRPLQJ KRPH WR ERUURZ WKHLU ´LQKHULWDQFHµ EHFDXVH WKH\ FDQ·W PDNH HQGV PHHW" 'LG WKH\ PHQWLRQ WKH LQFUHDVH LQ WUDQVSRUW FRVWV" 1RW just to get around the town, but also for that round-the-world WULS WKDW ZDV SODQQHG DW UHWLUHPHQW 'LG WKH\ WKLQN DERXW ULVLQJ PHGLFDO FRVWV" And who was it said I had to retire at 65, anyway? ,Q WKH HDUO\ V LW ZDV FRQVLGHUHG D IHDW WR DFKLHYH DJH DQG WKRVH ZKR GLG ZHUH XVXDOO\ SK\VLFDOO\ DQG PHQWDOO\ VSHQW E\ WKHQ %XW QRZ LQ , DP WROG WKDW WKH À UVW SHUVRQ WR UHDFK DJH QR W\SR , PHDQ PD\ KDYH DOUHDG\ EHHQ ERUQ &RQVLGHU KRZ ORQJ KLV UHWLUHPHQW ZLOO EH I was told that “the norm” is for members of a pension fund WR VWDUW FRQVROLGDWLQJ WKHLU IXQGV DV WKH\ DSSURDFK DJH 7KH\ VKRXOG UHGXFH WKHLU H[SRVXUH WR HTXLWLHV DV DQ DVVHW FODVV DQG VWDUW EHFRPLQJ PRUH FRQVHUYDWLYH %XW LVQ·W LW MXVW WKLV H[SRVXUH WR HTXLWLHV WKDW ZLOO JLYH PH D ODUJHU IXQG RQ ZKLFK WR UHWLUH" , XQGHUVWDQG WKDW PDUNHWV DUH À FNOH , XQGHUVWDQG , PLJKW KDYH WR ZDLW WR UHFRYHU IURP DQ\ GRZQWXUQ LQ WKH PDU NHW %XW HYHU\RQH NHHSV DVVXPLQJ , ZLOO VWRS ZRUNLQJ DW DJH , NQRZ D ORW RI \HDU ROGV ZKR DUH QRW VSHQW DQG XVHOHVV ,Q IDFW WKH\ ZRXOG EH RIIHQGHG WR EH UHIHUUHG WR DV VXFK :K\ WKHQ ZKHQ , JHW WKHUH VKRXOG , QRW SODQ WR FRQWLQXH EHLQJ LQYROYHG LQ EXVLQHVV IRU D ZKLOH ORQJHU" 6XUHO\ , ZRXOG HQMR\ WKH VRFLDO LQYROYHPHQW DQG WKH DGGHG LQFRPH ZLOO VKLHOG PH IURP GUDZLQJ P\ ´SHQVLRQµ· DW WKDW VWDJH :KHUH DUH WKH À QDQFLDO SODQQHUV ZKR VKRXOG EH WHOOLQJ PH

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DOO RI WKLV" +DV WKH )6% PDGH DOO RI WKHP VR FRQFHUQHG ZLWK JLYLQJ ´DSSURSULDWH DGYLFHµ RU EHLQJ KDXOHG EHIRUH WKH 2PEXGVPDQ WKDW WKH\ VK\ DZD\ IURP DOORZLQJ ROGHU FOLHQWV WR LQYHVW LQ HTXLWLHV" $UH WKH\ SURWHFWLQJ DJDLQVW RXU JURZLQJ OLWLJLRXV VRFLHW\ E\ JLYLQJ FRQVHUYDWLYH DGYLFH" , WKLQN ZH VKRXOG EH WROG DQG À QDQFLDO SURGXFW VDOHVPHQ VKRXOG EH HQFRXUDJHG WR H[SODLQ WKH FRQVHTXHQFHV RI PHGL FDO VFLHQFH H[WHQGLQJ RXU ORQJHYLW\ VR WKDW ZH SODQ IRU RI FXUUHQW LQFRPH DV D UHDO WDUJHW IRU UHWLUHPHQW :K\ " :HOO LW JLYHV XV D JRRG WDUJHW WR VKRRW IRU LVQ·W XQDFKLHYDEOH EXW LV PRVWO\ MXVW EH\RQG RXU PHDQV +H\ LI \RX RQO\ KLW KDYH \RX GRQH DQ\ KDUP" 5HPHPEHU LW·V QRW MXVW DERXW EHLQJ DEOH WR OLYH DW UHWLUHPHQW DJH ZKDWHYHU WKDW PD\ XOWLPDWHO\ EH EXW DOVR DERXW EHDWLQJ LQÁ DWLRQ LQ WKH IXWXUH 'RQ·W WKLQN IRU D PRPHQW WKDW LQÁ DWLRQ ZLOO EH NHSW EHORZ IRU HYHU 6R , UHSHDW ZK\ VHWWOH IRU " , IRU RQH GRQ·W LQWHQG WR , DP JRLQJ WR WU\ WR DFFXPXODWH HQRXJK DVVHWV WR VXSSRUW PH IURP VD\ DJH RQZDUGV RQ WKH HTXLYDOHQW RI RI ZKDW , ZDV HDUQLQJ DW DJH 7KHQ LI , GHFLGH DW WKDW VWDJH RI P\ OLIH WKDW , ZDQW WR JHW RXW RI WKH HDUQLQJ F\FOH DQG OLYH RII P\ DFFXPXODWHG DVVHWV , ZLOO DW OHDVW NQRZ , FDQ GR VR ZLWKRXW KDYLQJ WR SDLU GRZQ P\ VWDQGDUG RI OLYLQJ WR PDWFK P\ LQDGHTXDWH LQFRPH , ZDQW WR NQRZ WKDW , DP LQ FRQWURO , ZDQW WR NQRZ WKDW , won’t suffer if the markets take a turn for the worse for a year RU WZR , ZDQW WR NQRZ , FDQ WDNH WKDW 0DXULWLXV KROLGD\ RQ D ZKLP , ZDQW WR NQRZ , KDYH PDGH DGHTXDWH À QDQFLDO SURYL VLRQ IRU ODWHU RQ , GRQ·W ZDQW WR EH IRUFHG WR PRYH P\ KRPH GRZQPDUNHW WR VDYH PRQH\ RU UHOHDVH DVVHWV , ZLOO WHOO P\ À QDQFLDO SODQQHU WKLV DQG PDNH VXUH KH IROORZV P\ WKLQNLQJ DQG SODQV DFFRUGLQJO\ +H GRHVQ·W KDYH WR IHDU UHWULEXWLRQ IRU SODFLQJ P\ LQYHVWPHQWV LQ WKH HTXLW\ PDUNHW , QHHG WR JURZ P\ DVVHWV DV DJJUHVVLYHO\ DV , FDQ If you are reading this as a retired person, please tell the DQG \HDU ROGV \RX NQRZ WKDW WKH\ QHHG WR VWDUW VDYLQJ DJJUHVVLYHO\ QRZ 7HOO WKHP RI \RXU H[SHULHQFHV ([SODLQ WKH SDLQ RI ZDLWLQJ WRR ORQJ EHIRUH \RX VWDUW (QFRXUDJH WKHP WR JHW JRRG À QDQFLDO SODQQLQJ DGYLFH QRZ 'LG \RX KDYH D PHQ WRU WR KHOS \RX" %H D PHQWRU WR WKHP I won’t settle for 70%! June/July 2011

32

Investment

Special Trusts: A muchoverlooked tax planning tool

David Warneke, Tax Director at BDO South Africa

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rusts are often used by estate planners in planning for DGPLQLVWUDWLYH DQG WD[ HIĂ€ FLHQF\ DIWHU WKH SODQQHU¡V GHPLVH ² DQG FRUUHFWO\ VR However, a much overlooked vehicle is the ‘special trust’, which has all of the advantages of D ÂśUHJXODU¡ WUXVW EXW ZLWK VLJQLĂ€ FDQW DGGHG WD[ EHQHĂ€ WV A ‘special trust’ is a regular trust for all purposes other than WKH ZD\ LW LV WD[HG 7KH WHUP ÂśVSHFLDO WUXVW¡ LV GHĂ€ QHG LQ VHFWLRQ RI WKH ,QFRPH 7D[ $FW DQG LV D YHKLFOH WR KRXVH WKH DVVHWV RI D SHUVRQ ZLWK D VHULRXV PHQWDO RU SK\VLFDO GLVDELOLW\ %XW LW LV OHVV ZLGHO\ NQRZQ WKDW WKHUH LV DQRWKHU SDUW WR WKH GHĂ€ QLWLRQ of a ‘special trust’- namely, a trust set up in terms of the will RI D GHFHDVHG SHUVRQ VROHO\ IRU WKH EHQHĂ€ W RI ÂśUHODWLYHV¡ WKH The Financial Planner

