Issue 36 (1 of 2015)
New
regulations
The Budget, Retail Distribution Review (RDR), Retirement Funds Regulation and the Financial Sector Regulation Bill
Official journal of the Financial Planning Institute of Southern Africa
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Contents
Issue 36 (1 of 2015)
4 6
Letter from FPI Budget Budget Speech 2015: the impact of financial planning
New
FPI News & Events
regulations
8
The Budget, Retail Distribution Review (RDR), Retirement Funds Regulation and the Financial Sector Regulation Bill
News
Official journal of the Financial Planning Institute of Southern Africa
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R170
14
Continuous Professional Developments Events 2015
Client Engagement 24 Tips for financial professionals worldwide 26 Words, words and more words
Employee Benefits 28
Tax-free investments
30
Trustees‌ beware of your extended fiduciary duty
32
An inequitable situation
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34
Competition Comission market inquiry into private healthcare
Investment 36
What is the Cost of Being Human?
38
There’s more to risk than risk profiling
40
Portentous 2014 developments
Practice Management
VAT no:
42
Title:
Paralanguage can make or break your practice
Regulation
Initial: Surname:
44
Retail Distribution Review in a nutshell
Postal address:
48
Date set for SAM Pillar 2 interim measures
Code: Tel: Fax: E-mail:
Signature:
The Financial Planner www.fpi.co.za Tel: 086 1000 FPI (374)
Tsholofelo Dihutso, CPRP Communications Specialist tsholo@fpi.co.za
Editorial enquiries: media@fpi.co.za
Membership queries: membership@fpi.co.za
Postal address: PO box 6493, Weltevredenpark, 1715 Street Address: 84 Sophia Street (Cnr 11th Avenue), Fairland, Johannesburg, 2170
Advertising: Michael Kaufmann michaelk@comms.co.za 021 555 3577
Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications. The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/ or products or the reliance of any information contained in this publication.
Michelle Baker michelle.baker@mediamarx.co.za (031) 764 6725 (073) 137 1231 The Financial Planner magazine is published by COSA Media, a division of COSA Communications (Pty) Ltd. www.comms.co.za
letter from fpi
RDR
Attaining equality with other
R D R I
n the midst of a myriad of simultaneous regulatory changes - Twin Peaks, Treating Customers Fairly (TCF), Regulatory Examinations, Continuous Professional Development (CPD), Retail Distribution Review (RDR) and more to follow - there is cause for genuine optimism for the financial planning profession.
The quest to create a recognised and respected profession of financial planning has been an FPI dream since our founding in 1981. Over the years, we have constantly worked on developing the four cornerstones of building a recognised and respected profession – professional community, professional body, government, public recognition. We have come a long way establishing FPI as a credible professional body that sets professional standards. As a community of experts, as CFPŽ professionals, we have also established ourselves as, undoubtedly, the most competent, ethical and ultimate professionals in our industry. This is something that all FPI members should take welldeserved pride in!
4
As your professional body, FPI is constantly making representations to regulators, policymakers and industry groups in a bid to positively influence any planned legislative and regulatory changes that may affect the profession. In the midst of all the various regulatory changes, we are finally starting to see tangible evidence of all the effort that, as a community, we have put in over the last several years, into attaining public as well as regulatory recognition of the financial planning profession of. RDR offers the greatest hope for financial planning reaching strategic equality with other respected professions such a doctors and chartered accountants. Policymakers and regulators, given their need to protect the public, are keen to address the conflicts that exist within the financial services marketplace. The regulators focus on establishing threshold standards for those offering financial advice or products, productbased regulation, qualification and licensing requirements tends to be positioned at an entry, rather than professional level. Furthermore, as we have seen in the past ,regulators have made very little or no
professions now a reality! distinction among the activities and oversight of those who provide limited advice (financial advisors) and those capable of offering comprehensive financial planning (financial planners). Some of the proposals in the RDR paper are a welcome break from this trend and offer us the most hope that regulators and policymakers are seriously considering the creation of financial planning as a profession. What does RDR really mean? Refer to David Kop’s (our Head of Advocacy and Consumer Affairs) article on Retail Distribution Review in a nutshell on page 44, which summarises the paper very well. FPI has responded to Financial Services Board’s (FSB) call for comment on RDR through the rubric of financial planning—a clientcentric process-driven professional practice that can help (re)build trust and restore consumer confidence in financial intermediaries and support better outcomes for South Africans engaging the financial services marketplace. We have entrenched therein our conviction that financial planning needs to be recognised as a professional practice distinct from limited product advice or product sales, and have furthermore encouraged better differentiation and protection of the notion of “advice” as distinct from product information provided to encourage a purchase. Based on our experience in developing competency, ethics and practice standards for the financial planning profession in South Africa over the last 34 years, as well as enforcing those standards, our answers to FSB’s Retail Distribution Review 2014 reinforces the point that effective regulation of financial services and products will best be achieved through a collaborative effort between regulators and professional bodies. FSB would set the regulatory expectations of practice, market integrity and consumer protection in South Africa, and enforce criminal or civil sanctions. And professional bodies (such as FPI) would determine what constitutes professional norms (including the definition of the professional practice of financial planning), conduct expectations and certification requirements that foster consumer and regulator confidence in professional financial advisors such as CERTIFIED FINANCIAL PLANNER® professionals /CFP® professionals. FPI considers “professional financial advice” to be a subset of financial planning as practiced by CFP® professionals. While the client-centric process of financial planning may address and focus on the client’s unstated goals or needs, be comprehensive in nature, and may result in the delivery of a financial plan and not necessarily a product sale, professional financial advice is typically delivered to address a client’s stated need, is of a limited duration, and usually, the solution involves a product. However, like a financial planner, a professional financial advisor should also adhere to the fiduciary standard of care, and would be subject to the professional standards set by the advisor’s professional body.
FPI will thus always support financial services legislation/regulations that clearly distinguishes between product selling and information provided to sell products, where the product drives the focus of the engagement), and the provision of professional financial advice or financial planning, where the client drives the focus of the engagement. In saying the above, we encourage the FSB to recognise that financial planning is still an emerging professional practice in South Africa, and in fact, in many territories around the world. Any regulatory or oversight models that are developed for financial advice need to ensure the opportunity for growth of, and innovation within, the professional financial advice or financial planning sector to better serve the public’s needs. Consequently, FSB and key marketplace players need to foster flexibility and engagement, to ensure consumers are protected and the financial planning profession has the opportunity to establish itself in South Africa.
Your voice was heard We wish to thank the many members who attended our RDR consultative member-meetings earlier this year to air your views regarding RDR and the future of our profession. We know that many of our members could not attend these events and sent written and oral comments. We thank too our Advocacy Committee for having taken the time to co-ordinate the responses. We have worked to ensure that the FPI response to the RDR paper is reflective of the viewpoints that you expressed with us. Wherever necessary, we have opposed certain proposals contained in the RDR paper and have proposed alternative and more palatable solutions to achieving FSB’s desired objectives of consumer protection We are excited about this opportunity to further engage with you, the industry, FSB and National Treasury on the RDR paper.
New appointments We are proud about the recent re-appointment of Sankie Morata, CFP®, FPI Chairperson as chairperson of Financial Planning Standards Board’s (FPSB) Developing Markets Forum, for an additional term. The Forum allows FPSB member organisations to discuss trends that assist in advancing the financial planning profession globally especially in those markets which the profession is still developing. His appointment does indeed advance our mission of ensuring that our CFP® professionals have access to world class practices that will benefit all South African consumers.
Godfrey Nti Chief Executive Officer | Financial Planning Institute (FPI)
5
Budget Speech 2015:
the impact on financial planning By Ronald King, CFPÂŽ, FPI Board Member and Head: Technical Support at PSG
This year saw the Budget Speech totally overshadowed by the State of the Nation address (SONA), not only for the antics of the EFF and the appearance of men (and women) in black, but also for the impact it had on financial planning.
T
he sudden sharp drop in oil prices gave the Minister of Finance enough breathing space to submit a Budget with little surprises leaving the land reform announced by the President as the biggest impact on estates. Land reform has probably been on the cards for a very long time so it shouldn’t come as a surprise that drastic measures were announced. Nor is it the aim of this article to venture an opinion on the soundness of the matter. According to SONA, 36 000 land claims have been lodged to date and the cut-off date
6
Tax table Individuals and special trusts Taxable income (R)
Rate of each R1
0 - 181 900
18% of each R1
181 901 - 284 100
R32 742 + 26% of the amount above R 181 900
284 101 - 393 200
R 59 314 + 31% of the amount above R284 100
393 201 - 550 100
R93 135 + 36% of the amount above R393 200
550 101 - 701 300
R149 619 + 39% of the amount above R550 100
701 301 and above
R208 587 + 41% of the amount above R701 300
for the second window to lodge a claim is only in 2019. Together with these land claims government is investigating the 50/50 policy framework whereby people who live and work on farms would receive relative rights on those farms. Finally, the Regulation of Land Holdings Bill will be submitted to parliament this year which will limit the maximum land ownership in South Africa to 12 000 hectares. In addition to this ceiling, foreign nationals will not be allowed to own land in South Africa, but will be eligible for long-term lease. All three announcements will have a significant impact on farmers and foreign nationals; it would require a complete restructuring of their financial plans. At this stage however, it is impossible to determine exactly what the extent of the impact will be as many crucial issues are still uncertain. We do not know what the definition of land will entail and whether it would include residential and commercial land or only farming land. This will more than likely be the case although this could just increase the possibility of the Act being attacked based on Constitutionality. In addition, it is uncertain whether a South African incorporated company owned by foreigners would be seen as South African or not. Would a person holding 48 000 hectares in the Karoo be able to split it between himself, his spouse and two children? Would he be able to use a company and a trust to own additional pieces of land? The devil would thus clearly be in the detail of this Act and before then we should caution any farmer or foreigner not to start with expensive restructuring exercises. Any foreigners who were in the process of purchasing land would however now continue at their own peril. The Budget Speech was, however, not without its own little surprise when it came to financial planning. Apart from the overall increase in Income Tax rates which results in an automatic increase in Capital Gains Tax (CGT) rates as well, the biggest surprise was with regards to lump sum Retirement Annuities (RAs). Since 2006, any amounts that originated from a retirement fund was excluded from the estate of a deceased, even if it was fully commuted by the beneficiaries. In addition, the maximum age for contributions to a RA was lifted. This created the possibility for high net worth individuals to make large contributions to an RA shortly before death. This amount in the RA was then free of estate duties, but could immediately be commuted by the beneficiaries. As the lump sum contribution was not deducted from income tax (being larger than 15 percent of taxable income) the tax-free portion of the lump sum was increased by the amount of the lump sum
contribution. The end result was a 20 percent estate duty saving on the contribution made. To counter this, the Budget announced that any lump sums at death that weren't deducted from income tax would now be included in the estate of a deceased. As an example: an 80 year old with a taxable income of R500,000 per year makes a lump sum contribution to an RA of R2 225 000 and dies three years later. Over the three years, he was able to claim R225 000 of the lump sum as a deduction against taxable income. The remaining R2 000 000 will now form part of his dutiable estate. Again the specific wording of the change to the Estate Duty Act will be of importance, because as the proposed change currently stands, a lump sum RA will still be a very efficient way in pegging the value of an estate. To date, interestfree loans to trusts have been the most common way to peg the value of an estate. R2 225 000 would be lent to the trust at zero interest with the result that all the growth on the investment happened within the trust and the loan account
remained at the original value. This would still seem possible with the lump sum RA. It is only on the growth that the tax would be different. With the loan scenario the growth would be taxed as interest, dividends and capital growth at 40 percent, 15 percent, and 27.33 percent respectively. In the RA the growth when taken as an additional lump sum will be taxed at a rate of 18 percent, 27 percent or 36 percent, depending on the size of the lump sum. If no previous lump sums were taken, it could even be tax-free. To know exactly how to restructure our clients’ estates, we will, however, have to wait patiently for the Regulation of Land Holdings Bill and the Taxation Laws Amendment Bill to be published.
