Monthly Archives: November 2016

how to find consultant in umbrella funds

Sanlam Employee Benefit’s head of special projects David Gluckman penned the following in response to a recent article published as part of a Sygnia marketing campaign.

Consistency is the only currency that matters” is a well-known slogan of one of South Africa’s leading asset managers.

At the other end of the spectrum, a new player entered the commercial umbrella fund market less than 4 months ago proudly announcing “one all-in fee as a percentage of assets under management” and illustrating projected cost savings to clients adopting this model versus the competing leading commercial umbrella funds. Besides some fees such as costly hedge funds being over and above the so-called “one all-in fee”, importantly all these projections assumed there would be no need to separately pay for the services of a consultant. Today the message is slightly different and we should now understand that these projections were never accurate in that the true intention was always to leave “financial room for the employment of independent consultants.”

But the new player does raise some valid questions as regards the most appropriate governance model for commercial umbrella funds. These questions are important given the massive growth in this market (see graph below).

Two recent experiences highlighted to me that a very important question to explore is what will in the future be the role of the consultant in commercial umbrella funds.

  1. One highly respected independent consultant to a large book of Sanlam Umbrella Fund clients (and who also has many clients participating in other major commercial umbrella funds) raised the issue with me at our 2016 Sanlam Employee Benefits Benchmark Symposium, and said he is worried about the sustainability of his business given the increasing power of the major commercial umbrella fund sponsors.
  2. Various senior Financial Services Board officials also raised the matter in an April 2016 workshop with Sanlam Umbrella Fund representatives, essentially asking whether consultants introduce an extra and unnecessary layer of costs. They wanted to explore whether Sanlam could instead provide these advisory services thus savings costs for the ultimate clients of umbrella funds being the members.

The Sanlam Umbrella Fund governance model was structured consistently with thinking as set out in my paper entitled “Retirement Fund Reform for Dummies” presented to the Actuarial Society of South Africa as far back as 2009. In that paper I argued:

The role of intermediaries (aka consultants) requires particularly close scrutiny. I would argue their role is a particularly vital one if we want to create a culture of effective competition.

Rusconi argues “In the institutional space, however, savings levels are less likely to change and marketing is more about attracting another provider’s customer than about motivating additional savings”.

Such arguments emanate from the premise that intermediaries do not add value to consumers – an assertion that I would challenge. My view is that there are both good and bad intermediaries, and we need to find a model where market forces will push in the direction of forcing intermediaries to continually “up their game”.

How to increase your wealth

I am regularly asked for advice by younger people looking for a sure-fire way to build their wealth. They are often surprised when I tell them to invest more time and money in themselves and their human capital. Historically, people who do this are likely to create significantly more wealth over their lifetime than those who don’t. It is obvious that you need to accumulate investment assets but you also need to ensure that you earn income at an increasing rate over your career. The best way to do this is by investing in yourself.

What is human capital?

Human capital is the combination of skills, knowledge and abilities you have that will enable you to generate income over your working life. Nearly all of us have an ability to generate some income but very few people consistently invest in themselves so that they can increase their earning potential over time. According to the Federal Reserve of San Francisco, university graduates generate R16 million more income over their careers than non-graduates. This might give some context to the #feesmustfall campaign in South Africa.

If you choose to invest in yourself, you need to ensure that your skills and knowledge remain relevant and adaptable to changing economic conditions and an evolving business environment. You should regularly review whether you need to add to your skills or knowledge-base. Additionally, you need to be honest enough with yourself to be able to decide if you need to change careers if you are in a dead-end street. For instance, I would not consider newspaper printing as a long-term career option!

Specialise but not too much

Some careers reward those who specialise but one should always be careful of becoming too narrowly focused in your career. For example, deciding on an academic career researching the mating habits of albino penguins in the Southern Cape might not ensure a long-term income. However there might be less risk in being the orthopaedic surgeon who specialises in surgery of the shoulder in South Africa. Many young people strive to be a manager in a large corporate. This might be the most risky career choice one can make. Managers are essentially generalists and are often the first people to be fired in a merger or downsizing. If you plan to work in a corporate, you might do better focusing on being a revenue generator or product specialist.

Not only for academics

If you are not academically inclined or you have no interest in tech, you could always consider specialising in old world industries. There is a massive shortage of plumbers, electricians and general handymen. Now that more people work in services industries, there are many fewer people who can work with their hands. This provides an ideal opportunity for reskilling yourself if you have the inclination.