youngest of whom is under the age of 21 on the last day of )HEUXDU\ RI WKH UHOHYDQW WD[ \HDU 7KH GHĂ€ QLWLRQ RI ÂśUHODWLYH¡ LQ WKH ,QFRPH 7D[ $FW LQFOXGHV DQ\RQH UHODWHG WR WKH SHUVRQ RU his or her spouse to the third degree of consanguinity, that is,it LQFOXGHV JUHDW JUDQGFKLOGUHQ DQG QHSKHZV DQG QLHFHV $ VSHFLDO WUXVW HQMR\V DOO RI WKH EHQHĂ€ WV ZLWK UHJDUG WR separation of assets and ease of administration that are afIRUGHG D ÂśUHJXODU¡ WUXVW KRZHYHU LQVWHDG RI EHLQJ WD[HG DW WKH Ă DW UDWH RI RQ LWV WD[DEOH LQFRPH D VSHFLDO WUXVW LV WD[HG RQ WKH VDPH IDYRXUDEOH VOLGLQJ VFDOH WKDW DSSOLHV WR WKH WD[DWLRQ RI LQGLYLGXDOV ,W DOVR HQMR\V WKH DGYDQWDJHRXV WUHDW PHQW DIIRUGHG WR LQGLYLGXDOV ZLWK UHJDUG WR WKH UDWH RI WD[D WLRQ RQ FDSLWDO JDLQV ZKLFK DUH WD[HG DW D PD[LPXP HIIHFWLYH UDWH RI DV RSSRVHG WR LQ WKH FDVH RI D ÂśUHJXODU¡ WUXVW ,W LV LPSOLHG E\ WKH GHĂ€ QLWLRQ RI ÂśVSHFLDO WUXVW¡ WKDW VXFK D WUXVW FRXOG RQO\ HQMR\ WKH DGGHG WD[ EHQHĂ€ WV XQWLO WKH \RXQJ HVW EHQHĂ€ FLDU\ WXUQV 7KHUHDIWHU WKH WUXVW ZLOO EH WD[HG RQ WKH VDPH EDVLV DV D UHJXODU WUXVW 1HYHUWKHOHVV WKH WD[ EHQHĂ€ WV WKDW FRXOG DFFUXH GXULQJ WKH SHULRG LQ ZKLFK WKH WUXVW LV WD[HG DV D ÂśVSHFLDO WUXVW¡ FDQ EH HQRUPRXV 7DNH IRU LQVWDQFH WKH VLWXDWLRQ ZKHUH D IDWKHU LQ KLV ZLOO directs that, on his death, a trust be established for the benHĂ€ W RI RQO\ KLV FKLOGUHQ +H GLHV ZKHQ WKH \RXQJHVW RI WKH FKLOGUHQ LV IRXU \HDUV RI DJH 6XFK D WUXVW ZRXOG TXDOLI\ DV D ÂśVSHFLDO WUXVW¡ LQ WHUPV RI WKH GHĂ€ QLWLRQ DERYH +H EHTXHDWKV 5 PLOOLRQ LQ FDVK WR WKH WUXVW 7KH WUXVW XVHV WKH 5 PLOOLRQ WR SXUFKDVH D SRUWIROLR RI VKDUHV ,I WKH VKDUHV \LHOG DQ compound capital growth rate per annum, when the youngest FKLOG LV \HDUV ROG WKH SRUWIROLR ZLOO EH ZRUWK 5 PLO OLRQ ,I WKH WUXVW ZHUH WR VHOO WKH VKDUHV LQ WKDW \HDU DQG UHWDLQ WKH JDLQV WKH VDYLQJV LQ FDSLWDO JDLQV WD[ ZRXOG DPRXQW WR PRUH WKDQ 5 PLOOLRQ ZKHQ FRPSDUHG WR WKH WD[ WKDW ZRXOG KDYH EHHQ SD\DEOH KDG WKH WUXVW EHHQ D UHJXODU WUXVW 7KLV LV EHVLGHV WKH VDYLQJV LQ LQFRPH WD[ RYHU WKH SHULRG RQ GLYL GHQGV IURP IRUHLJQ VKDUHV LQ WKH SRUWIROLR $IWHU WKH WUXVW QR ORQJHU TXDOLĂ€ HV WR EH WD[HG DV D ÂśVSHFLDO trust’, it does not have to be terminated – it can continue in H[LVWHQFH DV D ÂśUHJXODU¡ WUXVW ZLWKRXW WKH VSHFLDO WD[ WUHDWPHQW RXWOLQHG DERYH My advice is that serious consideration should be given to the use of a ‘special trust’ when doing any estate planning exercise. As the majority of laypersons are not versed in issues relating to the taxation of trusts, this is especially the case for those in the Ă€ QDQFLDO SODQQLQJ DUHQD ZKHUH FRQVLGHULQJ WKH DSSURSULDWHQHVV of a ‘special trust’ should be standard item on the due diligence checklist. June/July 2011

33

Retirement

Why we all will need to be working longer than our parents Willem Loots, Actuarial Manager at Liberty Corporate Consultants and Actuaries

W

e live in an age and culture where the concept of retirement is taken as given. Less than 150 years ago, the concept of retiring as we know it today did not exist. Indeed, most people happily worked until death or GLVDELOLW\ ZKLFKHYHU RFFXUUHG À UVW Worldwide, health improvements directly affect the number of years people are expected to live in retirement, and this is also the case for South Africa. We can therefore expect to likely have to work longer than our parents did or save much more to provide for a longer retirement.

Improvements in life expectancy Life expectancies have been increasing dramatically in all OECD countries over the last four decades, as demonstrated by Table 1: OECD

1960

2006

DiÄŤerence 2006-1960

Women

70.8

81.7

10.9

Men

65.8

76.0

10.2

Table1: Life expectancy at birth, in years, men and women, in 1960 and 2006

compared to previous generations. Furthermore, these retiring individuals are healthier than previous generations. An increase in the average retirement age, to compensate for longer retirements, has not been seen in South Africa. It is not surprising in a country with a critically high youth unemployment rate that the retirement age is kept low. However, one must ask with a dire skill shortage whether this is sustainable. Another problem facing South Africa is the large number RI HPSOR\HG 6RXWK $IULFDQV WKDW GR QRW HDUQ VXIĂ€ FLHQW LQFRPH to save for retirement. In addition, many underestimate the amount of money required to secure a comfortable income after retirement. As a very broad guideline, an annual retirement income of 75% of pre retirement salary may be considered comfortable. Of course, this income would be expected WR LQFUHDVH LQ OLQH ZLWK LQĂ DWLRQ It is possible to estimate the level of savings required at retirement to secure a comfortable level of income post retirement. This level can be expressed as a multiple of pre-retirement salary. Using this concept, Table 2 illustrates the required multiple of pre-retirement salary based on average life expectancies at retirement (using data of OECD countries). Furthermore, the table illustrates how this required multiple has been changing since 1960, and how it is projected to change to the year 2050. EsĆ&#x;mated required mulĆ&#x;ple of salary at reĆ&#x;rement 14

Source: OECD (2008), OECD Health Data 2008 12

While retirement ages are slowly adjusting for these changes, it is clear these are not keeping pace with improvements in longevity. So, an increase in retirement age to 65 by 2050 from 62 today still means a longer period of retirement, based on data of the OECD countries. To illustrate, by 2050, IHPDOHV LQ WKH 2(&' FRXQWULHV ZLOO VSHQG DOPRVW WZHQW\ À YH years in retirement. This group of individuals will spend longer preparing for work and in retirement than they actually will be working.

Impact on South Africa Longevity and the related ageing of populations experienced across the world are problems we tend to ignore in South Africa mainly due to the incidence of HIV. Although HIV dramatically affects the average life expectancy at birth, the reality is that those who remain HIV-free during their working lifetime do have an increased life expectancy post retirement

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8

6

Table2: Estimated required multiple of salary at retirement (1960 – 2050) Sources: OECD Data, Liberty Corporate From Table 2, it can be seen that due to the longer expected time in retirement the estimated required multiple of salary has increased from 8,1 in 1960 to 10,5 in 2010 for males of average retirement age. This multiple is expected

June/July 2011

34

Retirement

to increase to around 11,3 by 2050. For a male who delays UHWLUHPHQW E\ À YH \HDUV WKLV PXOWLSOH GURSV IURP WR LQGLFDWLQJ WKH EHQHÀ W RI UHWLULQJ ODWHU ,Q DGGLWLRQ WR D VKRUWHU SHULRG VSHQW LQ UHWLUHPHQW WKH UHWLU HH EHQHÀ WV IURP À YH DGGLWLRQDO \HDUV RI FRQWULEXWLRQ WRZDUGV UHWLUHPHQW VDYLQJV 7KLV FRQWULEXWLRQ LV XVXDOO\ H[SUHVVHG DV D SHUFHQWDJH RI DQQXDO VDODU\ FRQWULEXWHG WKURXJKRXW D ZRUN LQJ OLIHWLPH )RU D PDOH UHWLULQJ DW DJH LQ WKH HVWL PDWHG LPSDFW RI WKH FRPELQHG EHQHÀ WV RI VDYLQJ ORQJHU DQG GUDZLQJ D UHWLUHPHQW LQFRPH IRU D VKRUWHU SHULRG LV D GURS LQ WKH UHTXLUHG FRQWULEXWLRQ UDWH IURP WR

The case for a higher retirement age ,I SHRSOH DUH OLYLQJ ORQJHU LQ UHWLUHPHQW DQG DUH LQ EHWWHU

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KHDOWK LQ UHWLUHPHQW WKDQ EHIRUH DQG GR QRW KDYH VXIĂ€ FLHQW LQFRPH WR HQDEOH WKH DSSURSULDWH VDYLQJV OHYHOV UHTXLUHG WR VHFXUH DQ DGHTXDWH UHWLUHPHQW LQFRPH VXUHO\ ZH VKRXOG FRQ sider increasing their retirement age? The reality is that many South Africans will not have the luxury to choose to work past normal retirement age. For many, working longer means deferring receipt of a state old age grant. For others, employers do not provide the option of working longer. Therefore, those needing or electing to work beyond traditional retirement ages will need to be inventive in terms of how they are able to secure employment. A semi retirement stage of a working lifetime which includes a scaled down workload is probably the ideal solution. To enable this, the labour market will, KRZHYHU QHHG WR EHFRPH PRUH Ă H[LEOH

June/July 2011

35

Planning

Breaking Trusts Franscois van Gijsen

&HUWLĂ€ HG )LQDQFLDO 3ODQQHUÂŽ, BProc; LLM (Tax Law); Dip. Legal Practice; Post Grad Dip. Financial Planning; Adv Post Grad Dip. Financial Planning, Director Legal Services at Finlac Risk and Legal Management.