Retirement fund (RA) matters Retirement fund lump sum withdrawal benefits Lump sum (R)
Rate of tax
0 - 25 000
0% of lump sum
25 001 - 660 000
18% of lump sum above 25 000
660 001 - 990 000
R114 300 + 27% of lump sum above R660 000
990 001 and above
R203 400 + 36% of lump sum above R990 000
Retirement fund lump sum or severance benefits Lump sum (R)
Rate of tax
0 - 500 000
0% of lump sum
500 001 - 700 000
18% of lumop sum above 500 000
700 001 - 1 050 000
R36 000 + 27% of lump sum above R700 000
1 050 001 - and above R130 500 + 36% of lump sum above R1 050 000
Transfer duty Transfer duty rates Value of property (R)
Rate of tax
0 - 750 000
0%
750 001 - 1 250 000
3% on the value above R 750 000 but not exceeding R1 250 000
1 250 001 - 1 750 000
R15 000 plus 6% on the value above R1 250 000 but not exceeding R1 750 000
1 750 001 - 2 250 000
R45 000 plus 8% on the value above R1 750 000 but not exceeding R2 250 000
2 250 001 - and above
R85 000 plus 11% on the value above R2 250 000
7
fpi news
Financial Planning Standards Board re-appoints
Sankie Morata as Chairperson
F
inancial Planning Standards Board Ltd. (FPSB); the international standards-setting body for the financial planning profession has recently re-appointed the Financial Planning Institute’s chairperson, Sankie Morata, CFP® as FPSB’s Developing Markets Forum chairperson for an additional term. FPSB’s Developing Markets Forum offers a platform to FPSB member organisations to discuss issues, practices and trends that assist in advancing financial planning in markets where the profession is still developing. According to FPSB’s CEO, Noel Maye, FPSB recognises the need to build capacity and promote information sharing among FPSB member organisations in markets where financial planning as a profession is still emerging. It relies on the Developing Markets Forum to facilitate and advise FPSB on the implications of setting policies and programmes related to CFP® certification in those markets, and they are pleased to have somebody with the calibre and passion of Morata to lead this body.
8
FPI welcomed Morata’s re-appointment by FPSB which is an achievement for the organisation and the broader financial planning profession, as this will enable it to further its mission of ensuring that its CFP® professionals have access to world-class practices that will benefit South African consumers broadly, and is proud to see its chairperson representing FPI on an international platform. His re-appointment will have a positive impact on the Institute’s CFP® professionals understanding of important matters relevant to the financial planning profession, and in turn, the global community will benefit as a result of the progress that has been by made by the Institute in raising the profession in South Africa. Morata will be responsible for setting the Forum’s annual agenda, identifying projects for the group, and ensuring effective performance of the group. This will include an assessment of the adequacy of the Forum’s terms of reference for its scope of activities each
year, and an evaluation of the extent to which the Forum participants have met these terms during the year. About Sankie Morata Sankie Morata, CFP® is currently the FPI chairperson and head of legal risk and compliance at Nedgroup Trust. He holds an LLB, LLM in mercantile Law and Postgraduate Diploma in Financial Planning. Morata is an admitted advocate of the High Court of South Africa and is currently studying towards his Postgraduate Diploma in Compliance Management and holds various certificates in management. “I am humbled to be re-appointed as the chairperson of FPSB’s Developing Markets Forum.” Says Sankie Morata, CFP®, FPI Chairperson. "I look forward to working with the Forum in realising all the set objectives, and advising FPSB of the forum members’ position in relation to the CFP® certification in all identified emerging markets”.
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9
fpi news
FPI
appointments R
ecent appointments aim to enhance FPI’s ability to deliver added value to the financial planning profession. The Financial Planning Institute of Southern Africa (FPI) is delighted to announce the following staff appointments, effective immediately. David Kop, CFP®, previously head: membership and corporate relations is now head: advocacy and consumer affairs; Sherma Malan MBA, previously senior certification manager is now promoted to head: membership and corporate relations and Lelane Bezuidenhout, CFP®, previously certification manager is now promoted to the position of senior certification manager.
Malan, in her new role, will be responsible for overall development, growth and satisfaction of the institute’s membership. She will also be responsible for fostering employer and other stakeholder relationships that are vital to the pre-eminent positioning of the CFP® mark, and other FPI designations, in the marketplace.
In his new position, Kop will be responsible for overseeing the Institute’s entire process of policy formulation and advocacy, positioning it as a stronger thought leader for financial planners and advisors. He will also oversee the development and roll out of technical member benefits and will be responsible for FPI’s consumer affairs.
According to the Institute, the recent promotions of these individuals support its strategic objective of positioning itself as the financial planning professional body that sets the standards for competent, ethical and professional financial planners that act in the interest of the public.
The overall responsibility for developing, implementing and maintaining best practice certification standards will be Bezuidenhout’s key focus as senior certification manager.
David Kop, CFP® Kop joined FPI in July 2013 as senior manager: policy and research, and in January 2014, he was promoted to head: membership and corporate relations. He holds a B.Comm in Financial Management from the University of Johannesburg and a Postgraduate Diploma in Financial Planning Law from the University of Free State as well as a Certificate in Administration of Estates from Unisa. Over and above this, he is a member of the South African Institute of Tax Practitioners; where he is a General Tax Practitioner™ and has served on the Income Tax and Estate Planning committees since 2009. “I am very excited to serve in my new position and look forward to being more instrumental in helping South Africans change their attitude towards the benefits of financial planning. The Institute encourages South African consumers to achieve financial freedom through engagement and advice from our CFP® professionals, and I am committed to driving this vision.”
Sherma Malan, MBA Malan is an MBA graduate and has her career roots in education. During her 18-year career, she has been a part of various disciplines, from business related training to education management. She was appointed as certification manager at FPI in 2011. In January 2014 she was promoted to senior certification manager. Malan recently completed the Postgraduate Diploma in Financial Planning and is currently working towards attaining the CFP® designation. “I am excited to be in a position where I can add more value to our members by ensuring that the service and benefits FPI offers are in line with that of similar professional bodies worldwide.”
Lelane Bezuidenhout, CFP® Bezuidenhout joined FPI in 2014 as the certification manager, prior to this she worked for Liberty Life as a customer relations specialist for over 11 years. She later joined the Financial Advisory and Intermediary Services (FAIS) Ombudsman where she practiced as a case manager for over three years. Moreover, she holds a Postgraduate Diploma in Financial Planning from the University of Free State and is a CERTIFIED FINANCIAL PLANNER® professional. “As CFP® professionals, we are held to the highest standards of education, experience and ethics and I am honoured to be involved in the continued upliftment, promotion and maintenance of this highly respected certification standard. My ability to train and relate with others makes working with students and candidates a seamless and enjoyable experience.”
10
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19
Embracing change The 27th FPI Professionals Convention is the largest and most significant event in the calendar of financial planning professionals. The convention has a proud history of hosting the best local and international speakers on topics that add value to South Africa’s financial planners and advisors, and the customers we serve.
Industry topics to be discussed at this year’s convention: Rising to the impossible - The case of Costa Concordia Opening Keynote Speaker: Captain Nick Sloane Master Mariner Capt Nick Sloane, known for successfully uprighting and refloating the Costa Concordia, described as the largest, most technically demanding wreck removal ever attempted on a ship of its size. Capt. Sloane humanist and known as a genius for improvisation will be sharing his expert knowledge and experience, on leadership, managing diverse teams, strategy, vision, risk, adventure and embracing change.
· The World and South Africa Beyond 2015: The Latest Scenarios, Flags and Probabilities Presented by: Dr. Clem Sunter · Retail Distribution Review (RDR) - A South African Panel Discussion Presented by: Katherine Gibson, National Treasury; Leanne Jackson, FSB; David Kop, CFP®, FPI and Phil Billingham (UK) · Agility and Absorption – Surviving and Thriving in the Wealth Planning and Management Industry Presented by: Dr Adrian Saville, businessman and professor · Cyber Security - How safe are your clients’ files and data? Presented by: Danny Myburgh- Director at Cyanre: The Forensic Lab
Registration Fee
(price per delegate, incl VAT)
1 delegate
2–5 delegates
6-10 delegates
11-15 delegates
Members
R5,670
R5,386
R5,245
R5,103
Non members
R6,572
R6,243
R6,079
R5,914
Youth*, or 16+ delegates Members
R4,819
Non members
R5,586
*Youth rates are applicable to all delegates who are 29 years old and younger.
Contact the FPI Convention Team Tel: (031) 268-3255/3052 Fax: (086) 682-6461 E-mail: seminars@lexisnexis.co.za
SC000/15
Facilitated by:
12
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fsp’s reporting obligations to the
financial intelligence centre Who is an fsp? Persons or entities which provide advice or intermediary services on the investment of financial products (excluding short term insurance and health service benefits) e.g. longterm insurance business or other investment business, are accountable institutions in terms of item 12 of Schedule 1 to the Financial Intelligence Centre Act, Act No. 38 of 2001, as amended (the FIC Act) and must comply with the relevant provisions of the FIC Act. Financial services providers (FSPs) which are, in terms of their license conditions in terms of the Financial Advisory and Intermediary Services Act, Act No. 37 of 2001 (the FAIS Act), limited to the provision of advice and intermediary services exclusively on short-term insurance and/or medical aid membership, are not accountable institutions and are excluded from the requirements of the FIC Act which apply to accountable institutions.
Submitting reports to the financial intelligence centre
Cash threshold reporting (section 28) FSPs are reminded of their obligation to file cash threshold reports with the FIC in terms of section 28 of the FIC Act. In terms of section 28 of the FIC Act, accountable and reporting institutions must, within 2 business days, report to the FIC the prescribed particulars concerning a cash transaction concluded with a client in excess of R25 000 which: (a) Is paid by the accountable institution or reporting institution to the client, or to a person acting on behalf of the client, or to a person on whose behalf the client is acting; or (b) Is received by the accountable institution or reporting institution from the client, or from a person acting on behalf of the client, or from a person on whose behalf the client is acting.
Terrorist property reporting (section 28A)
The FIC obtains information in the form of reports which are filed with it in accordance with the following sections of the FIC Act: • Section 28 (cash threshold reporting) • Section 28A (terrorist property reporting); and • Section 29 (suspicious and unusual transaction reporting).
Section 28A requires an accountable institution, listed in Schedule 1 to the FIC Act, to file a report with the FIC if the accountable institution knows that it possesses or controls property linked to terrorism. It is important to emphasise that the knowledge about the origins and ownership of the property in question should be gained with reference to an objective set of circumstances or facts (as opposed to a suspicion that may be formed by those persons involved in the day to day running of an accountable institution or business).
When institutions fail to submit these reports to the FIC, intelligence data needed to fulfil its mandate is lost to the FIC.
When filing a report with the FIC in terms of section 28A, it is an offence to continue dealing with that property in any way.
FSPs are reminded of their obligation to submit reports to the FIC in terms of the FIC Act.
Financial intelligence centre REPUBLIC OF SOUTH AFRICA
Reports to the FIC in terms of section 28A should be made by means of Internet-based reporting provided by the FIC on the FIC’s website at wwww.fic.gov.za
Suspicious and unusual transaction reporting (section 29)
The obligation to report suspicious transactions to the FIC in terms of section 29 of the FIC Act applies to all businesses in South Africa, including FSPs. Even though some businesses are actively reporting suspicious and unusual transactions to the FIC, our experience to date is that some FSPs are not filing suspicious or unusual transaction reports with the FIC. The FIC Act requires the following persons to report in terms of section 29 to the FIC: • A person who carries on a business; • A person who is in charge of or manages a business; or • A person who is employed by a business. The requirement to report suspicious or unusual transactions applies to all FSPs. By reporting suspicious and unusual transactions to the FIC, FSPs will indirectly and, at times, directly help the fight against crime. This can lead to a safer and more stable business operating environment which encourages and improves investor confidence. Where an institution becomes aware of a reporting failure to the FIC it has to mitigate the loss of intelligence data to the FIC by informing the FIC in writing of the failure and request an engagement with the FIC to discuss relevant mitigation factors.