Advice worth the cost of finance

In this advice column Riette Coetzee from Alexander Forbes answers a question from a reader who wants to know whether he really needs a financial advisor.

Q: I will be going on pension at the end of this year at the age of 65. I have no debt and my home is paid for.

I have been involved with four different financial advisors, but cannot get away from the exorbitant costs that are involved. I have my pension and a separate retirement annuity (RA) and about R2 million in cash which they all would love to invest for me. I am left with the impression that they could invest my money to earn about 1.5% per annum more than I could, but since their fees will be 1%, it hardly makes it worth my while.

I now seem to think that my best option is to take my R500 000 tax-free allowance from my pension and draw down the minimum of 2.5% on the rest. If I subsidise myself from my cash reserves, I can survive for the first six years of my retirement while still leaving the rest of my pension to grow. I would not even have touched my RA yet.

However I’m still wondering if I  would be better off investing the cash amount through a financial advisor?

To answer this question, we need to take a step back. Before you can decide what you want to do with your money, you need to know what you want to do with your retirement.

One person’s retirement dreams are very different from another’s. For some it is to slow down, but for others it is to do the things that your working life never allowed you to do.

At your age a financial plan should support your remaining life plan and lifestyle. Your  financial plan is one component of a flexible life plan that will need to see you through from your mid 60s into your late 90s.

Bear in mind that if you manage your investments yourself, you need to set aside the time to monitor your portfolio and be disciplined to adjust to different market conditions. You also have to keep your emotions in check when markets are volatile. These demands and complexities of successful investment management can prove challenging, even for the most informed individual investor.

People everywhere are also living longer. You therefore have to consider the long-term implications of managing risk, your money, tax and liquidity.

In addition, we live in very uncertain times. The IMF has cut South Africa’s 2016 growth forecast to 0.1%, foreign investment in the country has dipped to its lowest in ten years, a credit downgrade is still on the horizon, and there are still uncertainties around Brexit and Chinese growth, to name only a few. Getting the right financial advice to manage these risks is more important than ever.

A professional advisor will help you set up different investment strategies to achieve certain financial goals and provide assistance and guidance with retirement and estate planning. Competent financial advisors are knowledgeable about financial markets, investing landscapes and tax implications.

How to shares after retirement

In this advice column Jamey Lipschitz from Sanlam Private Wealth answers a question from a reader who wants to know what to do with his share portfolio when he retires.

Q: I have a portfolio of blue chip shares worth around R7 million. I am 63 years old and will have to start using some of my savings to sustain me and my wife in three years time.

My concern is whether I should stay in shares or should I sell and invest in something else? I am worried about what the markets are doing, and need some peace of mind.

I will need around R700 000 a year, and I have some annuities as backup.

There are a number of important issues that someone in this position would need to consider.

Firstly, South Africa and most of the world is in a low-yield environment at the moment. Some countries are actually providing a negative yield on cash investments for the first time in history.

This has forced investors into higher risk asset classes like equities and property for the relatively higher yield they provide. At the same time, however, this has pushed up the valuations of these asset classes and many are now considered expensive. In turn, the relative yield on these asset classes have come under pressure as the prices have increased.

Secondly, even the current situation notwithstanding, equities are considered high risk compared to other asset classes. It is therefore important to establish what percentage exposure to equities is appropriate based on an investor’s risk profile and income requirements.

There are periods when equities do not perform and one must be able to stay invested for the long term and not be a forced seller for income purposes. This will ensure that one derives the full upside and value.

Thirdly, the dividend yield on South African equities is currently approximately 3%. That means that a R7 million equity portfolio would yield around R210 000 per annum. That is a shortfall of R490 000 every year on the R700 000 income required.

There are certain equities that provide a higher yield, but making changes will potentially incur capital gains tax and brokerage charges, which will lower the overall value of the investment. One must also consider the 15% tax on dividends when calculating the income that one will be receiving.

Fourthly, other asset classes like preference shares and bonds provide a higher income yield, however, their potential for capital growth is generally more limited than equities over longer periods. Bonds (fixed income) are also taxed at the investors’ marginal rate (potentially 41%) as opposed to the 15% tax on dividends for preference shares and equities.