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hilst analysing a trust deed for a client recently I started wondering why so many individuals who use trusts in their estate planning, and their advisors are so intent on “breakingâ€? their trusts. Why would a planner go to the trouble of creating a trust, the expense and effort of transferring assets to a trust and of administering D WUXVW MXVW WR DJDLQ GHSULYH KLPVHOI RI WKH EHQHĂ€ WV WKDW WKLV versatile estate planning tool offers him? The answer, it would seem, is the result of forgetting why the trust was created in WKH Ă€ UVW SODFH ZKLOH QRW XQGHUVWDQGLQJ WKH FRQFHSW RI KDYLQJ a vested right in trust assets. /HW XV WKHQ Ă€ UVW WDNH D ORRN DW ZK\ FOLHQWV W\SLFDOO\ GHFLGH WR XVH D WUXVW 6SHDN WR DQ DGYLVRU UHJDUGLQJ WUXVWV DQG WKH\¡OO usually tell you about the “advantagesâ€? to be had from using a trust. Trusts, we are told, can be used to save on income tax, postpone capital gains tax and save estate duty. It can also serve as a way in which to safeguard assets from attachPHQW E\ FUHGLWRUV DQG NHHS WKHP IURP IDOOLQJ LQWR WKH KDQGV of spouses during divorce proceedings. These are also the reasons that clients most often tell me, and indeed that was the reason my aforementioned client told me for which he decided, to use a trust as an estate planning tool. An LQWHU YLYRV trust can be either a discretionary trust or a vesting trust. In this article we are dealing with discretionary WUXVWV /HW XV QRZ ORRN DW WKH FRQFHSW RI D ´YHVWHG ULJKWÂľ DV LW pertains to trust assets. 1) According to the case of -HZLVK &RORQLDO 7UXVW Y (VWDWH 1DWKDQ1 a right can be said to vest in a person when he owns it. Secondly, the case tells us, the word vested can be used to draw a distinction between “what is certain and what is conditional: a vested right is distinguished from a contingent or conditional right.â€? 3) The case of Goliath v Estate Goliath2 points out another interesting aspect of vested rights, namely that the right is “immediateâ€?, but “the enjoyment thereof may be postponed.â€? A right can be said to be “immediateâ€? if it is not dependant on DQ\ IXUWKHU FRQWLQJHQF\ VXFK DV WKH VXUYLYDO RI WKH EHQHĂ€ FLDU\ to a given age or the death of a given person.3 4) It is also clear, from the case of Jowell v Bramwell Jones4, that once a right is vested in this sense it is transmissible to WKH VXFFHVVRUV RI WKH EHQHĂ€ FLDU\ RQ GHDWK RU LQVROYHQF\ DQG LW IRUPV DQ DVVHW LQ WKH EHQHĂ€ FLDU\¡V HVWDWH $ FRQWLQJHQW ULJKW The Financial Planner

RQ WKH RWKHU KDQG GRHV QRW IRUP DQ DVVHW LQ WKH EHQHĂ€ FLDU\¡V estate at death. The one way, more often than any other, that I see trusts ´EURNHQÂľ LV WKH UHVXOW RI D YHU\ FRPPRQ SUDFWLFH LQ WUXVW ERRNNHHSLQJ RQH WKDW DXGLWRUV DQG DGYLVRUV ORYH HPSOR\ LQJ %ULHĂ \ WKLV LQYROYHV WKH DOORFDWLRQ LQ WKH WUXVW¡V DFFRXQWV RI D FHUWDLQ SRUWLRQ RI WKH WUXVW¡V LQFRPH RU FDSLWDO JDLQV WR D VSHFLĂ€ F EHQHĂ€ FLDU\ DQG WKHQ FUHGLWLQJ WKH DPRXQW WR WKDW EHQ HĂ€ FLDU\ RQ ORDQ DFFRXQW , H WKH LQFRPH RU FDSLWDO JDLQ LV VDLG WR EH DOORFDWHG WR EHQHĂ€ FLDU\ ; EXW WKH PRQH\ LV QRW DFWXDOO\ paid to him yet, and a loan account is created in his favour in WKH WUXVW ERRNV ZKLOH WKH WUXVWHHV VWLOO DGPLQLVWHU WKRVH DPRXQWV on his behalf. 7KLV LV GRQH WR UHGXFH WKH WUXVW¡V OLDELOLW\ IRU LQFRPH WD[ DQG capital gains tax by means of the conduit pipe effect created by section 25B(2)5 and Paragraph 80(2)6. These sections allow trust income or capital gains to be taxed in the hands of a EHQHĂ€ FLDU\ DW WKDW EHQHĂ€ FLDU\¡V PDUJLQDO UDWH RI WD[ DV RS SRVHG WR WKH WUXVW¡V Ă DW UDWH RI +RZHYHU WKLV ZLOO EH WKH case only if the allocation is done within the tax year in which it accrued to the trust. In this way the trust acts merely as a FRQGXLW SLSH LQ WKDW WKH WUXVW LQFRPH RU FDSLWDO JDLQV Ă RZV WKURXJK LW WR WKH UHOHYDQW EHQHĂ€ FLDULHV WR ZKLFK LW KDV EHHQ allocated. $W Ă€ UVW JODQFH WKLV SUDFWLFH PD\ VHHP EHQHĂ€ FLDO DV LW FRXOG JLYH ULVH WR D WD[ VDYLQJ +RZHYHU WKH DOORFDWLRQ RI D WUXVW DVVHW RU RI LQFRPH RU D FDSLWDO JDLQ WR D EHQHĂ€ FLDU\ KDV VHUL ous consequences that are usually lost sight of by advisors and their clients in their eagerness for tax savings. This is the case even if the date of delivery is still entirely at the discretion of the trustees. Such allocations, as was shown, create vested interests in UHVSHFW RI WKH VSHFLĂ€ F EHQHĂ€ FLDULHV DQG DV VXFK H[SRVHV WKH DVVHWV WR HVWDWH GXW\ LQ WKH HVWDWH RI WKDW EHQHĂ€ FLDU\ H[SRVHV LW WR H[HFXWRU¡V IHHV LQ WKH HVWDWH RI WKDW EHQHĂ€ FLDU\ 3) exposes the asset to potential attachment by creditors, VSRXVHV HWF RI WKDW EHQHĂ€ FLDU\ ([DFWO\ WKH QHJDWLYH FRQVH quences the estate planner above was trying to avoid. It should also be borne in mind that there will always come a time when such amounts will in fact have to be paid out, either WR WKH EHQHĂ€ FLDU\ RU WR KLV HVWDWH %HDU LQ PLQG DOVR WKDW WUXVWHHV DUH REOLJDWHG WR DW DOO WLPHV KDYH VXIĂ€ FLHQW DVVHWV LQ WUXVW WR settle all such claims and their failure to do so could lead to perVRQDO OLDELOLW\ RQ WKHLU SDUW Lastly it should also be mentioned that clients and their advisors often attempt to circumvent these negative effects by including all manner of clauses in their trust documents purporting to say that these assets are excluded from attachment until such time as the assets have been paid over to the UHOHYDQW EHQHĂ€ FLDU\ DQG WKDW VKRXOG KH EH GHFODUHG LQVROYHQW prior to receipt of such assets, that the asset will revert to the June/July 2011

36

Planning/Long-term

trust. Unfortunately for them any such attempt or pretence, as can be seen in the well known cases of Vorster v Steyn7 and Du Plessis v Pienaar8, contained in any trust deed is a nudum praeceptum or naked condition and is invalid. I would suggest that any trustees and their advisors, when WHPSWHG WR DOORFDWH WUXVW LQFRPH RU FDSLWDO JDLQV WR EHQHÀ FLDULHV IRU QR UHDVRQ RWKHU WKDQ WR UHGXFH WKH WD[ OLDELOLW\ UH sulting from the receipt of such income or capital gain, should À UVW WKLQN ORQJ DQG KDUG DERXW WKH UHDVRQV IRU ZKLFK WKH WUXVW was originally created. Remember that an individual’s assets will be repeatedly hit by estate duty, and executor’s fees. First upon his death and repeatedly thereafter in the estates of his heirs as they in turn pass on and leave the assets to their own heirs. By keeping the income and the capital gains in trust it will not be liable for estate duty and executor’s fees in the KDQGV RI DQ LQGLYLGXDO DQG WKH VDYLQJV RQ HVWDWH GXW\ DQG H[ ecutor’s fees will keep repeating itself through the generations

for as long as the trustees do not allocate the income, capital gain. The same goes for allocating other trust assets. I am of the opinion that if you consider the potential savings WKURXJK WKH JHQHUDWLRQV DQG DOVR WKH SURWHFWLRQ WKDW WUXVW DV sets, prior to being allocated to and vesting in an individual, enjoys from creditors that a short term tax saving does not MXVWLI\ GHSULYLQJ WKH EHQHĂ€ FLDULHV RI WKH EHQHĂ€ WV WKDW WKH WUXVW has to offer 1 Jewish Colonial Trust v Estate Nathan 1940 AD 163 2 Goliath v Estate Goliath 1937 CPD 312 3 Re Allen Trust 1941 NPD 147 4 Jowell v Bramwell Jones (1998 (1) SA 836 (W) 5 Income Tax Act, 1962 (Act 58 of 1962) 6 Eighth Schedule to the Income Tax Act, 1962 (Act 58 of 1962) 7 Vorster v Steyn 1981 (2) 831 (OPD) 8 Du Plessis v Pienaar 2003 (1) SA 671 (SCA)

Business assurance concerns Harry Joffe,Head, Legal Services, Discovery life

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usiness assurance is undoubtedly a lucrative area for WKH Ă€ QDQFLDO DGYLVRU WR VSHFLDOL]H LQ DV LW LV VXFK D WHFKQLFDO DQG VSHFLDOLVW DUHD WKDW WKH EXON RI DGYLVRUV tend to avoid it out of fear. 7KRVH VSHFLDOL]LQJ LQ LW FDQ Ă€ QG D nice niche area avoided by the ‘riff raff’. However, the area is fraught with dangers, even for the expert. The following are SUREOHPV ZKLFK DOZD\V VHHP WR FURS XS LQ DQ\ EXVLQHVV DVVXU ance structure:

%X\ DQG 6HOO SROLFLHV DUH VROG ZLWKRXW DQ\ EX\ and sell contract This, alas, is an all too common occurrence. Often this is not WKH DGYLVRU¡V IDXOW RQFH WKH FOLHQWV KDYH WKH SROLFLHV WKH\ lose all interest in the agreements, and never get to sign them. &OLHQWV XQIRUWXQDWHO\ IDLO WR UHDOL]H WKDW ZLWKRXW D VLJQHG FRQ tract, they have very little to compel the surviving partners/ spouse to buy or sell any shares/interest on a death. This would mean that the whole point for which the policies were taken out would not be achieved. The insurance company is regrettably unable to help, as they would be obliged to pay the owner of the policy and would be unable to get involved after that.