Feedback and enquiries
Enquiries may be sent to the FIC by e-mail to fic_feedback@fic.gov.za or to the FIC Compliance Contact Centre on 0860 222 200. Kindly consult the FIC’s website at www.fic.gov.za to keep abreast of further developments.
13
fpi events
Continuous Profe ssional Development
Events Calendar 2015
Face-to-face events Month
Event
March
April
May
Region
Date
Estate Planning
Western Cape Western Cape George Bloemfontein KwaZulu-Natal East London Port Elizabeth Polokwane Pretoria Johannesburg Johannesburg
2 March 3 March 4 March 9 March 10 March 11 March 12 March 16 March 17 March 19 March 20 March
Essential Tax Update
Port Elizabeth Cape Town KwaZulu-Natal Bloemfontein Pretoria Johannesburg
14 April 15 April 21 April 22 April 28 April 29 April
Professionalism, Practice Standards and Practice Management
Bloemfontein Pretoria Johannesburg KwaZulu-Natal East London George Western Cape
12 May 13 May 14 May 19 May 20 May 26 May 27 May
KwaZulu-Natal Western Cape Pretoria Johannesburg
Below dates still to be confirmed 2 June 3 June 4 June 5 June
Client Engagement (3 day course/workshop)
Johannesburg
Below dates still to be confirmed 8-10 June
FPI Professionals Convention
Johannesburg
24-25 June
Employee Benefits
June
14
10 Month
9
Event
29
31
31
4
22 5
16
Region
Date
Client Engagement (3 day course/workshop)
Western Cape
Below date still to be confirmed 22-24 July
August
Retirement and Investment Planning(2 day workshop)
KwaZulu-Natal
Below date still to be confirmed 3-4 August
September
Retirement and Investment Planning (2 day workshop)
Western Cape Johannesburg
Below dates still to be confirmed 8-9 September 10-11 September
October
Annual Refresher Workshop
KwaZulu-Natal East London Port Elizabeth
28 October 29 October 30 October
Pretoria Johannesburg (west) Johannesburg (north) Polokwane Free State George Western Cape Western Cape
2 November 3 November 4 November 5 November 11 November 17 November 18 November 19 November
July
November
Annual Refresher Workshop
Webinar events Month March April
June
Online courses
Date
Topic
17 March
Estate Planning (2) 16h00-17h00 Marius Botha
To be confirmed
Essential Tax Update
To be confirmed
Professionalism, Practice Standards and Practice Management
May To be confirmed
Employee Benefits
To be confirmed
Retirement Planning Investment Planning
To be confirmed
Personal Risk and Insurance Health Benefits
October
To be confirmed
Ethics (1)
November
To be confirmed
Ethics (2)
August September
1
Month
Date
April
To be confirmed
June
To be confirmed
September
To be confirmed
Topic Tax Planning Integrated Financial Planning (The Financial Plan) Risk Management: Insurance and Business Assurance
** Dates are subject to change depending on speaker and venue availability
To find out more about the 2015 events, contact the events team on (011) 470-6000 or email events@fpi.co.za.
15
fpi news
CFP® Professional Competency Challenge Status
Examination The exam was approved at the FPI board meeting held in November 2014 After discussions with members, education partners, students, Financial Planning Standards Board (FPSB) and various other role players in the financial services industry, the CFP® Professional Competency Challenge Exam was approved at the FPI Board meeting on 28 November 2014.
Requirements to gain access to the CFP® Professional Competency Challenge Exam The challenge exam is offered to individuals who hold certain advanced degrees or professional credentials, but have not
completed one of the FPI approved qualifications. FPSB as the licencing authority for the CFP® designation, approved that FPI may accept specific professional credentials as fulfilling the education requirement for CFP® certification. Furthermore, FPI may extend the availability of the Challenge Exam to individuals that are performing in senior positions in the industry, but that do not necessarily hold the prescribed qualification of study. FPI has the right to determine the types of qualifications it will accept for challenge status. FPI will be required to verify the qualifications and credentials of candidates for the challenge status with appropriate oversight bodies. (Adapted from: FPSB Certification Standard)
The following designations may be considered when allowing for Challenge Status exams: Designation
Awarded by/registered with
Underlying qualification
Master tax practitioner
South African Institute of Tax Practitioners (SAITP)
Postgraduate Diploma in Tax Law, M Com (Tax), LLM (Tax)
CA(SA)
South African Institute of Chartered Accountants (SAICA)
BCom Hons (Acc)
Registered auditor
Independent Regulatory Board for Auditors
Postgraduate degree/diploma accredited by SAICA
Admitted attorney with relevant qualification
Law Society South Africa or General Council of Postgraduate degree equivalent to NQF Level the Bar of SA 8
CFA Charter holder
Chartered Financial Analyst Society
16
CFA Level 3
Apart from awarding access to the Challenge exam to any of the previous designation holders, the following qualifications will also allow access to the Challenge exam: Qualification
Experience
Bachelor of Laws (Only if registered on NQF Level 8 with 480 credits)
10 years financial planning related experience
Postgraduate diplomas in: • Finance banking and investment management • Financial management • Investment banking/planning • Insurance law • Taxation • Tax strategy and management
10 years financial planning related experience
BCom Honours in the following specialisation areas: • Accounting or financial accounting • Actuary/actuarial sciences • Auditing • Banking • Economics • Finance or financial management • Financial analysis and portfolio management • Financial taxation or taxation • General • International trade and finance • Investment management • Monetary and financial economics
10 years financial planning related experience
Masters degrees in business and or finance related areas
10 years financial planning related experience
Doctorate degrees in business and or finance related areas
10 years financial planning related experience
While individuals may be highly qualified in a specialised area of financial practice, it does not necessarily guarantee their success on the CFP® Professional Competency Examination. FPI could encourage candidates seeking to sit for the CFP® Professional Competency Examination via challenge status to consider completing an examination review course or reviewing the currency and completeness of their education against the FPI Financial Planning Topic List. Challenge status candidates may benefit from retaking courses or taking additional courses to improve currency and mastery of specific topic areas. The challenge exam will be exactly the same exam that the current candidates write as the Professional Competency Exam. Challenge status exams are limited to two lifetime opportunities. If the candidate is not successful in passing the exam, it will become a requirement that the person must enrol at an FPI Approved Educational Provider to complete the Postgraduate Diploma in Financial Planning or the B Com Honours in Financial Planning.
• A motivational letter • Certified copy of their identity document and, • Certified copies of the qualifications which allow them access to the exam.
Contact us
How to apply to write the exam
If you have any questions, please feel free to contact our membership department:
In order for any candidate to be considered for the CFP® Professional Competency Challenge Status Examination, they are required to submit:
Office: (011) 470-6000 or 086 1000 384 (FPI) Email: membership@fpi.co.za
17
Value Proposition for Fpi professional Designations
bE part of a community of profEssionals As A certIFIed MeMber oF A recognIsed ProFessIonAl body, you wIll joIn A strong network oF over
6000
profEssionals in thE financial sErvicEs industry
ExclusivE mEmbEr only accEss • Member-only access on the FPI website • Your professional profile will form part of the FPI membership directory for all prospective clients to view • As a member you can use the exclusive trademarked designation logos to boost your professional profile by branding your stationery, business cards and electronic signatures
othEr mEmbEr bEnEfits you can Enjoy • Most FPI professional designations are registered with the south African Qualifications Authority (SAQA) on the National Learner Records Database • As a CFP® professional, you also acquire the Commissioner of Oaths status • FPI attracts over 1000 professional financial planners to the FPI Convention. Our delegates benefit from panel discussions, keynote presentations by industry experts as well as opportunities to learn, grow and network with other like-minded professionals • Access to personal leadership development opportunities through volunteering or becoming an FPI brand ambassador
FPI’s member dIscount Programme that can save you money and add real value to your membershIP
beneFIt
value
Free subscription to the LexisNexis online Financial and Legislation News
R2 000
Free CPD webinar programme that awards up to 15 CPD points including ethics
R1 500
A 50% discount on your SAIT membership
Up to R1 715
Industry publications subscription savings per annum
Over R1 000
RubberstampSA Commissioner of Oaths stamps ordered online
20%
Member discount on FPI CPD events
An average 20%
Astute Financial Services Exchange provides preferential rates on their services to all FPI members
7% per transaction
also: 1. As a member you qualify for preferential rates on your indemnity insurance with Southern Cross Risk Management (Pty) Ltd 2. Your membership fees are tax deductible
So you see, the value clearly outweighs the investment...
beneFIts
Download a full copy at www.fpi.co.za or email membership@fpi.co.za to request a hard copy of the value proposition brochure.
cost
industry news
SAQA seminar to
build trust and combat fraudulent qualifications O
ur vision is to build a credible, trustworthy network of public verification institutions with central online digital learner records databases providing fast and affordable services operating on the African continent�, said Joe Samuels, chief executive officer of the South African Qualifications Authority (SAQA) who was speaking at a two-day seminar, hosted by SAQA, on the verification of foreign qualifications. The seminar was attended by over 112 delegates from 14 countries on the African continent. The delegates included CEOs, directors and registrars representing key national, federal and provincial qualification agencies as well as education institutions from around Africa. Delegates connected and shared information about systems in their own countries, best practices, challenges and innovative ideas to combat qualification fraud. They also exchanged ideas about digital mechanisms to communicate better. At the event, Samuels also explained that the real challenge for all qualification evaluation bodies lies in the need to receive accurate and trustworthy information to dispel any suspicion of fraudulent activities while implementing a system that responds quickly and cost-efficiently to the needs of stakeholders. Currently this is a time and resource intensive process, and because of the delays in obtaining feedback, many evaluation decisions remain on hold indefinitely, and this has serious implications for the work and study prospects of
Delegates at the seminar
applicants. He added that this is one of the key obstacles they are hoping to address by developing an African Qualifications Verification Network (AQVN) that will deliver a credible, trustworthy network of public verification institutions with central-on-line digital learner records databases providing a fast and affordable service on the continent. The delegates at the seminar agreed on the establishment of the AQVN. The main purpose of this network is to bring together key stakeholders and strengthen relationships on the African continent for the verification of qualifications so that fraudulent practices can be combated in a coordinated and effective manner. AQVN will work actively to gain support from the African Union and Regional Economic Communities in Africa, as well as from international agencies, governmental and non-governmental organisations.
Samuels concluded that they are pleased with the outcomes of the seminar and that SAQA hopes to work in a phased manner in collaborating with various countries on our continent. This seminar is the first phase. The two-day seminar ended in the development of a joint declaration amongst participating countries; South Africa, Botswana, Cameroon, the Democratic Republic of Congo, Gabon, Ghana, Kenya, Lesotho, Malawi, Namibia, Uganda, Zambia, Zimbabwe and Swaziland; to combat qualification fraud on the continent. This will be achieved through structured relationships and defining the institutional arrangements between SAQA and recognised bodies responsible for verification of learner records in countries on the African continent.
21
industry news
Carol Le Grange (MD) and Rishai Neerachand (Director)
LINKfinity Financial Advice Group celebrates their
Grand
O
Launch
n 5 November 2014, LINKfinity Financial Advice Group celebrated its grand launch at Clearwater Office Park in Gauteng. One of many offices to be replicated Nationwide and with aspirations of eventually embarking on a journey to partner with major heavyweights in the financial industry and in the international arena.
Greeted by the managing director Carol Le Grange, CFP®, guests were in wonder with the unique design of the office with special reference to the five pillars wrapped in ribbon that caught the attention of all which would be unveiled later that night – the ‘secret sauce’ for financial wellness.
22
Family, friends and media from the financial services industry and South African business women embraced the evening in anticipation of the fresh, new look and unique five pillars.