3UHPLXPV DUH QRW SDLG FRUUHFWO\ This again is an all too common occurrence. In almost all FDVHV WKH SUHPLXPV DUH SDLG E\ WKH FRPSDQ\ ZLWK WKH LQWHQ

The Financial Planner

tion of debiting the individual’s loan accounts. In practice, either loan accounts are never debited or created, or if they are, they are incorrectly allocated – normally they are simply VSOLW HTXDOO\ ZLWKRXW WDNLQJ DFFRXQW RI WKH GLIIHUHQW VKDUHKROG ing split. In both cases, according to a SARS guidance note, the policies will not be given estate duty exemption on death. Therefore, by this simple error, policies that should have been free of estate duty, are now made dutiable. In addition, if no loan accounts are ever created, this has the effect that the company has paid for private premiums which is a taxable IULQJH EHQHÀ W 7KHUHIRUH ERWK DQ HVWDWH GXW\ DQG LQFRPH WD[ problem have now been created.

7KH SROLFLHV DUH RYHU XQGHU YDOXHG In practice, the problem arises because no true valuation is done to ascertain the real value of the shares in question. A ‘thumb suck’ value is simply used. This obviously creates a problem that the policies are either higher or lower in value then they should be. Two simple examples will illustrate this: A’s shares are worth 1 million Rand objectively valued. B takes a policy on his life for 2 million Rand. On A’s death, two problems will arise. Firstly, SARS will say that because the shares were only worth 1 million, the 2 million policy was not a genuine buy and sell policy. This means that, once again, the HVWDWH GXW\ H[HPSWLRQ ZLOO QRW EH DOORZHG ,Q DGGLWLRQ EH FDXVH % ZLOO KDYH SDLG PLOOLRQ IRU D SROLF\ RQO\ ZRUWK PLO OLRQ WKLV FRXOG EH VHHQ E\ 6$56 DV D GRQDWLRQ ZLWK % WKHUH fore having to pay donations tax on the 1 million donated. Therefore once again a double problem has been created. >1RWH WKDW WKLV SUREOHP ZLOO QRW DULVH ZKHQ SROLFLHV ZHUH FRU rectly valued in the beginning, and have simply become out of date due to an unforeseen event or crash in the market.]

June/July 2011

37

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$·V VKDUHV DUH ZRUWK PLOOLRQ 5DQG % FDQ RQO\ DIIRUG D SRO LF\ RI PLOOLRQ 5DQG % WKHUHIRUH LQVXUHV $ IRU PLOOLRQ HYHQ WKRXJK WKH VKDUHV DUH ZRUWK PLOOLRQ 2Q $·V GHDWK WZR SURE OHPV DJDLQ DULVH )LUVWO\ $·V IDPLO\ ZLOO RQO\ UHFHLYH PLOOLRQ 5DQG IRU D VKDUH WKDW ZDV UHDOO\ ZRUWK PLOOLRQ 5DQG 6HF RQGO\ RQFH DJDLQ WKHUH LV D GRQDWLRQV WD[ ULVN 6$56 FRXOG DUJXH WKDW WKH HVWDWH KDV VROG VKDUHV ZRUWK PLOOLRQ 5DQG IRU RQO\ PLOOLRQ 5DQG 7KLV ZDV LQWHQGHG IURP WKH YHU\ EHJLQ QLQJ 7KH HVWDWH KDV WKHUHIRUH PDGH D GRQDWLRQ RI PLOOLRQ 5DQG 7KLV PHDQV WKDW WR FRPSRXQG WKH SDLQ RI RQO\ UHFHLYLQJ PLOOLRQ 5DQG IRU D VKDUH ZRUWK PLOOLRQ 5DQG $·V IDPLO\ ZLOO LQ DGGLWLRQ KDYH WKHLU SD\ RXW UHGXFHG E\ D SRWHQWLDO GRQD WLRQV WD[ DVVHVVPHQW 7KH EHVW ZD\ WR DYRLG WKHVH SUREOHPV LV WR HQVXUH WKH VKDUHV DUH FRUUHFWO\ YDOXHG IURP WKH YHU\ EHJLQQLQJ 7KH SROL FLHV VKRXOG WKHQ EH PDGH WR HTXDO WKH VKDUH YDOXHV DQG QRW WKH RWKHU ZD\ URXQG 7KLV ZLOO DYRLG ERWK WD[ DQG SHUVRQDO SUREOHPV

4. The company pays the premiums 7KLV SUREOHP DULVHV ZKHQ WKH SROLFLHV DUH H[SHQVLYH DQG WKH VKDUHKROGHUV ZRXOG SUHIHU WKH FRPSDQ\ WR SD\ WKH SUHPLXPV

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µEXLOW LQµ WR WKH SROLF\ DQG WKH DPRXQW RI WKH SROLF\ LQFUHDVHG WKLV LV VLPSO\ D ZDVWH DV LI WKH VWUXFWXUH ZDV FRUUHFWO\ GRQH QRQH RI WKHVH WD[HV ZRXOG KDYH EHHQ SD\DEOH

Conclusion 7KLV LV VLPSO\ WKH À UVW SDUW RI D VHULHV RI DUWLFOHV RQ WKLV WRSLF 7KH VLPSOH UHDOLW\ LV DGYLVRUV HQWHULQJ WKLV PDUNHW QHHG WR XQGHUVWDQG WKH GHWDLOHG WD[ DQG OHJDO LVVXHV LQYROYHG RU WKH\ ZLOO EH FDXVLQJ WKHLU FOLHQWV XQQHFHVVDU\ KDUGVKLS

Boost relationships with social media marketing Dr. Estelle van Tonder, Programme Manager: Management and Leadership Faculty, Milpark Business School

S

ocial media marketing is ideal for small business owners not able to carry out conventional marketing activities because of limited resources. ,W LV GHÀ QHG DV WKH ¶XVH RI VRFLDO QHWZRUNV RU RQOLQH FROODERUDWLYH PHGLD IRU PDUNHWLQJ FRPPXQLFDWLRQV VDOHV SXEOLF UHODWLRQV DQG FXV WRPHU VHUYLFH· ,Q 6RXWK $IULFD VRFLDO QHWZRUNLQJ VLWHV VXFK DV )DFHERRN 7ZLWWHU DQG 0;LW DUH FRQVLVWHQWO\ UDQNHG LQ WKH WRS WHQ RI WKH ¶PRVW YLVLWHG· VLWHV 2QH RI WKH PRVW LQWHUHVWLQJ VWXGLHV LQ WKLV DUHD ZDV FRQGXFW HG DPRQJ VPDOO EXVLQHVVHV LQ WKH 8QLWHG .LQJGRP 8. DQG $XVWUDOLD 7KH VWXG\ LQYHVWLJDWHG WKH FRQQHFWLRQ EHWZHHQ RS HUDWLRQDO SUDFWLFHV DQG WKH KLJK VDOHV JURZWK WKHVH EXVLQHVVHV GLVSOD\HG 7KH UHVXOWV UHYHDOHG WKDW WKH UHODWLRQVKLSV WKHVH VPDOO EXVLQHVVHV KDG EXLOW ZLWK WKHLU FOLHQWV HPSOR\HHV VXS The Financial Planner

June/July 2011

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pliers and support networks through social media marketing were a critical factor in their success. Coopers and Lybrand found very similar results in their study conducted among 400 small businesses with high sales growth. Small businesses with strategic alliances experienced an 11% higher sales turnover than those not utilising network relationships. In the new, connected millennium, the availability of social media platforms offers small business owners opportunities to expand their customer base at a fraction of the cost of above-the-line advertising, to gain insight into their customers and to build good relationships with them. Forming wellestablished partnerships could be of great value to the small EXVLQHVV RZQHU DQG FRXOG DOVR LQFUHDVH SURÀ W PDUJLQV Business owners wishing to capitalize on these opportunities need to ensure that they can successfully rise to the many challenges implicit in the digital arena. Certain key behaviours that need to change include the need to get closer to consumers, to engender bilateral conversations, to master the context of marketing messages, to make better use of consumer data and insight, and to build new and more collaborative relationships across the value chain. Unlike their more traditional predecessors, social media are not merely digital platforms from which to showcase the business’s latest advertising campaign, to release a press statement or to tweet what you had for breakfast. The audiences have also changed: no longer just consumers of media and advertising, they are their creators, too. In today’s increasingly fragmented and digital world, consumers are more involved in the purchase process than ever The Financial Planner

before and are more likely to search for additional information and evaluate all the options available to them before making a well-informed decision. In this new connected milOHQQLXP FRQWURO LV PRUH À UPO\ LQ WKH KDQGV RI WKH FRQVXPHUV If they are not persuaded by the sales offering or are bored with the content presented to them, they will simply click away to another website! Social media marketing programmes should focus on efforts to create content that attracts attention and encourages readers to share them with their own social networks. A message will spread from user to user and may resonate more effectively precisely because it comes from a trusted source (a peer), as opposed to coming from the business itself. To win the minds and hearts of contemporary consumers, more creative approaches are needed. For starters, remember consumers no longer want passively to support a brand; they want to engage with it. Successful users of social media for marketing invite their consumers to become friends and partners in the business and aim to build trust relationships with them. Consumers want to understand the value of the products on offer and should be provided with opportunities to obtain more information, have their concerns addressed and share both positive and negative service experiences. Participation from both sides is thus a major factor for online success, and the more the business participates in the conversation, the more it stands to gain. Business owners need to ensure that they understand the needs of their target audiences, know what appeals to them and are up-to-date with current trends and information in WKHLU VSHFLÀ F DUHD &RQWHQW VKRXOG EH XSGDWHG RQ D UHJXODU EDVLV DQG PXVW LQFOXGH SUREOHP VROYLQJ LGHDV RI EHQHÀ W WR the consumer. The key to an effective social media strategy is listening and an investment in listening and measurement tools ensures that consumers’ needs are understood and addressed. $OWKRXJK DOO W\SHV RI VPDOO EXVLQHVVHV PD\ EHQHÀ W IURP VRFLDO PHGLD PDUNHWLQJ VWUDWHJLHV LQGHSHQGHQW À QDQFLDO DGYL sors, in particular, could consider this approach for their businesses; for example, a blog to advertise the advisor’s service and, consequently, create more brand awareness, could be XVHG $GYLVRUV FRXOG FRPPXQLFDWH WKH EHQHÀ WV RI WKH ODWHVW insurance product developments (perhaps a sponsored link to an insurance company’s website), comment on market develRSPHQWV SURYLGH WD[ DQG À QDQFLDO SODQQLQJ WLSV DQG HIIHF tively address generic concerns raised by clients on the web. 8OWLPDWHO\ VDWLVÀ HG FOLHQWV ZLOO UHFRPPHQG WKH EORJ WR WKHLU friends, offering the advisor further lead-generation opportunities. In conclusion, there might be great income potential for indeSHQGHQW À QDQFLDO DGYLVRUV PDNLQJ XVH RI VRFLDO PHGLD PDUNHWLQJ VWUDWHJLHV LQ WKHLU EXVLQHVVHV 7KHVH DGYLVRUV ZLOO KRZHYHU QHHG WR HQVXUH WKHLU PDUNHWLQJ PHVVDJHV FRPSO\ ZLWK WKH À QDQFLDO UHJXODWLRQV DQG GR QRW PDNH SURPLVHV WKDW FDQQRW EH NHSW 7KH HVVHQFH RI D VRFLDO PHGLD PDUNHWLQJ VWUDWHJ\ LV WR SXW WKH QHHGV RI WKH FRQVXPHUV À UVW $OWKRXJK EXVLQHVV RZQHUV FDQ H[SDQG WKHLU FXVWRPHU EDVH WKURXJK VRFLDO PHGLD WKH\ VKRXOG GR VR RII D EDVLV GHVLJQHG WR EXLOG WUXVW WR VWUHQJWKHQ WKHLU UHODWLRQVKLSV ZLWK FRQVXPHUV DQG WR RIIHU WKHP HIIHFWLYH VROXWLRQV WKDW ZLOO DGG YDOXH WR WKHLU OLYHV DQG UHWDLQ WKHP DV OR\DO FXVWRPHUV June/July 2011

39

Legal

Insurance and the Consumer Protection Act

Patrick Bracher, Director, Deneys Reitz

T

he only rational way to ensure that the Short-term Insurance Act and the Long-term Insurance Act are aligned to the consumer protection measures provided for in the Consumer Protection Act by October 2012 is to incorporate those measures into the Policyholder Protection Rules. The reason for this is not only the fact that major amendments to the Acts themselves is an impossible task within the time available. The Consumer Protection Act has created two parallel commercial systems. On the one track is the legal framework governing the relationship between the suppliers of goods and services and the protected consumers, namely all individuals The Financial Planner

and small businesses with assets or annual turnover less than R2 million. For these transactions, the Consumer Protection Act has driven a bulldozer through the thickets of contract law. Freedom of contract is closely governed to see that the consumer is always entitled to fair trade practices. On the other track is the economy that consists of supply and demand between commercial enterprises. Contracts relating to the supply of goods and services to corporations having assets or turnover above the threshold are untouched by the Consumer Protection Act. The entire common law of contract, and freedom of contract, applies to these relationships except in relation to franchise agreements. Consequently, amendments to the Insurance Acts themselves would be very messy if they try to cater for both these economies. The Policyholder Protection Rules, on the other hand, are VSHFLÀ FDOO\ LQWHQGHG WR GHDO ZLWK LQGLYLGXDO SROLF\KROGHUV VXFK as the insured under personal lines policies in the short-term arena. The Policyholder Protection Rules can be expanded considerably in order to incorporate the protection needed by individuals and very small businesses. There are some real challenges. The Consumer Protection Act requires every limitation on risk and liability, any assumption of risk by the consumer, any indemnity imposed on the consumer and any acknowledgement of a fact by the consumer to be drawn to the consumers’ attention clearly and in plain language with an explanation as to the nature and effect of the provision. Seeing that insurance policies essentially deal with risks, liabilities and indemnities, the task is challenging one. In addition, the CPA regulations set out a number of respects in which a contract may be presumed to be unfair unless, in the circumstances, it is a fair provision. These provisions relate to terms applicable to individual consumers who enter into the agreement for purposes unrelated to their business or profession. One of the relevant examples is that it is presumed to be unfair if the supplier imposes a limitation period for taking legal steps including demands and legal proceedings, that is, shorter than otherwise applicable under the common law or other legislation. That will mean that individual policyholders cannot be given less than the statutory prescription period of at least three years to enforce rights under a policy. Such long limitation periods are wholly inappropriate to the law of insurance and this has been recognised for hundreds of years. Much shorter limitation periods have been upheld because of the particular nature of insurance and the need to balance the books on an annual basis. The question will always be whether a particular term is unJune/July 2011

40

Retirement

IDLU XQMXVW RU XQUHDVRQDEOH IURP WKH FRQVXPHUV¡ SRLQW RI YLHZ The insurance industry is going to have to give careful consideration to what can be limited and what cannot be limited. In a sense, the insurance industry is going to be subject to equity jurisdiction when it deals with individual policyholders. The ideal place to provide equity for individual policyholders is in the Policyholder Protection Rules. That is the very reason that they were developed. The rules are supposed to record sound insurance principles and practice in the interest of the parties and in the public interest generally. The public

LQWHUHVW LV QRZ GHĂ€ QHG E\ WKH &RQVXPHU 3URWHFWLRQ $FW DQG policyholder protection will have to follow suit. (YHQ LI FRQVXPHU SURWHFWLRQ LV DIIRUGHG WKURXJK WKH 3ROLF\ holder Protection Rules, it is going to be a monumental task to SUHSDUH FRPSUHKHQVLYH DQG UDWLRQDO UXOHV E\ 2FWREHU DQG WKH ORQJ WHUP LQGXVWU\ DQG WKH VKRUW WHUP LQGXVWU\ QHHG WR DSSO\ WKHPVHOYHV WR WKH WDVN GLOLJHQWO\ DQG XUJHQWO\ ,I WKH GHDGOLQH LV QRW PHW DQG WKH SURYLVLRQV RI WKH &RQVXPHU 3URWHFWLRQ $FW DSSO\ WR LQVXUDQFH ZLWKRXW DGDSWLQJ WKDW DFW WR WKH SULQFLSOHV DQG SUDF tices of insurance, the outcome will be a mess.

Offshore markets offer good yields for your PREtirement savings Ralph Mupita, Managing Director RI 5HWDLO $IĂ XHQW DW 2OG 0XWXDO

T

he slow economic growth and potential weakening of the rand predicted for the year ahead mean that South Africans planning for their retirement should consider diversifying their investments and investing offshore. However, investment principles such as “time in the market, not timing the marketâ€? remain paramount. We like to think of it as the PREtirement age, which means the time that you have to save leading up to your retirement. Despite the turmoil in some markets, there are few shortcuts. People who plan DKHDG ZLOO UHDS PRUH EHQHĂ€ WV WKDQ WKRVH ZKR KDYH WR ¡SOD\ FDWFK XS ¡¾ As a rule of thumb, those who invest early in their years leading up to retirement can afford to take more risks than those with less time to save for their golden years, meaning the rewards of a long-term view of investment can be compounded. :H FDQ¡W VWDWH FOHDUO\ HQRXJK WKDW VLPSO\ ÂśVDYLQJ LQ OLQH ZLWK LQĂ DWLRQ¡ LVQ¡W HQRXJK DQG WKDW LW¡V QHYHU EHHQ PRUH FUXFLDO for individuals to get sound advice on how to capitalise on the many opportunities in diversifying their investments and venturing offshore. ,W¡V LPSRUWDQW WR DGYLVH FOLHQWV RQ ZKHWKHU WKHLU UHWLUHPHQW SODQQLQJ LV DGHTXDWH DQG LI WKHUH¡V D VKRUWIDOO WR DGGUHVV those savings one step at a time. It feels more achievable taking small steps in savings as opposed to viewing retirement as a distant, unattainable goal. Apart from providing peace of mind, various retirement vehicles are tax deductible within certain limits, whether the contribution is a lump-sum or a recurring premium contribution. “The generally long investment horizon for retirement planning means it should ride out short-term market volatility. And