Unveiling the five steps: Managing director Carol Le Grange, CFP®, took to the stage and officially launched what is deemed to be the future of financial planning in South Africa. A five-step interactive approach whereby the customer owns and is accountable for their own plan! Writable walls and new technology make the advice process something that the customer feels comfortable with, and it removes the fear from financial planning.
Justin Lippiatt (Business Development Manager, at FPI) with Carol and Rishai
Introducing the five steps: Why believe in our ‘secret’ sauce
What we recommend?
Step 1 Pay yourself first
Start by saving 10 percent of your income every month in a money market, savings or unit trust account.
Three times your monthly salary
Step 2 Replace your income
Without income protection, you will not be able to meet any commitments or service debt monthly at disability or illness. Replacing your income at retirement is TOP priority; the secret is to start early.
Have at least a 75 percent monthly income benefit payable.
Step 3 Cover your risks
99 percent of the working population has debt. You have to repay it, even if you become disabled, diagnosed with a severe illness or die! Cover it! Ensure your last will and testament is updated.
Enough life cover to settle any outstanding debt.
Step 4 Grow and preserve your wealth
Preservation might be before you start growing your wealth. When you resign from a company, your pension fund needs to be preserved to ensure your funds will provide you with optimal growth.
Best to refrain from cashing in on your pension fund. It will assist greatly at retirement
Step 5 Review and re-align
This is one of the most important steps! You have to review your portfolio at least annually to ensure it still meets your objectives.
“What we want to offer as a business is coaching our clients to financial freedom, as well as new and innovative ways to really serve the customer. An example of this is the USB version of their comprehensive portfolio that every LINKfinity client is given, in easy-tounderstand English, where they can save their financial information, study and review it at any time in a way that is easy to understand,” said le Grange.
Every 12 months, except if one of the trigger events take place
Guest speaker and regional head at Liberty, Anton Lamprecht , gave his stamp of approval and welcomed a new approach to financial planning and marked LINKfinity as the ‘flagship’ branch of their business. A successful business launch, fresh new-look modern offices and team that is ready to remove the fear from financial planning helping you to ‘die successfully’.
23
client engagement
Tips for financialls professiona
e d i w d l r wo
T
o be consistently successful and to maintain a sustainable practice you need to know your strengths and incorporate such strengths into your practice through relationship building. Some of these I practice as follows:
By Kobus Kleyn, CFP®, Chairperson of the Million Dollar Round Table (MDRT) South Africa
24
• Listen to your clients and let them do the talking first and be attentive at all times with real interest. Be in the ‘now’. You will understand what I mean if you read the book The Power of Now: A Guide to Spiritual Enlightenment by Echhart Tolle. Even if you do not agree, you should
never become confrontational. Show real empathy and understanding as financial planning is never easy and life changing events do happen. • Financial planning is not always about individuals, but more about families and, therefore, get to know all stakeholders within the family. • Always recognise, compliment and commend clients and family achievements with sincerity. People will know when you not sincere. • If you are sincere and take care of your clients and their families, and go beyond the call of duty (provide more services than what you get income for) your clients will become your best centre of influences (COI) and you will never have to worry about where your next client will come from as you will receive qualified leads and referrals by the dozen. If you do not get such leads and have to do cold calling, you will now understand why. • Never pretend or act out of character as your clients will eventually see through the act. By following this advice, you will never have to act in a manner you are not comfortable with and can be assured of operating as ethically as possible at all times. • Find your strengths and hone them all the time as life does change, and your environment will follow suit. • When you feel things are not going according to plan, or you are not productive enough, it is time to schedule a ‘walkabout’. • This is achieved by making a list of clients close to your office area and in easy reach (maybe 20-40 kilometres away at max and who you may have not seen for a while and simply, without taking anything like a tablet, laptop,
briefcase, pen etc. with, just move from client to client with no intent to do business or even discuss business. Simply ask, “How are you?” over a cup of coffee and you will be amazed at the response and action that follows. Depending on the area in the world you are in (geographically, clients may be far apart) or if you have very busy clients, depending on the ‘generation’ of clients you deal with, you can practice the same action by making a couple of phone calls saying, “I just phoned to say hello and to see how you and the family are doing.” • I have found such ‘walkabout’ visits with my clients, in their own comfort zone, or these phone calls, to be much more relaxed, allowing for consolidated relationship building, and certainly changing the way my clients perceive me. It should not always be about business and sales at all costs; that is never sustainable. • Although I believe motivation comes from within, even us as financial professionals have to get some motivation now and then before we can motivate others to do something about their financial planning. Such a breakaway will do just that, as well as revitalise you and look after your health. Like anything in life, it is best to break bad habits and create new habits with disciplines intact (just try to work out why most diets never work). I was fortunate to have read a great book (recommended by a client) many years ago called The Monk Who Sold His Ferrari, written by Robin Sharma. One of the key points in the book is that if you do anything for 21 occasions, you will break a habit and create a new one. Finally, it may be time to unleash the magic from within and liberate yourself as a financial professional in the best
interest of your family, clients, the industry and most importantly, yourself, and to understand the concept of living a ‘Whole Person Life’ . I was lucky enough to read a book that has now become a favourite of mine: Unleash Your Magic by Logan Naidu, author, motivational speaker, and 33-year qualifying life and Top of the Table MDRT member and current MDRT Divisional Vice President. This book taught me that as human beings we are endowed with an incredible capacity to dream big and to convert these dreams into reality, and how we can rise above self-imposed limitations and imagine our way to success. We are often judged by external indicators of success – our bank balance, the car we drive, the house we live in, the clothes we wear – but in the end, we will be judged by the legacy we leave for future generations, and what we did to make this world a better place. It is the impact, the contribution and the positive difference we make in the lives of others that counts in the final analysis.
25
client engagement
words and more words “Complexity begets ambiguity, which yields in all ways to prejudice and avarice. Complication does not so much defeat men as arm them with fancy” – R. Scott Bakker
A
nd so the confusion begins. I can say with about 90 percent certainty that you turned to your thesaurus to find synonyms for at least one or two of the words quoted and then you tried to string the sentence together in a manner that makes sense to you? Well, unless you're an English ninja it’s only natural to read that sentence more than once for it to have any real impact.
Words, words and more words – the reason people do not want to read! Okay, so I'm being a little facetious; oops! Big word, let’s try that again. <<Rewind>> <<Play>> Okay so I’m being a little playful – words are most certainly the reason we all read, but when filled with
26
unfamiliar and complex words or phrases, it interferes with the readers understanding and slows them down.
the contracts between service provider and consumer and it’s usually the service provider that falls short in the end.
Plain language can be defined as communicating in a way that your audience can understand the first time they read or hear it. Unfortunately, our industry is filled with technical jargon and a lot of consumers get their policy wording not knowing what cover they have or don’t have. Insurance companies are definitely not guilty of leaving out anything pertaining to the policy; everything is in the policy wording but it is neatly hidden away behind all the jargon and Latin phrases.
The Consumer Protection Act (Part D) explains that consumers have the right to information in plain and understandable language. This simply means that long-winded, repetitive language and jargon should not be evident in the contracts given to consumers. Companies who do not comply with this are left in a vulnerable position. Consumers could complain to the relevant Ombud, which may possibly result in the service provider dealing with financial loss.
So what stops most companies from making the transition to plain language?
South Africa is taking its direction from the Financial Services Authority (FSA) (UK).
After picking the brains of a few insurance and legal experts, it became clear that the general objection to plain language was that legal rights would be ‘dumbed down’ causing it to lose its ‘power’ and effect in a lawsuit. It is an absolute truth that certain industry and legal technical terms cannot be changed to plain language, but every single one of those terms and phrases can be defined. Often the definition itself is plagued with jargon, but at the very least all definitions should be explained in a manner that even a layperson can understand it.
In 2001, FSA began the implementation of TCF. In 2008, they changed their principlebased approach to an outcomes-based approach. They also started imposing fines to companies who failed to comply. Just one example of this is the fine given to Royal Bank of Scotland and its parent bank NatWest. A whopping £2.8m was paid by this bank for various complaints; one of them being that they issued consumers with correspondence that did not address all of the concerns raised by customers.
There are laws that protect the consumer and place an obligation on service providers to comply. By now everyone in the industry must have some knowledge on the National Credit Act (NCA), the Consumer Protection Act (CPA) and Treating Customers Fairly (TCF) where the rights of consumers have been detailed. It allows for consumers to report companies who have given them any misleading or deceptive information. More often than not, the trickery is found within
One of the plain language principles is that we should give customers all the information they need or ask for; not just what we think they should know.
Now for five tips from the Brazilian nut gallery (only because I prefer them to peanuts). 1.
Always communicate with your audience in mind. It’s never about you! Especially when it involves the resources of a consumer who pay you for a service.
2.
3.
4.
5.
Organise your thoughts and group them into topics that are the same or similar. You can't be talking about a death in the beginning of a document and then you only deal with how to claim for that death at the end of your document. It needs to make logical sense to your audience. If it doesn't, they will never read it with complete understanding. When communicating to your audience address one person and not a group. For example, you can’t say ‘policyholders may submit documents by emailing it to abc@ claims.co.za’ – a better way to say this would be, ‘you may submit your documents by emailing us on abc@claims.co.za’. Notice how the second sentence speaks directly to the individual where the first sentence was a general statement. Separate the different topics in your communication by adding meaningful headings. Make sure that the reader can make sense of the content just by reading the heading. You cannot put a heading like ‘Applications’ in a document – instead a heading like ‘How to submit your application’ is a more definitive and more helpful than just one word. Finally, write in short sections. This almost gives off the illusion that your communication is easier to understand. Documents that have paragraphs longer than five lines, or documents that have little to no white space, are very unappealing to the eye and makes the communication appear to be more difficult.
It’s new and yes it’s scary, but in the end your customers will love you for taking those first steps to revolutionising your business through advocating and applying plain language principles. So put on your cowboy boots and let’s get this rodeo on the go. First up let’s see how many of you can hold onto this ‘new way’ of communicating before falling off the wagon.
By Wende Davids, Plain Language Specialist and Customer Experience Officer, Financial Planning Institute
27
EMPLOYEE BENEFITS
Investments Last year National Treasury tabled amendments to the Income Tax Act and introduced draft regulations to allow service providers to offer tax-free investments. These saving vehicles have now been passed into law and will become effective on 1 March 2015. They are intended to encourage a greater level of discretionary saving in South Africa. By: Freddy Mwabi, Actuarial Specialist, Simeka Consultants & Actuaries
28
M
uch remains to be done in the development of tax-free investments (TFIs) but with the information at hand, it is possible to assess the tax efficiency of these TFIs relative to retirement funds and collective investment schemes (CIS).
How tax efficient are TFIs? Consider a 40-year-old individual who earns a salary of R 10 000 per month and in respect of whom the employer makes a monthly contribution of R1 000 to a provident fund over a term of 20 years. Compare this to a similar investment in a TFI or CIS. Assuming the contributions are placed in a balanced fund earning a return of 5 percent above inflation, our projections show that the provident fund investment will be 10 percent better than the TFI which in turn will be 16 percent better than the CIS. In this exercise, we assumed exactly the same cost
structure. The difference will likely be even bigger once we can factor in the actual costs of each investment type. If the individual earns R100 000 pm (taxed at the highest marginal rate) the provident fund investment will be 35 percent better than the TFI which in turn will be 14 percent better than the CIS. It is clear that individuals who are in a higher tax bracket will benefit more. The below analysis also shows that the provident fund investment will produce the best net after-tax retirement outcome by far. It really is a virtual tax haven. The provident fund and TFI have the same advantage over the CIS in that they are exempt from dividend, interest and capital gains tax. The tax efficiency of the provident fund is amplified by the fact that contributions (made by the employer in respect of the member) are tax deductible. That means the full amount is available for investment while the contributions to TFI and CIS are made with after-tax income.