The Financial Planner

right now appears like a good opportunity to invest offshore, with South African equities looking relatively more expensive than some foreign markets. By capitalising on the undervalued VKDUHV RIIVKRUH UHDO JURZWK EHQHĂ€ WV ZLOO LQFUHDVH \RXU FOLHQWV¡ retirement savings as market conditions improve. A good time to increase offshore exposure Those who already have a PREtirement plan in place should consider increasing their international equity portfolio, especially those who hold less than the maximum offshore exposure now permitted. 1RW RQO\ ZLOO WKLV DGG GLYHUVLĂ€ FDWLRQ EHQHĂ€ WV EXW WKLV \HDU LV likely to see a weakening of the rand, which means now is a JRRG WLPH WR LQFUHDVH FOLHQWV¡ RIIVKRUH LQYHVWPHQWV 7WKHUH DUH FOHDU DGYDQWDJHV IURP GLYHUVLĂ€ FDWLRQ LQFOXGLQJ UHGXFHG ULVN and exposure to fast-growing companies and industries not available within our borders. 2OG 0XWXDO ,QYHVWPHQW *URXS¡V 06, 0DFUR 6WUDWHJ\ ,QYHVW ments) boutique found that the optimal portfolio for SA invesWRUV ZLOO KDYH DW OHDVW LQ LQWHUQDWLRQDO DVVHWV 6$¡V HTXLW\ volatility is also no less than 30% higher than that of international equity, making local equity a lot more risky. Furthermore, the MSI boutique forecasts a return from international HTXLWLHV RI DERYH LQĂ DWLRQ RYHU WKH QH[W Ă€ YH \HDUV DQG believes this will be the best-performing asset class in real WHUPV RYHU Ă€ YH \HDUV The government’s easing of exchange controls has enabled those invested in active asset allocation funds to increase their offshore exposure through their fund managers. Although equities will deliver the best returns over the medium term, all indications DUH IRU VLJQLĂ€ FDQWO\ ORZHU UHWXUQV IURP PRVW DVVHW FODVVHV LQ WKH QH[W WHQ \HDUV ,W LV WKHUHIRUH FUXFLDO IRU LQYHVWRUV WR HQVXUH WKH\ VDYH PRUH DQG LQFOXGH DV PXFK HTXLW\ DV SRVVLEOH LQ WKHLU ORQJ WHUP SRUWIROLRV LQ OLQH ZLWK WKHLU ULVN SURĂ€ OH DQG VDYLQJV WHUP 1RZ LV D JRRG WLPH WR VLW ZLWK \RXU FOLHQWV DQG DVVHVV ZKHWKHU WKHLU XQGHUO\LQJ LQYHVWPHQWV DUH LQ OLQH ZLWK FXUUHQW JURZWK SURV pects. June/July 2011

41

Planning

Process Driven Advice

Colin Long CFPÂŽ Executive Financial Planner, Post Grad Dip Fin Plan

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he only certainties in life are death, taxes and change. The Financial Services Authority (FSA) in the U.K. has recently published a guidance paper for investment selection. The FSA’s fundamental message for investment advisors is that they should have a transparent, defensible and logical process to match clients’ needs or the FSA will make life a misery. Look familiar? In the past few months the FAIS ombudsman has made a number of determinations that have related to the sale of Property Syndication investments. In most cases the advisors failed to do one or all of the following: 1R SURSHU À QDQFLDO QHHGV DQDO\VLV ZDV FRQGXFWHG 7KH DGYLVRU ZDV QRW OLFHQVHG WR VHOO WKH LQYHVWPHQW 3. No proper due diligence was done on these investments

The Financial Planner

and thus the advisors failed to properly understand the risks DVVRFLDWHG ZLWK WKHP 4. The advisors failed to properly understand the clients’ risk tolerance because of a number of shortfalls involving Risk 3URĂ€ OLQJ 7RROV 7KH )6$¡V SDSHU VHWV D PDUNHU IRU WKH HQWLUH Ă€ QDQFLDO DGYLFH world and there is a clear imperative to impose greater structure on the advice process. In the words of the FSA: “The level of failure in this area is unacceptable. We have taken, and continue to take tough action to address these IDLOLQJV ZLWK LQGLYLGXDO Ă€ UPV Âľ “As we apply our intrusive and intensive supervisors approach, ZH ZLOO EH ORRNLQJ WR VHH KRZ Ă€ UPV KDYH DFWHG RQ WKLV UHSRUW :H ZLOO FRQVLGHU IRU H[DPSOH ZKHWKHU Ă€ UPV KDYH UREXVW procedures, tools and risk category descriptions (where used) WR HVWDEOLVK DQG FKHFN WKH OHYHO RI ULVN D FRQVXPHU LV ZLOOLQJ DQG DEOH WR WDNH DV ZHOO DV DVVHVVLQJ WKH VXLWDELOLW\ RI LQYHVWPHQW VHOHFWLRQV Âľ ´:H H[SHFW WR VHH LPSURYHPHQWV LQ WKH VWDQGDUGV RI DGYLFH DQG SULYDWH FOLHQW GLVFUHWLRQDU\ PDQDJHPHQW DQG ZLOO FRQWLQXH to take tough action where we identify poor practice e.g. Tools, ZKHUH XVHG DUH Ă€ W IRU SXUSRVH DQG DQ\ OLPLWDWLRQV UHFRJQLVHG DQG PLWLJDWHG Âľ ´:H H[SHFW DOO W\SHV RI Ă€ UPV WR FRQVLGHU ZKHWKHU WKH\ QHHG WR LPSURYH WKH ZD\ WKH\ DVVHVV DQG FKHFN WKH ULVN D FXVWRPHU LV ZLOOLQJ DQG DEOH WR WDNH DQG HQVXUH WKDW WKH\ PDNH VXLWDEOH LQYHVWPHQW VHOHFWLRQV :H HQFRXUDJH SURYLGHUV RI ULVN SURĂ€ OLQJ and asset allocation tools to take action to address any potential ZHDNQHVVHV LQ WKHLU WRROV Âľ “Firms [read advisers] remain responsible for assessing suitability, including assessing the risk a customer is willing and able to take action to address and potential weaknesses in their tools.â€? 5LVN SURĂ€ OLQJ WRROV DUH PHQWLRQHG QR OHVV WKDQ IRXU WLPHV LQ WKH DERYH Ă€ YH VWDWHPHQWV )RU PDQ\ DGYLVRUV DQG DGYLVRU\ Ă€ UPV ULVN SURĂ€ OLQJ WRROV DUH VHHQ DV WKH SDQDFHD WR GHWHUPLQLQJ D FOLHQW¡V ULVN SURĂ€ OH 7KH )6$ KDV UHYLHZHG HOHYHQ ULVN SURĂ€ OLQJ WRROV DQG IRXQG WKDW QLQH KDG ZHDNQHVVHV The FSA is also concerned that many advisers do not fully XQGHUVWDQG KRZ WKH ULVN SURĂ€ OLQJ WRROV ZRUN DQG IDLO WR understand the nature and risks of products or assets selected for customers. In South Africa we have had a number of such FDVHV H J WKH VDOH RI 3URSHUW\ 6\QGLFDWLRQV )RUH[ LQYHVWPHQWV and unlisted shares.

Key risks for advisers to consider ‡ )DLOXUH WR FROOHFW DQG DFFRXQW IRU DOO WKH LQIRUPDWLRQ UHOHYDQW to assessing the risk a customer is willing and able to make as part of suitability considerations, for example because they: )DLO WR DVVHVV WKH FOLHQWV FDSDFLW\ IRU ORVV

June/July 2011

42

Editorial

* Do not have a robust process to identify clients that are best suited to placing their money in cash deposits because they are unwilling or unable to accept the risk of loss of capital; * Use poor questions and answers to establish the risk a client is willing and able to take; * Inappropriately interpreting client responses to questions (particularly where advisers rely on tools with sensitive scoring or attribute inappropriate weighting to answers); or * Use vague, unclear or misleading descriptions or illustrations to check the risk that a client is willing and able to take. 7KH HYLGHQFH WHOOV XV WKDW ÀQDQFLDO ULVN WROHUDQFH LV D VWDEOH trait and it is likely to be one of the few permanencies in an individual’s life. In South Africa, I don’t believe we have yet seen a determined focus by the FSB and the FAIS legislations to fully investigate and analyse the investment processes of Financial

The Financial Planner

$GYLVRU\ ÀUPV DQG WKH ULVN SURÀOLQJ WRROV WKH\ XVH ,W LV WKXV FULWLFDO WKDW DGYLVRUV DQG DGYLVRU\ ÀUPV WDNH WKLV RSSRUWXQLW\ to develop sound investment processes and a robust framework for making investment decisions for their clients before the regulators come knocking on their doors. 7KH ÀQDQFLDO VHUYLFHV LQGXVWU\ VWDUWHG DV D SURGXFW DQG VDOHV GULYHQ PRGHO ZLWK WKH LQYHVWLQJ SXEOLF 2YHU WKH SDVW IHZ \HDUV WKH WRS HQG RI WKH DGYLVRU\ FRPPXQLW\ KDV FKDQJHG LWV IRFXV WR EHLQJ FOLHQW FHQWULF +RZHYHU IRU WKH ÀQDQFLDO VHUYLFHV LQGXVWU\ WR à RXULVK LW PXVW PRYH UDSLGO\ WRZDUGV EHLQJ ERWK FOLHQW FHQWULF DQG SURFHVV GULYHQ Consolidated Financial Planning KZN (PTY) LTD $Q DXWKRULVHG ÀQDQFLDO VHUYLFHV SURYLGHU FSP License Number 12978 &RQVROLGDWHG LV D QDWLRQDO ÀQDQFLDO SODQQLQJ SUDFWLFH ZLWK RIÀFHV LQ :HVWHUQ &DSH -RKDQQHVEXUJ 7VKZDQH (DVWHUQ &DSH DQG .ZD=XOX 1DWDO &ROLQ LV EDVHG LQ .=1 )RU PRUH LQIRUPDWLRQ SOHDVH YLVLW ZZZ FRQVROLGDWHG FR ]D

June/July 2011

43

Legal

The implications of divorce on a compulsory purchase annuity

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n the event of a couple divorcing, once one of them has already retired and is already receiving an income from DQ DQQXLW\ ZKHWKHU D Ă€ [HG DQQXLW\ RU D OLYLQJ DQQXLW\ can the annuity be taken into account as an asset in the divorce order, and divided among them? The answer is No! We cannot ‘split’ an annuity, for a variety of legal reasons.

Can a compulsory annuity be included in the GHĂ€ QLWLRQ RI SHQVLRQ LQWHUHVW" An annuity (including a living annuity) is what is regarded in the Pension Funds Act and Income Tax Act as a ‘compulsory’ annuity payable only to the retired person during their lifetime and which cannot be commuted or assigned to a third party during their lifetime. Pension interest, against which a court could award a portion to a non-member spouse in terms of Section 7 & 8 of the Divorce Act, is an amount held by a registered retirement fund (pension/pension preservation/provident/ provident preservation/retirement annuity fund) prior to the member EHFRPLQJ HQWLWOHG WR D EHQHĂ€ W IURP VXFK IXQG An annuity, including a Living Annuity, on the other hand, is WKH EHQHĂ€ W DZDUGHG WR D SUHYLRXV PHPEHU RI D IXQG after retirement. It follows that an Annuity cannot be construed as ‘pension LQWHUHVW¡ DV GHĂ€ QHG LQ WKH 'LYRUFH $FW DQG WKHUHIRUH FDQQRW be considered for an award in the same manner as preUHWLUHPHQW EHQHĂ€ W LQWHUHVWV IURP D IXQG VRPHWKLQJ OLNH D retirement annuity fund.