Table 1 Description: A: R10 000 pm salary: R1 000 pm investment
Provident fund
Tax-free investment
Collective investment
Total contributions (net after tax)
R 567 000
R 394 000
R 394 000
Plus: Investment returns
R 901 000
R 681 000
R 659 000
Less: Tax on dividend, interest and capital gains
-
-
(R 125 000)
Retirement lump sum tax
(R 281 000)
Lump sum net of tax at retirement
R 1 187 000
R 1 075 000
R 928 000
Table 2 Description: B: R100 000 pm salary: R1 000 pm investment
Provident fund
Tax-free investment
Collective investment
Total contributions (net after tax)
R 567 000
R 340 000
R 340 000
Plus: Investment returns
R 901 000
R 541 000
R 526 000
Less: Tax on dividend, interest and capital gains
-
-
(R 95 000)
R 881 000
771 000
(281 000) Retirement lump sum tax Lump sum net of tax at retirement
R 1 187 000
At retirement, however, the provident fund benefit is subject to retirement fund tax. The comparison shows the favourable taxation enjoyed by retirement fund investments despite this tax. Much the same result would have been obtained if we compared a pension fund investment. In such a comparison, we would have to compare the after-tax annuity income of each investment, not the aftertax lump sum at retirement. This is a more complex calculation and less easy to explain.
Conclusion The introduction of tax-free investments reminds us just how tax efficient retirement funds are. Add to that the economies of scale offered by a group arrangement and one will not find a more effective retirement fund investment in South Africa. TFIs, however, will be much more tax efficient than a CIS investment. If individuals wish to build up a nest egg in addition to their retirement funds – one that they can have access to in the event of a life crisis, a TFI would be a very good choice. It should be possible for employers to provide favourably priced TFIs to their employees as a voluntary benefit arrangement in addition to their current retirement fund. These investments have the potential to help develop a savings culture in South Africa. Used correctly they may also add to the stability of the workplace and prevent many members from resigning when they have a life crisis in order to gain access to their benefits.
29
EMPLOYEE BENEFITS
Trustees...
be aware of your extended fiduciary duty
By Sabir Bacus, LLB, Consultant, Gallet Employee Benefits Support Services (PTY) Ltd
30
The televised trial of Oscar Pistorius showcased the workings of the justice system and for the very first time most South Africans could witness first hand a true life court drama unfold. The testimony of witnesses and their examination and cross-examination makes for fascinating and educational viewing.
I
t was during one of these crossexaminations of an ‘expert witness’ who was taken to task for not reading an official report before framing his expert opinion that brought to mind the potential dangers that face trustees who do not take the time to read and understand the documents that bind their funds.
duties. Often, it is a third party contract that determines the rights, benefits and duties of members; be it direct or indirect. Without reading and understanding the contract, a board cannot adequately and accurately dispense with the aforementioned duty. This inaction may also offend various other duties of a board.
The objective of boards of funds and duties of boards remain long standing and unchanged but with the flow of transparent information, open lines of communication and readily available information in the public sphere and together with the advent of (and easy access to) the Pension Funds Adjudicator’s office has increased awareness and the opportunity to test the board’s management of their funds against their duties has increased tremendously. The modern Trustee has no place to hide.
The introduction of the principles of good governance and risk management into retirement funds has added a dynamic approach to retirement fund management. In order to construct robust processes and meaningful risk management policies, all contractual duties and obligations must be thoroughly examined. It is of little use and irresponsible to construct governance and risk management systems that are incongruent to contractual limitations and exclusions. This results in an indefensible state of affairs.
By and large, boards are acquainted with the rules of their fund. However, an area of concern is third party contracts.
Contractual law allows for many defences to be raised. However, pension law requires the board to have some expertise and if the board lacks sufficient expertise in a certain area; it is the duty of the board to obtain expert advice. This particular clause could very well defeat a defence that otherwise could be a saving grace for the board.
In dispensing with their duties, a board must inform members of their rights, benefits and
Hence, regardless of the complexity of the contract that a board may enter into, on behalf of a fund and/or members, the legal responsibility for ensuring that the board is acting in the best interest of both the fund and members, always lies with the board. The board should not ignore a contract due to complexity
and place their trust in a third party based on values such as well-known entities, good reputation or long standing relationships and so forth. Let us consider, as an example, the common practice of funds taking out a reassured riskbenefit policy to cover a promised benefit in the fund. The proffered benefit is somewhat static information. However, there is the little matter of specific contractual conditions and exclusions. If a board is unaware of these provisions then one may safely assume that members will also be unaware of these provisions. It stands to reason that a member who is ignorant of these provisions has no opportunity to rectify their position. It is inherent within the concept of good governance that any person who has a vested interest in an entity is notified of any matter that could potentially change the nature of that vested interest or diminish its value. Hence, not only must a board be fully cognisant with contractual obligations but a board must also ensure that such obligations are adequately communicated to their members. In the event of a rejected claim, the delicate question of who is responsible and who is liable will surely have to be navigated with potentially dire consequences for the board. To mitigate risk, a board ought to establish a standard protocol where all third party contracts are reduced to its vital elements and each element is subjected to full risk management assessments together with periodic re-evaluation of the risk. To complement this, a funds’ communication policy must incorporate, at the very least, the manner, content and frequency in which third party contractual provisions, which has the potential to alter a vested interest, are communicated to all stakeholders. I guess that the expert witness in the Pistorius case has highlighted a universal truth; a lack of knowledge is like a tree without roots - it is destined to fall at some point in time.
31
EMPLOYEE BENEFITS
An
inequitable situation By Melissa Wentzel
In February 2011 Minister of Finance, Pravin Gordhan, announced the amendment to Regulation 28 of the Pension Funds Act that stipulates, among other things, a maximum exposure to certain asset classes for retirement funds. For those who managed to ‘grandfather’ their Retirement Annuities into 2015, FPI finds out what to do next.
R
egulation 28 had always prescribed the maximum allowable investment into particular asset classes (75 percent in equities, 25 percent in property, and 25 percent in offshore assets overall) at fund level, the amendment in 2011 meant the restrictions would be imposed at an individual investor level as well. But thanks to what is referred to as the ‘grandfathering clause,’ investments prior to 1 April 2011 were not required to comply with regulation 28 provided no transactions were made that significantly altered the terms of the investment agreement.
32
In other words, you would not have been able to make any additional investment contributions, amend debit orders or annual escalation rates, switch between the underlying unit trusts invested in, or transfer other investments over into the portfolio. The prescribed maxima were aimed at ensuring South Africans were prudent when investing their retirement savings – protecting the fund member – and that savings were ‘channeled in ways that achieve economic development and growth.’ But an article published recently in the Sunday Times:
Business Times paints a picture of South African pensioners going backwards. A private pension index launched by payment clearing house, BankservAfrica, revealed that the typical South African pensioner gets a meagre R3 559 every month, and 85 percent of all pensioners receive less than R10 000. Gregg Sneddon, of MacConnell Sneddon Personal Wealth Management, cited three major concerns about the amendment and what it means, practically, for investors. His first concern is that a maximum equity exposure has been set but no minimum
equity exposure. “They’re trying to protect investors from themselves, but they don’t stop an investor sitting 100 percent in cash. Which, if you are doing – and many are doing – you’re never going to beat inflation in return,” he says.
Blend responsibly His second concern is that it is now almost impossible to construct your own portfolio for an RA on a LISP platform. “I say almost because it’s not completely impossible. If I decide to blend an equity fund with an offshore equity with a cash fund, a bond, and a property fund, each fund has what’s called a mandated maximum exposure and then an intended maximum limit as well. “For instance a maximiser fund, which is a pure equity fund, can have 10 percent in property. Practically speaking, it might have nothing. When the LISP does the asset allocation on that fund it says, ‘Well, it can have 10, it’s got nothing but maybe it puts in 10, so let’s just assume it’s got 10.’ So you’ve just lost 10 percent of your property exposure. The same fund, for argument’s sake, could also have 25 percent offshore but it’s currently got nothing. If it takes it, then we just assume it’s got 25 percent offshore and you’ve just lost your offshore exposure as well. So it becomes very difficult to blend your own portfolio.”
Make sure the fund manager’s goals are aligned with yours Sneddon says that all that money is now going into the balanced fund, representing his third concern: the conflict of interest between the balanced fund manager and the individual investor. “The managers manage the money with a 5-7 year time horison, but as a 25-year-old investor you have a 40-year time horison. Thus, the manager, so as not to create too much volatility and also because he is constantly checking out his peers, will tend to sit – over time – with an equity exposure of approximately 65 percent maximum, when it could be 75 percent. You might get 10 percent property, if you’re lucky, when that could be 25 percent in property. As a result, you will not get the returns you could get if there weren’t those restrictions in place,” he says.
Don’t underfund your retirement He believes that the legislation is yet another reason for people to underfund their retirement by not taking enough risk. “Most people haven't started soon enough, they don’t contribute enough, the fees are too high, and now the returns are not going to be what they
could be so it's just added another nail into the coffin of retirement funds. “The point is they’re trying to legislate and protect people from themselves and when you chat to the legislators they all say it’s about volatility but that’s exactly the thing that a younger investor needs – volatility in order to get the return,” he says. One investor’s 100 percent equity RA has netted 46 percent year on year since 1992. An incredibly high return like in this instance would not inspire any changes, but is it wise to continue ‘grandfathering’ your RA indefinitely? Sneddon warns against a blanket approach due to the personal and individual nature of financial planning. “As a generalisation: younger investors, if they’ve got it leave it alone; older investors, consult your financial planner, look at your needs, how long you’ve got to go until retirement, what type of returns you’ve had, and then make a decision. It might be appropriate to make a change. It might not,” he advises.
they see a word like an ‘aggressive’ portfolio. Your typical company pension fund might have three funds: aggressive, balanced and conservative. Your 25-year-old thinks, ‘Oh, this is retirement money – I’ve always been told I shouldn’t be aggressive with my retirement money,’ and goes with the balanced fund which is 50 percent equity. In the aggressive one, it might have 65 to 70 percent equity. You can never be aggressive with 70 percent in equity.” His last piece of advice is, young or old, always consult your adviser and do a stock take, “Before you go and do something silly.” Sneddon personally uses a passive RA with 10X where he can have his equity exposure at the maximum of 75 percent.
Take out a second RA “If you want to add to your RA and you don’t want to fiddle with your current one, start a new one. It could also help you come retirement, because then you’ll have two RAs from which you can retire, and you can stagger your retirement as opposed to having to retire from one fund and doing it all at one time,” he adds. He says that for the older investor it also depends on the type of annuity they plans on buying. “If you’re buying a life annuity as a function of how much capital you’ve got, then you want to bank the money. If you’re buying a living annuity, you’re going to be invested for the next 30 plus years but you probably don’t want to be invested in 100 percent equities. Again, it depends on your other capital, it depends on your income draw and on a host of things. “The legislature applies to an RA preretirement; post-retirement you can do whatever you like. This doesn’t apply to a living annuity. When you get closer to retirement you want lower equity – but never no equity. Unless you’re buying a life annuity, then you want no equity,” he adds.
Consult a professional “We need to protect people from themselves and one of the things that the average investor does is not take enough volatility risk because
33
HEALTHCARE
Competition Commission market inquiry into
private healthcare The market inquiry into private healthcare initiated by the Competition Commission aims to identify factors that affect competition in the sector. It also seeks to provide a factual basis for recommendations to be made in the interest of a more affordable, accessible and innovate market.
A
market inquiry is a general investigation into the state, nature and form of competition in a market, rather than a narrow investigation of a specific conduct by any particular firm. The Commission has initiated this inquiry into private healthcare because it has reason to believe that there are features of the sector that prevent, distort or restrict competition.