Does an annuity have an intrinsic capital value?

Michelle Human, Senior Legal Adviser, Liberty Retail SA The Financial Planner

7KH UXOHV RI D GHÀ QHG FRQWULEXWLRQ W\SH UHWLUHPHQW IXQG ZRXOG XVXDOO\ UHà HFW WKDW RQ UHWLUHPHQW IURP WKH IXQG D EHQHÀ W ZRXOG EH PDGH DYDLODEOH WR WKH PHPEHU WR SURYLGH a future income stream for the rest of the retired member’s life (you could use the expression monthly pension or monthly annuity payment to describe this income stream). The purchase of this income stream is compulsory where the fund from which the member retires is a pension/pension preservation or Retirement Annuity Fund, and compulsory to the extent that it is chosen by the retiring member in terms of the rules of a provident/provident preservation fund. The retiring member is then compelled, in terms of the registered and tax approved rules of the fund, to purchase

June/July 2011

44

Editorial

with that amount the right to a future income stream (pension/ annuity) from an authorised provider such as an insurer, and once that is done, they cease to be members of the fund and the fund has no further liability towards the retired member. As the retired person is therefore no longer a member of a fund, it follows that the fund (that provided the original capital amount used to purchase the annuity) holds no membership or pension interest for that retired member and therefore any proposed ‘award’ against a pension interest in that fund is zero. ,Q WHUPV RI ZKDW DQ ÂśDQQXLW\¡ LV WKH EHQHĂ€W HPDQDWLQJ from an annuity is an income stream (usually regular monthly payments of income). It has no intrinsic capital value (even though a nominal capital value may be used to determine the value of the income stream under a living annuity) until such time as the owner (retired person) dies. Only on the death of the retired person who was receiving WKH LQFRPH VWUHDP ZRXOG WKH EHQHĂ€FLDU\ QRPLQDWHG LQ ZULWLQJ by the deceased, have the option to continue to receive the income stream or commute the future income stream for a lump sum depending on the conditions of the annuity contract itself. The conditions under which a compulsory annuity may be purchased are established in terms of the Income Tax Act and the Pension Funds Act (Section 37A) , and require that the annuity may not during the lifetime of the retired person be commutable or assignable to a third party. This means that the retired person may not enter into any agreement to “cedeâ€? or “transferâ€? a portion of the income The Financial Planner

stream from such compulsory annuity to a third party during his/her lifetime, other than to be able to receive the whole income stream (after tax) into their possession and then use WKH DIWHU WD[ LQFRPH DV WKH\ GHHP ÀW ZKLFK FRXOG LQFOXGH paying a portion of it to a third party of their choice.

Can the income derived from an annuity be split? The question then arises as to whether splitting the income in such a manner is possible and enforceable via a divorce order. In the context of an annuity, this would be an undertaking that as the annuitant receives an after tax income stream from the annuity every month, he/she undertakes to pay the agreed percentage of that amount directly from his own bank account to his / her former spouse. This is essentially an agreement to the payment of monthly maintenance equal in value to a percentage of the net after tax income he/she receives. As the income stream is always considered to be income in the hands of the annuitant, and taxed as such in his/her hands, there is no taxation due by the former spouse. An annuity therefore: ‡ GRHV QRW FRQVWLWXWH D SHQVLRQ LQWHUHVW ‡ GRHV QRW KDYH DQ LQWULQVLF FDSLWDO YDOXH ‡ FDQQRW EH FHGHG RU DVVLJQHG GXULQJ WKH OLIHWLPH RI WKH retired person in whose name it is purchased Therefore it would be unlawful to attempt to ‘split’ the annuity during the lifetime of the defendant, whether the attempted split was of a capital or regular income stream in nature. June/July 2011

45

FPI News

FPI celebrates 30 years of excellence

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uly 2011 marks the 30th year that FPI has been LQ H[LVWHQFH DV WKH SURIHVVLRQDO ERG\ IRU Ă€QDQFLDO planners in South Africa. To celebrate our achievements; a chronicle of the industry’s journey will be published and made available in early 2012. Key milestones 1981 Institute of Life and Pension Advisors (ILPA) was formed and ILPA professional exams developed for professional membership with the highest level being FILPA (Fellow of the Institute of Life and Pension Advisors). 1986 ILPA signed an agreement with the then University of the Orange Free State to moderate and verify the standards of the professional exams. 1996 Strategy conference of the ILPA Council at which a generalist level (that eventually led to the Diploma in Financial Planning) and specialist level (leading to the Advanced PostGraduate Diploma in Financial Planning) as well as the tiered FHUWLĂ€FDWLRQ VWUXFWXUH 5)3ÂŒ $)3ÂŒ DQG &)3ÂŽ professional) was conceptualised. 1998 CFPÂŽ mark brought into SA on licence from the &HUWLĂ€HG )LQDQFLDO 3ODQQHU %RDUG RI 6WDQGDUGV ,QF LQ WKH 8QLWHG States. First Associate examinations through ILPA introduced. 2000 Adopted the new company name: Financial Planning ,QVWLWXWH RI 6RXWKHUQ $IULFD LQWURGXFHG WKH )LQDQFLDO 3ODQQHU RI <HDU $ZDUG DQG Ă€UVW 3RVWJUDGXDWH 'LSORPD LQ )LQDQFLDO 3ODQQLQJ offered through the University of the Free State. 2002 ,QWURGXFHG WKH $)3ÂŒ DQG 5)3ÂŒ SURIHVVLRQDO GHVLJQDWLRQV 2004 5HJLVWHUHG DV D QRW IRU SURĂ€W 6HFWLRQ FRPSDQ\ The Financial Planner

and founding member of the Financial Planning Standards %RDUG /WG )36% EDVHG LQ WKH 8QLWHG 6WDWHV 2005 %RDUG VWUDWHJ\ UHYLHZHG DOLJQ WKH ,QVWLWXWH¡V PLVVLRQ vision and activities to being a true professional body and LQWURGXFHG WKH 1DWLRQDO &HUWLĂ€FDWH :HDOWK 0DQDJHPHQW through FPI Learning. 2007 Professional designations recorded on the National 4XDOLĂ€FDWLRQV )UDPHZRUN 14) 2009 $SSRLQWHG E\ WKH )LQDQFLDO 6HUYLFHV %RDUG )6% DV DQ ([DPLQDWLRQ %RG\ IRU WKH GHYHORSPHQW DQG GHOLYHU\ RI WKH regulatory exams. 2010 5HDFKHG RYHU &)3ÂŽ professionals.

2-year CPD cycle ends 31 December 2011 7KH FXUUHQW \HDU F\FOH IRU &3' SRLQWV HQGV RQ 'HFHPEHU 2011. It is important that members load their CPD points by this date (electronically via the FPI website) as non compliance LV D EUHDFK RI RXU FHUWLĂ€FDWLRQ UHTXLUHPHQWV DQG PD\ UHVXOW LQ DQ DXGLW RU GLVFLSOLQDU\ DFWLRQ )RU DQ\ DVVLVWDQFH SOHDVH FRQWDFW WKH )URQWOLQH 7HDP RQ )3, RU HPDLO membership@fpimail.co.za.

The new draft Code of Ethics and Responsibility is now available for commentary The new code serves to become the beacon of professional FRQGXFW IRU DOO )3, PHPEHUV ,W LV KRZHYHU RI LPSRUWDQFH WKDW members have the opportunity to provide their input before the new code is implemented to bind members in their conduct. June/July 2011

46

FPI News

The draft has been published and is available to members for commentary. The document can be downloaded from ZZZ ISL FR ]D LQ WKH 0HPEHUVKLS VHFWLRQ RI WKH ZHEVLWH XQGHU Standards and Discipline. )RU IXUWKHU LQIRUPDWLRQ RQ WKH QHZ FRGH SOHDVH HPDLO standards@fpimail.co.za. Commentary on the draft code needs WR UHDFK WKH )3, RQ RU EHIRUH 7KXUVGD\ 6HSWHPEHU

Update your details online and stand a chance to win In order to communicate timeously and effectively with members UHJDUGLQJ WKHLU PHPEHUVKLS HYHQWV WHFKQLFDO LQIRUPDWLRQ DQG RWKHU LPSRUWDQW LVVXHV LW LV HVVHQWLDO WKDW WKH )3, KDV XS WR GDWH contact details and that members maintain their member record on a regular basis. The FPI has also applied to SAQA for recognition as a professional body and the registration of our professional GHVLJQDWLRQV IRU WKH SXUSRVHV RI WKH 1DWLRQDO 4XDOLÀFDWLRQV )UDPHZRUN 14) $FW RI ZLWK WKH SLORW SKDVH VWDUWLQJ DV VRRQ DV $XJXVW 7KLV ZLOO UHTXLUH YDOLGDWHG PHPEHU GDWD LQ order to capture members’ details on the National Learners’ 5HFRUGV 'DWDEDVH 1/5' ,W LV WKHUHIRUH LPSHUDWLYH WKDW VKRXOG )3, JDLQ WKLV UHFRJQLWLRQ WKDW PHPEHUV XSGDWH WKHLU GHWDLOV LQ RUGHU WR FRUUHFWO\ UHJLVWHU WKH SURIHVVLRQDO VWDWXV RQ WKH 1/5' By completing this process by the close of business on 31 August 2011, members will be entered into a random draw and stand the chance to win one of the following prizes: ‡ $SSOH L3DG *% ZLWK :L )L SOXV * YDOXHG DW 5 ‡ $SSOH L3KRQH *% YDOXHG DW 5 ‡ $WWHQGDQFH DW WKH $QQXDO &RQYHQWLRQ LQFOXGLQJ HFRQRP\ WUDYHO DQG VWDU DFFRPPRGDWLRQ DW DQ )3, DSSURYHG YHQXH YDOXHG DW EHWZHHQ 5 WR 5 GHSHQGLQJ RQ WUDYHO UHTXLUHPHQWV )RU IXUWKHU DVVLVWDQFH SOHDVH FRQWDFW WKH )URQWOLQH 7HDP RQ )3, RU HPDLO PHPEHUVKLS#ISLPDLO FR ]D

Technical Update National Health Insurance In a press release by the Department of Health on 11 August LW ZDV DQQRXQFHG WKDW D *UHHQ 3DSHU RQ 1DWLRQDO +HDOWK Insurance was released. FPI has a NHI working group who will be looking at this document and will provide members with further information as soon as this becomes available.

The Taxation Laws Amendment Bill 2011 7KH 7D[DWLRQ /DZV $PHQGPHQW %LOO ZDV UHOHDVHG E\ National Treasury for comment in June this year. The FPI FRPPHQWHG H[WHQVLYHO\ E\ HQJDJLQJ PHPEHUV RQ WKH %LOO DQG participated at public forums to engage with National Treasury on the proposed changes to tax laws. The FPI now awaits SRVVLEO\ D VHFRQG GUDIW RI WKH %LOO RU IRU WKH OHJLVODWLRQ WR EH passed through parliament later this year.

Repository created on the FPI website The FPI has created a repository of technical information under HDFK ,QGXVWU\ 6HFWRU *URXS ,6* XQGHU WKH 5HVRXUFH &HQWUH RQ The Financial Planner

the FPI website. The repository contains all published technical communications and documents relevant to each ISG.

Conversion of medical deductions to medical tax credits National Treasury released a discussion document in mid June for commentary. The document proposes a change to the current tax deduction afforded to taxpayers for medical scheme FRQWULEXWLRQV DQG RXW RI SRFNHW PHGLFDO H[SHQVHV 7KH )3, RQFH DJDLQ VXEPLWWHG FRPPHQWDU\ )RU IXUWKHU LQIRUPDWLRQ RQ WKH DERYH PHQWLRQHG LWHPV SOHDVH email technical@fpimail.co.za.

LexisNexis Online News and Legislation Service For those members who have not yet accessed the free VXEVFULSWLRQ WR WKH /H[LV1H[LV RQOLQH ÀQDQFLDO DQG OHJLVODWLRQ QHZV IXOO GHWDLOV FDQ EH IRXQG RQ RXU ZHEVLWH XQGHU WKH 5HVRXUFH &HQWUH 7KLV VHUYLFH LQFOXGHV )$,6 DQG ),&$ OHJLVODWLRQ DQG QRWLFHV ZKLFK ZLOO EH RI JUHDW EHQHÀW WR PHPEHUV IRU the regulatory exams. This service is free to all FPI members during 2011.

Refresher Workshops These national workshops are the second biggest event on the ÀQDQFLDO VHUYLFHV LQGXVWU\ FDOHQGDU DQG LV DOVR WKH RQO\ HYHQW RI its kind in South Africa at which professionals are updated on all GHYHORSPHQWV GXULQJ WKH \HDU LQ WKH ÀQDQFLDO SODQQLQJ LQGXVWU\ DQG WKH LPSDFW RQ WKHLU EXVLQHVVHV LQ RQH VHVVLRQ LQFOXGLQJ FRPSOLDQFH OHJLVODWLRQ FRXUW FDVHV DQG GHWHUPLQDWLRQV 7KHVH ZLOO DOVR EH EHQHÀFLDO WR DOO ÀQDQFLDO SODQQHUV ZKR QHHG to refresh their knowledge as well as those students studying WRZDUGV D FDUHHU LQ ÀQDQFLDO SODQQLQJ :HVVHO 2RVWKXL]HQ DQG 0DULXV %RWKD ZLWK WKHLU FRPELQHG H[WHQVLYH NQRZOHGJH ZLOO again be presenting at these workshops. )RU IXUWKHU LQIRUPDWLRQ RQ WKH 5HIUHVKHU :RUNVKRSV RU RWKHU )3, &3' HYHQWV SOHDVH YLVLW ZZZ ISL FR ]D WR DFFHVV WKH (YHQWV &DOHQGDU RQ WKH KRPH SDJH WKH ,QGXVWU\ (YHQWV &DOHQGDU IRU )3, DSSURYHG HYHQWV XQGHU WKH 5HVRXUFH &HQWUH RU HPDLO marketing@fpimail.co.za.

International News 7KULYLQJ &(57,),(' ),1$1&,$/ 3/$11(5 FHUWLÀFDWLRQ SURJUDPPHV LQ %UD]LO &KLQD ,QGLD ,QGRQHVLD DQG WKH 5HSXEOLF of Korea helped to push the global number of CFP professionals WR D QHZ KLJK LQ )LQDQFLDO 3ODQQLQJ 6WDQGDUGV %RDUG /WG )36% RZQHU RI WKH &)3 &HUWLÀHG )LQDQFLDO 3ODQQHU DQG &)3 /RJR PDUNV RXWVLGH WKH 8QLWHG 6WDWHV UHSRUWHG WKH QXPEHU RI &)3 SURIHVVLRQDOV UHDFKHG DV RI 'HFHPEHU XS IURP DW \HDU HQG 'HVSLWH XQVHWWOHG ÀQDQFLDO PDUNHWV DURXQG WKH ZRUOG JURZWK RI WKH JOREDO QXPEHU RI &)3 SURIHVVLRQDOV KDV DYHUDJHG SHUFHQW RYHU WKH SDVW ÀYH \HDUV DQG &)3 FHUWLÀFDWLRQ FRQWLQXHV WR HPHUJH DV D JOREDO ÀQDQFLDO SODQQLQJ FUHGHQWLDO %\ WKH HQG RI WKH PDMRULW\ RU SHUFHQW RI WKH ZRUOG·V &)3 professionals conducted business outside the United States. The number of CFP professionals outside the U.S. more than tripled VLQFH DQG WKH JOREDO QXPEHU RI &)3 SURIHVVLRQDOV PRUH than doubled during the same time period. June/July 2011

47

2011 Refresher Workshops for Financial Planning Professionals REGISTRATION FORM (OR REGISTER ONLINE VIA FPI WEBSITE) Fax: 086 635 2446 ^ĞůĞĐƚ ǀĞŶƚ

Date 15-Nov-11

E-mail: adel@fpimail.co.za

Tel: (011) 470-6050

Region Free State

16-Nov-11

KwaZulu-Natal

17-Nov-11

Eastern Cape

21-Nov-11

Western Cape

22-Nov-11

Western Cape

23-Nov-11

Johannesburg

24-Nov-11

Johannesburg

25-Nov-11

Pretoria

Venues to be advised

EARLY BIRD until 30 September 2011

From 01 October 2011

Member

R 765.00 (incl. VAT)

R 900.00 (incl. VAT)

Non Member

R 999.00 (incl. VAT)

R1 175.00 (incl. VAT)

Cost

6 CPD points for FPI members

To qualify for the early bird discount, registration and payment must be received by 30 SEPTEMBER 2011.

Personal Details First Name:

Surname:

Company:

VAT No:

Tel No:

Cell No:

E-mail: Member Number: AND/OR

ID Number: Signature: _______________________________________________ Date: ______________________________ PAYMENT: In order to secure your place, advance registration and payment is essential. An invoice will be issued on receipt of registration. Please use your membership number or your name when making payment through either direct deposit or electronic transfer. Proof of payment must be validated by means of fax or e-mail and will be regarded as confirmation of registration. Please ensure we have received your details to confirm your booking.

Payments must be made to: Bankers: Standard Bank / Beneficiary: Financial Planning Institute / Branch Name: Clearwater Mall / Branch Code: 001206 / Account No.: 021183732. TERMS AND CONDITIONS: 1. Payment is due in full at the time of registration. 2. No telephonic registrations will be accepted. 3. The FPI reserves the right to refuse admission to the workshops if payment has not been received. 4. Non-payment or non-attendance does not constitute cancellation. 5. You may cancel your registration in writing up to 8 days before the workshop date. 6. Workshop fees will de refunded less a 15% administration charge if cancellations are received 8 days or more prior to date of the workshop. 7. Cancellations made within 8 days of the date of the seminar will be liable for the full fee. 8. Substitutions may be made, without penalty. 9. Should the FPI cancel the workshop, for whatever reason, all monies will be refunded within a period of 14 days.

REGULATORY EXAMINATIONS SUPPORT

The deadline has been extended and all representatives and key individuals now have to complete the first level Regulatory Examination by 30 June 2012. The required pass marks for the multiple choice examinations are 65% and 66% respectively and if you do not pass, you will not be Fit and Proper as required by the FAIS Act. Milpark Business School has an extensive training support package for the first level examinations, consisting of: 7 Study material; 7 Electronic practice examinations; and 7 A range of workshops covering both content and examination preparation.

PREPARE THOROUGHLY TO PASS THE REGULATORY EXAMINATIONS 7 7

7

7

Attend a content workshop if possible. This will ensure that the time you spend studying on your own is more focused and thus more efficient. Study for at least 3 to 4 weeks (material on Inseta website or ordered from Milpark): - Study one task at a time and then do the self-assessment questions at the end of each chapter to check your understanding. - Follow this process until you have covered all the tasks. - Ensure that you work through the material at least three times before attempting the practice exams. Once you feel you are ready for the exam, complete the online practice examinations offered by Milpark. At the end of each examination, you will be given feedback on your progress which will enable you to focus on tasks that need attention. Once you have passed at least two full practice examinations, you are ready for the real exam! Ensure that you work through the material in detail once more before the big day.

Register today: Contact an Educational Consultant at the campus closest to you or visit www.milpark.ac.za for more info.

Cape Town 021 673 9100

Johannesburg 011 718 4000

Durban 031 266 0444

w w w.m i l p ark . a c . z a

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