By Anthea Towert, CFPÂŽ, FPI Healthcare Competency Committee Chairperson and Head: Scheme Consulting at Alexander Forbes Health
34
After consultation with the independent panel appointed to preside over the inquiry, the Commission published guidelines for participation in August
2014. The guidelines essentially contain the rules that will apply to all stakeholders who wish to participate in the proceedings and they also clarify how information gathered during the inquiry will be used. The Statement of Issues finalised in August 2014 sets out the panelâ&#x20AC;&#x2122;s initial view of the appropriate framework for conducting the inquiry. A total of six theories of harm are contained in the Statement of Issues. A theory of harm refers to the assumption about how harm to competition might arise in a market to the detriment of consumers and to the detriment of
efficient and innovative outcomes in that market. These theories of harm will be tested against the facts during the course of the inquiry and will aid the panel in developing an understanding of the private healthcare market and evaluating the information gathered. The activities to be undertaken during the Inquiry will be broad ranging. A total of 66 submissions totaling 15 000 pages were received from interested parties during the ‘call for submissions’ open period which ended on 31 October 2014. Submissions have come from hospital groups, medical schemes, doctor associations, medical scheme administrators, labour and civil society organisations and are available to the public for viewing on the Commission’s website. A preliminary review of the submissions by the inquiry panel notes that there are conflicting views on the issue of market power, whether it exists at all and if so, where it resides. Also, most submissions acknowledge that private healthcare expenditure is high and medical inflation is higher than general inflation but they differ markedly on the underlying reasons for this. Reasons given in the submissions for increasing prices include: over-regulation that results in high barriers to entry; inadequate or incomplete regulation for medical schemes that undermine sustainability including current solvency requirements and the prescribed minimum
benefits; laws preventing hospitals from hiring doctors; high prices of medicines and medical supplies; a shortage of medical professionals including nurses; an ageing population and growing disease burden; and a lack of competition from government hospitals. A framework for public hearings is expected to be in place by April 2015 with public hearings set to be held from 1 May 2015 to 31 July 2015. Provisional findings and recommendations on how to improve competitive outcomes in the private healthcare sector are expected to be published in October 2015, with a final report due for release by end November 2015.
The inquiry provides a unique opportunity for consumers to gain valuable insight into the cost drivers of private healthcare from the perspective of key stakeholders like medical doctors, hospital groups, pharmaceutical companies, health insurers, medical scheme funders and the regulatory authorities. It also gives healthcare financial planners a unique platform to educate the broader health sector on the central role of healthcare brokers in helping consumers to make critical funding decisions and to demonstrate the value of broker services and best advice.
The six Theories of Harm identified by the panel include: Market power and distortions in healthcare financing
The market power of medical scheme administrators over medical schemes; medical schemes and health insurance over members and policyholders; the relationship between not-for-profit medical schemes and for-profit administrators; and the relationship between brokers and medical schemes and consumers.
Market power and distortions in relation to healthcare facilities
The market power of healthcare facilities during negotiations with medical schemes and administrators; the relationship between practitioners and healthcare facilities; the relationship between facilities and suppliers of consumables and the market power of facilities over patients and self-paying users.
Market power and distortions in relation to healthcare practitioners
This includes the effectiveness with which practitioners direct patients along the healthcare pathway; the scarcity of skills; co-ordinated conduct amongst practitioners; the market power of practitioners during negotiations with medical schemes and administrators and the relationship between practitioners and suppliers of consumables.
Barriers to entry and expansion at various levels of the healthcare value chain
Imperfect information
Regulatory framework
Structural barriers inherent to the market and behaviour barriers to entry and expansion. This includes licensing requirements for facilities and contractual arrangements between facilities and practitioners; economies of scale associated with the need for funders to attract beneficiaries and pool risk; reserve ratios for medical schemes; regulations impacting on healthcare practitioners and contractual arrangements between practitioners and funders. This includes a patient’s ability to choose the best healthcare provider; a member’s ability to choose the most appropriate medical scheme; a healthcare funder’s ability to compare cost and quality when contracting with providers; a patient’s lack of information on use-value of treatments and technologies and the third party payer system. The deficiencies and unintended consequences of the current regulatory framework as well as the role that competition law and policy plays in the sector.
35
INVESTMENT
By Paul Nixon, CFP®, Technical Marketing, Barclays Global Investments and Solutions
What is The Cost of
Being
Human?
The subject of behavioural finance needs little introduction, despite its relatively late arrival to the field of modern finance.
B
ehavioural psychology was catapulted into popular culture in 2008 by Thaler and Sunstein with their acclaimed work, Nudge, voted as one of the best books of 2008 by The Economist. Thaler and Sunstein introduce us to the field of 'Choice architecture' and how understanding human behaviour and exploiting biases can be used to ‘nudge’ people in the intended direction.
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Presenting information in a deliberate context, influences decision-making. Thaler and Sunstein provide a memorable example from, of all places, the men’s room at the Schiphol International Airport in Amsterdam where etching an image of a black housefly onto the urinal improved aim by as much as 85 percent, proving that minor detail is capable of guiding behaviour.
The need for a ‘reality check’ of sorts in respect of finance theory stems from the incongruence of so-called normative behavioural models, or how we should behave and descriptive models, or how we actually behave (Raffia, 1985). Capital market theory is built on some shaky foundations by assuming that we are rational and wealth maximising – in other
words, given a set of expected investment returns with associated probabilities (assuming risk neutrality), we simply select the outcome with the highest expected value. Sounds easy enough. The problem with this idea is that human beings would be required to accurately and adequately evaluate probability distributions. Before we can quantify being human as a cost, we need to understand a bit more of how sub-optimal decisions are made. The first and most prominent hurdle to this ideal is rooted in our (limited) ability to perceive and process information. The fact is we are faced, now more than ever, with a multitude of extraneous stimuli. Think of the visual and audio stimuli we encounter on the way to work; highway billboards, music on the radio, brightly dressed passengers on the Gautrain speaking with and over each other. We cannot possibly absorb all the information and so we have to ignore a lot to let the important bits through (such as concentrating on oncoming traffic or reading the newspaper on the train). Furthermore, in our attempt to process information we often take in information that is not even there; given cues about shape and size we go further to the inference of identity (Bruner, 1973). Think of a thin vertical stick on the ocean horison, which we infer to be a sailboat. Given the information IN_ESTMEN_, it should not take long for
you to infer the missing letters V and T. This is the process we go through as we try to make sense of information, often going beyond the raw data presented. We are able to construct when provided with inputs of the situation (stimuli) together with what we recall from memory. Now to the crux of the matter, our perception of the world is affected by the way we organise knowledge in our minds and how information complexity is dealt with using shortcuts or experience-based problem-solving techniques. Schemas help us to categorise, evaluate and process social information quickly and efficiently (Fiske and Taylor, 1991). You may think of a schema as a template your mind uses to process information quickly. When presented with information, stimuli are compared with a schema, and if it fits, information is processed accordingly. For example, if someone refers to ‘accountants’ in a conversation, we infer that they are reliable and conservative even though this information may be absent. The shortcuts we use are referred to as ‘heuristics’ and are well documented; more importantly for the purposes of this writing is how much this behaviour costs us as investors. Barclays Wealth published a white paper in March 2013, titled, ‘Overcoming the Cost of Being Human.’ In this paper, researchers posit a so-called ‘behaviour gap’ which explains the difference between long-term
Probability of loss at different holding periods
financial returns from sticking to sensible and simple rules of investing and actual returns received by investors including the impact of short-term (often suboptimal) decision-making. The graphic below reinforces what is known as the equity premium puzzle (Bernartzi and Thaler, 1995). Using the capital asset pricing model to analyse developed market equity reveals an adequate equity risk premium of one percent above bonds. In reality, however, investors are seeking in excess of six percent in compensation to assume the risk of uncertain returns. What is the reason for the phenomenon? Myopic risk aversion refers to the illusion of riskiness based on short-sighted and regular evaluation of portfolio returns. The more often we evaluate our portfolio, the more volatility we perceive. Evaluating equity market returns regularly creates additional investor anxiety and distorts our risk perception. The outcome of the research is that when it comes to investing, being human is costly. How costly? Our innate need for comfort sheds between three percent and four percent each year in investment returns. To place this in perspective, over a 20-year period, approximately half of your investment capital. How often has our sound investment strategy gone way off course in turbulent times? If the academics and explorers of the field set out to exploit sub-optimal investment decision-making, we can safely say this objective was never reached. After all, the commonality we all share is our humanity and, therefore, by default, the same shortcuts to processing massive amounts of information. In his book, Asymmetric Returns, Alexander Ineichen reminds us that orthodox economics credits us with the logic and rational mind of Mr. Spock where in reality decision-makers are more like Desperate Housewives.
37
INVESTMENT
There’s more to risk than
risk profiling
There has been much debate about risk profiling and its relevance – or lack thereof – in determining an appropriate investment solution for customers.
S
tepping away from this controversy, we look at what else financial advisors should consider about the customer when deciding on an investment strategy.
By Nicky Nairn, Head of Compliance at Masthead
38
Gathering information is a critical step in the financial planning process, and a requirement in terms of the General Code of Conduct. But output is only as good as the data input, so it is paramount to ask the right questions that will help you to develop a holistic view of the customer. The way in which a question is asked will
depend on the customer’s level of education and experience with investments. It will also determine the quality of the answer. Your questions should help you understand three broad aspects of the prospective investor: how much risk the customer is willing to take (risk tolerance), how much risk the customer is able to take (risk-taking capacity) and what risk the customer should take to achieve the defined investment objectives (risk requirement). These aspects can often be in conflict and should be plotted against one another to find a best-fit solution for the customer.
aspects of their life may prefer low-risk investments, and vice versa. Many tools are available to help gauge an investor’s risk tolerance, such as risk analysers. However, the focus should be less on the scorecard and more on the information gleaned from the customer when seeking information. Take time to understand whether the customer likes to take risks or prefers to play it safe. Your focus should be on understanding how the customer thinks. Risk-taking capacity, or the customer’s ability to take on risk, depends on factors such as investment objective, investment time frame, age, income, number of dependents and accumulated wealth. These must be considered when seeking a solution that will best fit the customer’s circumstances.
Risk tolerance is the degree of uncertainty an investor is willing to take or can handle when there is a negative change in an investment portfolio value. Risk tolerance lies in the mind of an investor and indicates how much risk he/she wants to take. In other words, how will the investor react should there be a loss and if that loss increases? Personality plays a role in the willingness to take risk and most people carry their personality into their investments. Someone who is conservative by nature in most
It is also important to establish the customer’s primary objective for investing, as objectives determine expectations. Broadly, the objective may be to create wealth to meet financial goals, protect savings from the eroding effects of inflation or generate income. The advisor is responsible for drawing out the necessary information about the customer’s circumstances and asking questions about aspirations and expectations, what the customer wants to achieve and the anticipated outcome of the investment. To ensure a multi-dimensional understanding of the customer’s circumstances, it is
important to ask additional questions. For instance, find out if the customer would need access to his/her investment funds in an emergency, and if his/her medical aid and gap cover would cover risk and medical expenses in the event of an accident or contracting a disease. Customers who require income from their investment should be asked whether they currently earn income. If they do, for how long will they continue to earn income and what increases do they expect? Do they anticipate their earnings will keep pace with inflation? Do they have a buffer in their budget to absorb any drop in real earnings? Do they need the income generated from their investment to grow in line with inflation? Do they anticipate any of their expenses to increase or decrease as they grow older? By understanding a customer’s willingness and ability to take on risk in an investment strategy, you have a foundation on which to inform the customer of the risk he/ she should take to achieve the defined investment objective. There are other benefits of going beyond the one-size-fits-all tick-box approach. By educating customers through the financial planning process and building their knowledge, skills and attitudes so they become financially literate, they can shift from reactive to proactive decisionmaking. You are also fully discharging your professional duty of care as an advisor – and treating your customer fairly.
Willingness/Tolerance (Attitude)
Note from the Financial Planning Institute's Investment Competency Committee:
Ability/Capacity (Time) The above graph reflects the relationship between the willingness to take risk and the ability to take risk. The longer the time horizon, the greater the ability to take risk, but this must be considered against the client’s risk tolerance or willingness to take risk.
The FPI Investment Competency Committee discussed risk profiling at its last meeting in the context of the document released for comment by Anton Swanepoel entitled “Assessing suitability with regard to investment advice”. This document, amongst other things, highlights the shortfalls of risk profile questionnaires. The committee is in agreement that this tick box approach is not sufficient and that the client’s subjective goals, tolerance and capacity need to be assessed and evaluated accordingly when developing their respective investment strategy.
39
INVESTMENT
Portentous
2014 developments
A
fter persistent trends and low volatility since the financial crisis, 2014 presented market dislocations and structural changes that we believe have important implications for the course of financial markets, whose participants seem somewhat complacent since ‘momentum’ has been the winning strategy for so long. We highlight some of these dislocations and changes below.
Gavin Wood, Chief Investment Officer, Kagiso Asset Management
40
The US passed on the QE baton Quantitative easing (QE), injecting liquidity into the economy via the purchase by central
banks of financial instruments from the private sector, has been executed on a grand scale since the financial crisis (see chart below) - at a time of near-zero interest rates in the world’s largest economies. The US Federal Reserve has purchased US$3.7 trillion between November 2008 and October 2014 (QE3’s conclusion). The magnitude of this intervention is staggering, given that the US economy (GDP is US$17.6 trillion) and bond market (103 percent public debt: GDP) are the world’s largest. The real economy benefits of US QE have, in our view, been mixed and of diminishing effect through time, but the impact on asset prices has been massive.
Graph 1 - Different directions for central bank balance sheets Australia, will see export revenues decline. Large net oil exporter economies such as Saudi Arabia, Russia, Nigeria, Angola, Columbia, Mexico and Venezuela will struggle as they are very concentrated around oil production. Oil price falls will particularly benefit large net importers, such as Europe and Japan.
In 2013, the Bank of Japan began its enormous QE programme and the European Central Bank tentatively began asset purchases in 2014, with widespread expectations of significant sovereign bond purchases to come. This significant structural change highlights the better state of the US economy and has precipitated a sharp strengthening of the US dollar against the yen and the euro. The net effect should be a tightening of global liquidity conditions, given the relative magnitude of the QE programmes, which should be negative for asset prices.
Foreigners began selling SA bonds After many years of foreign inflows into our bond market, foreigners sold R71.7 billion of bonds in 2014. Coinciding with these outflows, the rand depreciated by 9.3 percent (to the US$) to its worst level since 2001. Receding foreign liquidity will make our government’s budget deficit more difficult to finance. Emerging market equities also saw foreign outflows of US$25 billion in 2014, while, in contrast, foreign equity inflows into SA, at R13.3 billion, were positive. However, this may have had more to do with internal problems in our emerging market peers (Russia, Brazil, Turkey, Thailand) than the absolute prospects for our companies.
policy (infrastructure investment) and monetary policy (lower bank reserve requirements and an interest rate cut) stimulus measures were introduced.
Commodity prices fell sharply The growth deceleration in China, the world’s largest non-oil commodity consumer, came as 2014 saw an increase in supply of many of the commodities it imports. The result was large commodity price falls, with iron ore and oil prices almost halving and thermal coal down 22 percent. Precious metals were little changed in 2014 off already low levels as supply was curtailed. The oil price decline is particularly important for the world economy as it is the largest commodity traded by value. The cause of the price decline was increased production from North America at a time of weak demand from Europe and China and growing use of substitutes (natural gas and renewables), with OPEC making no change to their production intentions. These material commodity price declines will have significant implications for their respective consuming and producing countries and companies. Iron ore producers, eg Brazil and
South Africa's exports are dominated (roughly 60 percent) by iron ore, thermal coal, platinum group metals and gold, while oil makes up some 20 percent of imports. The large relative oil price decline should result in a slightly positive trade balance impact and, together with lower maize prices, will dampen price inflation, enabling the SARB to raise rates more slowly.
In South Africa Local developments of particular importance for financial markets were: • the start of the SARB rate hiking cycle; • National Treasury announcing ‘austerity measures’ in its October mini-budget in the form of an expenditure ceiling and imminent tax rises; • major splits in organised labour with the NUMSA expulsion from Cosatu and the emergence of non-aligned AMCU, whose perceived success with its platinum mine strike is fuelling a major recruitment drive from established unions in various other sectors; and • the demise of African Bank Investments, which should serve to reduce the extortionate returns earned by unsecured credit providers in SA, to reorganise the furniture retail industry and to remind bond and preference share investors to consider credit risk. Given these structural changes, 2015 has begun with raised market volatility and our clients’ portfolios are therefore positioned for a very different environment to the one that has prevailed in recent years.
Graph 2 - Falling commodity prices
China’s economy decelerated further Having grown GDP at rates of 8 -10 percent pa for over a decade (slowing to below 8 percent in 2013), China’s growth rate headed towards the 7 percent level in 2014. Growth is likely heading lower as the economy needs to absorb excess capacity, deleverage and rebalance away from fixed investment. China’s property activity slowed in 2014, housing prices declined, and new residential construction fell. Limited fiscal
41
PRACTICE MANAGEMENT
Paralanguage can make or break your practice
Your voice and body language conveys 93 percent of your communication message â&#x20AC;&#x201C; make this message count. By Frances Bailey
42
M
neutral accent. Your tone should be varied and interesting to make it easy to understand and listen to your presentation,” she says.
onique Rissen-Harrisberg, CEO and founder of the Voice Clinic, believes that a strong, steady voice and good presentation skills are essential skills for financial planners. “The voice is responsible for conveying 38 percent of every communication message whereas body language is responsible for 55 percent of the message and the actual content of the discussion only conveys 7 percent of the communication message.”
“One of the keys to success is how one presents oneself to clients. A good voice, intonation and body language express confidence in one’s abilities and help to build rapport with a client. Attending training to improve my speech and body language has in turn helped improve my presentation skills, aided my career in terms of being able to confidently express myself, conduct meetings and present proposals to clients”, says Lisa Beattie, corporate finance associate from Bravura Capital.
The non-verbal message
Using your voice to gain trust
“Among the problems we have identified when assessing financial planners during their initial consultation is that they are wellschooled in financial investment but not as focused on communication skills,” she says. “Yet the way that financial planners build a relationship depends on the way that they communicate. The voice, body language and content all have to be excellent otherwise they are essentially wasting their time. The way they speak, present and persuade will motivate the individual to invest in a certain direction,” she says.
“Studying the body language of the voice is known as paralinguistics,” adds RissenHarrisberg who has been responsible for training the likes of Adrian Gore and other industry thought leaders. “For example, if people speak softly they show that they lack confidence whereas if people speak loudly they seem arrogant and aggressive.
“Financial planners are experts in their field so they may not be aware that concepts that are obvious to them could be foreign to the audience. Presenting to a financiallyeducated audience will be different from presenting to the uninformed audience. For an educated audience, the financial planner will use more sophisticated jargon to show off their knowledge, whereas for the uninformed audience the communication needs to be easier for them to relate to”.
“You need to create an impression that is in accordance with audience expectations using your voice. For financial investors, this image is one of competence and to do this you need to speak with a low pitch, clear resonation and
“Another important point to remember is that (as a financial planner) you are selling an idea, you are selling trust and most of all you are selling a promise. And that means you are actually selling yourself.
Relating to your audience Following on from Wende David’s article on plain language (Anyone Fluent in Mumbo Jumbo – Financial Planner issue 35), RissenHarrisberg emphasises how your register and terminology need to adapt to your audience.
“Make a point of being presentable and professional at all times, take the time to listen carefully to clients, always be well prepared, cut the jargon and find common ground with your clients,” adds Hollard’s Andre Froneman.
Top three tips for a superior presentation 1. Establish credibility by creating a good image both visually and vocally. 2. Relate your facts and figures to the target audience. 3. Create a rapport and feeling of synergy, especially with the more uninformed audience who will be sold largely by the impression you make.
Finally, we leave you with this age-old wisdom: “skill in the art of communication is crucial to a leader’s success. She can accomplish nothing unless she can communicate effectively.” With the actual content of your discussion only accounting for a small percentage of your communication message, ask yourself whether you are satisfied with the message your voice and body language is conveying to clients.
43
REGULATION
Retail
Distribution Review in a nutshell
By David Kop, CFP®, Head: Advocacy and Consumer Affairs, Financial Planning Institute (FPI)
R
etail Distribution Review (RDR) is a review of the regulatory framework for distribution retail financial products to consumers in South Africa, carried out by the Financial Services Board (FSB). RDR was undertaken against the background of a new approach to regulating market conduct in the financial sector.
Desired outcomes Desired outcomes of the RDR are distribution models that: • Support the delivery of suitable products and provide fair access to suitable advice for financial customers; • Enable customers to understand and compare the nature, value and cost of advice and other services intermediaries provide; • Enhance standards of professionalism in financial advice and intermediary services to build consumer confidence and trust; • Enable customers and distributors to benefit from fair competition for quality advice and intermediary services, at a price more closely aligned with the nature
44
and quality of the service; and • Support sustainable business models for financial advice that enable advisor (written as advisor in the RDR paper) businesses to viably deliver fair customer outcomes over the long term. When considering the desired outcomes, it is encouraging to see the value of financial advice and the need to ensure that financial advisors will be able to earn a living in their chosen profession.
55 proposals On 7 November 2014 the FSB released the RDR discussion paper, which contained a review of the current landscape, risks identified and 55 proposals for future regulatory policy. The proposals are split into the following broad categories:
1. Financial advisor services (Proposals A-J) 2. Financial advisor relationships with product suppliers (Proposals K to GG) 3. Financial advisor remuneration (Proposals HH to CCC)
Financial advisor services Instead of the definitions we currently have in FAIS for Advice and Intermediary Services, RDR seeks to implement an activity-based approach to defining advice and intermediary services. Services provided by the financial advisor will be categorised into services to the customer, services connecting product suppliers and customers and services to the product supplier. The services identified are graphically represented below.
Financial planning defined What is key for the Financial Planning Institute (FPI) is that financial planning is for the first time getting recognition as a service provided to customers. This is an exciting development and one that will eventually aid customers in understanding financial planning as a service. In the RDR paper the definition for financial planning, taken from the FPI website, reads: “Financial planning is the process of structuring and arranging your financial resources to meet your life goals. These can be as short-term as saving for a car, to long-term planning for retirement. Financial planning aims to provide financial certainty and clarity on your current and future financial wellbeing.”
It is, therefore, important to note that financial planning advice is not relating to product advice but is rather providing advice around a customer’s goals and while a financial product could be a solution it will not always be a solution. Perhaps the easiest example to demonstrate this is a client who approaches a financial advisor for an investment recommendation after inheriting R 1 000 000. A financial advisor, under FAIS, would perform a financial needs analysis, taking into account investment objectives and a risk profile in order to recommend a suitable product for investing the R 1 000 000 A financial planner, however, would complete a financial plan and include a net worth analysis. The recommendation coming out of the financial plan may be to use the lump sum to pay off the customers bond. The savings on the bond payment would then be allocated to meet the customer’s investment goals. In addition to looking at services provided by financial advisors, the proposals also call for standards to be set for product aggregation services, lead generators, and non-advice distribution models. These standards have not however been set, and more industry consultation will follow.
Financial advisor relationships with product suppliers
In all the FSB sessions that I have attended
Diagram: Activity-based approach to defining advice and intermediary service Services to Customer
Services connecting product suppliers and customers
Advice Sales execution
Service to Products Supplier Outsourced functions Binder functions
Financial planning Ongoing maintenance/ servicing Up-front product advice Platforms Ongoing product advice
Aggregation Services/ referrals
Diagram is an extract from FSB’s RDR paper.
Other outsourced functions
and also the roadshows hosted by FPI around the country, this is probably the area that causes the most debate. RDR proposes that a financial advisor will only be able to use one of three job titles (with some variations due to specialities in short-term and health). These titles will be, tied adviser, multi tied adviser and independent financial advisor. The intention of having only these three titles is to ensure that the customer will be in a position to clearly understand the services being offered and the capacity in which the financial advisor is acting. But what exactly do these titles mean.
Independent financial advisor (IFA) Let's start with the one where there is probably going to be the most change. In order to use the IFA title post-RDR, a financial advisor will need to prove independence based on two tests: 1. Product and product supplier choice Under this test, the IFA would need to prove that they offer a sufficient number of products through a specified number of product providers. The number of products and product providers is not yet specified, and the FSB has invited comments on this. In addition, the nature of remuneration may also play a role. Lastly, the proposal seeks to understand if a once off review of the number of product suppliers is sufficient or if the IFA will need to show products/product suppliers actually recommended. FPI is of the opinion that it is not the number of product suppliers that indicate independence, but rather the process used in selecting providers to transact with. This process should demonstrate that a review, including a due diligence, is done on a majority of the providers in the market on an annual basis 2. Relationship with product supplier This test will look at the level of influence that a product provider has over the financial advisor. Criteria such as the contractual relationship, targets, ownership structure, special remuneration structures product supplier restrictions and other
45
REGULATION
factors will be considered when looking at the level of influence.
Tied adviser This is one of the simplest titles and refers to the tied agent employed by or mandated by a single product provider or product provider group. The major change in this area is that post-RDR tied advisers will not be allowed to give advice on products outside of the group to which they are tied. This will be implemented by a change to the Long term Insurance Act that allows insurers to enter into agreements with each other, whereby their tied advisers can render intermediary services on the other insurerâ&#x20AC;&#x2122;s products.
Multi tied adviser In the case where a financial advisor does not meet the criteria to be an IFA, but is also not a tied adviser they will be known as a multi tied adviser. The intention of this title is to accommodate financial advisors who do not meet the high criteria to be an IFA
Financial planner In addition to using one of the three titles a financial advisor may also use the title of the financial planner if they offer financial planning services. A new set of conduct standards will apply for financial planners.
As FPI, we are pleased to see that financial planning is getting the attention it deserves. With financial planning being recognised as a service, it will no longer be possible to disguise product advice or selling as a financial planning service. The ability to use this title will, therefore, distinguish the true financial planner from someone only selling products. The balance of the proposals in this section relates to disclosure and product supplier responsibilities.
Remuneration The remuneration proposals are summarised below based on the product type
Investment products Commission will be banned on investment products. A financial advisor will need to charge the customer advice fees. If the customer agrees, the payment of
these fees must be facilitated by the product provider. The customer will have the right to cancel the fee deduction if ongoing service is not provided. An example will be where a client invests R 100 000. The customer and financial advisor can agree on an upfront fee of 3 percent of the investment and 1 percent of assets under management ongoing. The full R 100 000 will be invested. The initial 3 percent will be deducted from the product and paid to the financial advisor. Likewise, the ongoing fee will be deducted and paid.
Long-term risk products (life policies) Commission will still be paid on life policies, however, the upfront portion will be limited to 50 percent of the total amount. Where a policy is replaced no commission may be paid on the replacement policy, however, an advice fee may be charged to the client.
Short-term risk products The as and when commission and service fee will continue, however the rates may be reviewed.
Binder agreements The fees payable under binder agreements will be capped.
Rebates The practice of asset managers paying rebates to linked investment service providers (LISPs) will be prohibited. FPI is particularly happy to see that where commission will be banned or reduced there will be an obligation on the product provider to demonstrate that the cost to the customer is adjusted, and the additional profit is not just absorbed by the product supplier.
Implementation timeframes The comment period on the paper closed on 2 March 2015. Phase one of implementation is planned for 2015, while the balance of the proposals will be implemented in 2016 and 2017, once the Financial Services Regulation Bill has been signed into legislation.
Conclusion There are many positive aspects to the RDR paper which will elevate the financial planning profession and provide fair outcomes to customers.
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REGULATION
2015
Date set for
SAM Pillar 2 interim measures
The governance and risk management framework for insurers has been amended and published in a Board Notice in the government gazette, and will take effect from 1 April 2015.
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he Financial Services Board (FSB) also published the comments received on the draft framework, explaining whether comments have been incorporated, and the framework amended or if the FSB disagrees with the comments. This governance and risk management framework is commonly known as the Pillar 2 interim measures within the Solvency and Assessment Management (SAM) framework, which comes into force in totality in 2016. Nico Esterhuizen, SAM programme manager at the South African Insurance Institute, says that the Pillar 2 deals with broad governance requirements of insurance companies; the requirement to formally adopt and implement risk management systems and internal control systems. It deals with issues such as specific requirements on the composition of a companyâ&#x20AC;&#x2122;s board of directors, the identification and monitoring of current and emerging risks to the company on an enterprise-wide basis, and internal control systems including establishing the four control
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functions; risk management, compliance, internal auditing and actuarial functions (for life insurers). Companies have been aware of the coming regulation for some time, and many have made changes in line with what they expected to come of the new regulations. However, some companies have been watching the development of the framework and waiting to make changes when the final regulation was published. Esterhuizen says that the requirements of the framework, while very onerous for insurers, are achievable for companies, however, timelines are tight. Because the framework was published in December 2014 and the implementation date is April 2015, companies may only have one board meeting scheduled for the quarter, and there is a significant amount of detail that needs to be put through the board. â&#x20AC;&#x153;There is the option to apply for an extension with the FSB, but they have made it very clear that companies cannot apply for this
extension after 1 April 2015,â&#x20AC;? notes Esterhuizen. Esterhuizen explains that the latest and final version of the governance and risk management framework contains certain contemporary and challenging requirements, for example that the chairperson of the board of directors of an insurer must be an independent director. If a company cannot comply with this, it must inform the FSB and appoint a lead independent director. Certain Pillar 1 interim measures of SAM, focusing on balance sheets and capital adequacy requirements, has been effective since 2012 for the short-term insurance industry, and Pillar 3, disclosures and reporting interim measures became effective in 2014; all designed as stepping stones to the final SAM requirements in 2016. The next substantial regulatory change expected is the release of the Insurance Bill (draft expected for comment in March 2015), which will replace the Short-term Insurance ACT and the Long-term Insurance Act.
Retiremeant:
Get more meaning from your money As a financial planner, you will know that preparing clients for retirement – and helping them through the transition – is about much more than money. By Kim Potgieter
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itch Anthony, author of The New Retirementality and Your Clients for Life, says, “Retirement is a merging point like no other. It is where the horizontal equator of personal means crosses the vertical axis of personal meaning. The difficulty and impact of this crossing are difficult to exaggerate.” Are your clients daunted by the prospect of retirement? Can they envisage a life beyond work? Do they have dreams for their future, or do they see it as an end? Kim Potgieter, CFP®, has a passion to see retirees living significant lives… and believes that your finances are closely entwined with the dreams you have for your life. In her book, Kim shares actual stories of clients who have consulted with her as a financial life planner on the retirement transition; she brings an inspirational perspective to preparing for retirement: all the money you have spent your life earning should be giving you the life you have always wanted. This book is packed with practical exercises and anecdotes to help you discover that the real value of a plan is in merging your money with your life goals. As a financial planner, Kim realised that life planning combined with financial planning is the secret to a meaningful retirement.
Book Review Mitch Anthony lends his support to her goal: “I’ve never met anyone who cares as much about the money/life dialogue as Kim does. She is relentless in her quest to make the discussion more meaningful and more lasting. This book is evidence of her quest… and I love what she is bringing to you the reader. She's not talking at you – she’s living it and sharing it with you.” Andrew Bradley, CFP®, CEO of Old Mutual Wealth, comments: “Kim tells a very personal and powerful story of discovery. She is an incredible person, with a unique breadth and depth of knowledge and
experience, with an unwavering desire to live her passion and purpose. In the book, she shares her own story and shows us how she works with her clients so that they can get the same meaning out of their life. Reading the book will help you in the same way.” This must-read book for financial planners is available to two FPI readers who mail their postal addresses to kimF@charteredwealth.co.za, with “Retiremeant book prize” in the subject line. Should you wish to purchase the book, call Anne at 011 502 2800.
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In memory of
Margie Cut, CFP
®
It is with deepest regret that we announce the passing of Margie Cut, CFP®, who passed away after a short illness.
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argie was involved in and contributed to the employee benefits sector for more than 30 years. She was actively involved with FPI and served as the chairperson of the FPI Employee Benefit Competency Committee as well as a member of the Gauteng Regional Committee.
About Margie Margie was born in Edenvale and her parents relocated to the West Rand when she was six. She matriculated from Jan Viljoen High School in Randfontein in 1979. She completed a postgraduate diploma in financial planning with the University of the Free State in 2008 and an Advanced Postgraduate Diploma in Financial Planning specialising in Employee Benefits in 2009. She later completed an AFS Leadership and Management for Results course in 2010 with the Gordon Institute of Business Science (GIBS) as well as the required Regulatory Examinations.
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She initially became involved in pension fund administration in 1986 when she joined Allianz Life Ltd. as secretary to the pension funds manager. She was promoted from administrator to supervisor within a short period of time. From Allianz she moved to AA Life as deputy manager and then to Fulford Brothers as group portfolio manager in 1990. One of her responsibilities at Fulford Brothers was to act as principal officer to a number of clients. From Fulford Brothers she moved to Alexander Forbes as an associate director and later moved to Jeremy Gallet and Associates as pensions manager where she was responsible for the overall day to day administration and also headed up the finance team responsible for annual financial statements. Part of her experience with Jeremy Gallet was also to computerise all the funds under administration. She was also responsible for the company’s overall
IT needs and acted as principal officer to a number of clients. Eventually, she moved to Robson Savage (Pty) Ltd where she became involved in consulting to a large number of pension/provident and retirement annuity funds and also acted as principal officer to a number of funds including the Robson Savage Staff Pension Fund and the Mondi Provident Fund amongst others. Margie later moved to Absa Consultants and Actuaries as a client services manager in the consulting area where she consulted on a number of funds. Some of the funds that she consulted with over the years include: JSE, Mondi, Steinmuller, Schneider Electric, University of Johannesburg and Mercedes Benz. At the time of her passing, she was a financial planner at Portfolio Administration Services (Pty) Ltd. Our hearts go out to her husband, Peter Cut, CFP®, and the rest of her family and friends. May her soul rest in peace.
Become an FPI Approved Professional PracticeTM and stand out as a role model for financial planning in your community.
As an FPI Approved Professional PracticeTM, your business would be distinguished as a professional financial planning practice offering financial services of the highest standard. If your core business is financial planning, and you have a minimum of four full time financial planners or advisors, then send an e-mail to membership@fpi.co.za and use ‘Professional Practice’ in the subject line.
Contact us on 086 1000 FPI (374) or visit www.fpi.co.za CFP®, CERTIFIED FINANCIAL PLANNER® and are trademarks owned outside the U.S. by Financial Planning Standards Board Ltd. The FPI is the marks licensing authority for the CFP marks in South Africa through agreement with FPSB. Terms & Conditions apply.
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FCB10016131JB/E
HOW MUCH IS ENOUGH TO TAKE THE SABBATICAL OF YOUR DREAMS & STILL INVEST OFFSHORE?
Let Old Mutual Investment Group deliver on your ‘enough’ by putting its 169 years of investment expertise to work. Everybody’s talking about a recession but while the economy contracts, the cost of everything else expands. You also need to plan for that sabbatical and build yourself a robust investment portfolio, so when you retire you have enough. How much is enough? At Old Mutual, we’ll help you work out exactly how much is enough for you. Then Old Mutual Investment Group provides the investment solutions to deliver on your goals. Solutions like the Old Mutual Investors’ Fund that has beaten inflation by 10.9% over the past 40 years.* Speak to your Financial Adviser today about how this fund can help ensure you have enough to do great things.
Call 0860 INVEST (468378) or visit www.howmuchisenough.co.za
ADVICE I INVESTMENTS I WEALTH
Old Mutual Investment Group (Pty) Limited is a licensed financial services provider. Unit trusts are generally medium to long-term investments. Past performance is no indication of future performance. Shorter-term fluctuations can occur as your investment moves in line with the markets. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. *Performance as at 30 September 2014. Since inception1966.
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