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Sunday, February 8, 2015

Caveat Intermediator

Loosely translated this means “beware the intermediary”. In the old world of commercial activity the Latin maxim read; “caveat emptor” let the buyer beware. This rule, finely tuned, through millennia of commercial trade and interactions has been thoroughly trashed by the rising tide of consumerism and political expedience. Legislators, anxious to prove that they are “doing something” for their constituencies fall over each other to outmaneuver their global fellows in passing increasingly uncertain and unworkable rules for the commercial world.

It was enlightening to read recently that, in Australia, one of the last remaining professional indemnity insurers abandoned the provision of cover for our Australian Financial Planning counterparts;

“A recent product review has determined that the financial planners segment of the professional indemnity market is no longer within our risk appetite,” Suncorp Commercial Insurance executive general manager, commercial portfolio and underwriting management, Darren O’Connell told ifa (an Australian Intermediary Magazine).

Sound business activity requires certainty in dealing with markets. Uncertainty results in service providers especially the PI insurer leaving the market. In this regard the provision of financial advice in South Africa has become fraught with uncertainty. In addition to PI suppliers and advisers themselves leaving the market, uncertainty also results in escalating disclosures to clients to secure certainty. This renders the paperwork more and more complex thus negating the advice given.

Consider the recent ombud “case study”, where a financial adviser was forced to settle R100,000 arising from an incorrect calculation of a tax lump sum. The Ombud stated;

We decided that although the provider was not a tax practitioner, he ought to have known of the tax implications, given the information furnished by complainant”

The ombud.goes on to some useful lessons to the planners:

  •  "Relevant information should be sought prior to providing financial services to clients. ie you have to insist that you customer tells you everything or insert a cause disclaiming liability for what he did not tell you.

  •  "Limitations on the part of the provider should be clearly conveyed to clients. In other words, insert significant disclosures as to how stupid you are.

  • "Tax implications relating to withdrawal of lump sums at retirement should be discussed and verified from SARS". Be aware also that you will not live long enough to secure a response from SARS. Your most useful feedback from SARS in these circumstances is that the client “should visit our offices in person” This you can then convey to your client with suitable documentary proof.

  • "All matters are decided on, based on documentary evidence provided".  Another lengthy disclaimer related to the first point.

The most important advice to be implemented by Financial Advisers as a result of this settlement and its related advice is; 

Don’t ever calculate an accurate figure in presenting such advice to your clients. Always at least precede any figure with the words “approximately” or “about”. Always add a paragraph stating that;

“all figures in this document are to be regarded as a “best guess”. They are finally determined by SARS, another financial institution or other entity over whom we/I have no influence or control. I/we furthermore usually have no independent way of determining whether the figures finally calculated by these entities are accurate or whether they are the figment of some corporate flight of fantasy by an external financial services provider. If they are projected any further than 6 months into the future or are linked to the charges levied by administrators they are immediately to be regarded, at best, as possible approximations of an uncertain future”.

A paragraph like this will render the advice you provide your client with sufficient vagueness to ensure that the advice document is meaningless but more importantly can never be used to extract a settlement of the kind described above. Your client will then, correctly, question what it is that you are actually responsible for. You can then advise that you are responsible for the guesses relating to his very long term chances of adequately funding his retirement in 25 years’ time, but of course there are some caveats that need to be considered. (This article was originally published in InvestSa)

Saturday, April 12, 2014

10 Financial Hints

.1.  Make sure that your financial products are well priced, remember that like any business there is huge competition in the financial service’s industry. Ask your financial planner to review the costing of all your life, disability and investments.

2.   Remember that the financial services that you bought online or “direct “ are not necessarily the cheapest or appropriate to your needs have a financial advisor look at them for you.

3.  Consolidate your debt aggressively with the lowest cost provider. If you have capacity in your accessible bond account use that to pay off your credit card and other more expensive debt.

4.      Say NO to the e-mail loan offers. They are offered at very expensive interest rates.

5.      Shop your short term insurance around, but be careful of the cover you are really buying.

6.    Remember that your registered adviser has to provide you by law with the most appropriate advice. This is your insurance policy.

7.    Consider consolidating your accumulated savings, like everything in life you get discounts for the size of investments you make.

8.    Retirement annuities Rand-for–Rand are by a long way the most efficient investment available use them aggressively

9.    Pay off your credit card in full every month. It is without doubt the most expensive debt you will ever have.

10.  If you are in financial difficulty cut out “wants” in favour of “needs” Gucci is a want and if you are in trouble a new handbag is not even a need.

Financial adviser versus investment manager published in Investsa

My wife and I were in a supermarket when I spotted the proverbial “little old lady” reaching for a pack of sugar. Having just put sugar in our basket, I knew that the pack that she had picked up was more expensive than the other brand. I also knew that “sugar is sugar” and brand differentiation generally has nothing to do with quality, so it’s only about price. I showed her the other cheaper brand and replaced the one in her trolley. She thanked me must profusely and went on her way.

On reflection, what I had just done is not dissimilar to my activities as a financial adviser. Financial advice at one level is ‘assisted shopping’. In a much more complex financial services environment our task is to select the most appropriate financial product or service for our client drawing on our extensive skills and industry experience and naturally avoiding conflicts of interest. There is another broadly equivalent ‘assisted shopping’ service provided by upmarket image consultants. These advisers analyse the industry you operate in, your target audience, your skin and hair colouring, and your body shape, (‘portly short’ in my case!). They then assist you to identify appropriate work and business clothing to suit these attributes.  Immediately, one now says; what is the role of the manufacturer of sugar on the one hand and clothing on the other in the transactions discussed? The answer is “none” A clothing factory in Goodwood in Cape Town would manufacture a huge range of purple and yellow shirts for a targeted broad market, but the image consultant may never select one of these their clients. Does it mean that yellow and purple shirts should not be made? The answer is absolutely not, unless of course the shirts don’t sell at all.

So the role of the financial planner is to analyse the needs of the client and provide the most appropriate product ranging from risk to short term and long term investments. In the investment world the Financial Adviser is not an asset or investment manager, the role is that of determining an appropriate asset mix in relation to the clients’ required returns and time horizons, putting the resultant asset mix to the client and discussing the anticipated volatility. Once the client fully understands the volatility the task is to place the funds with the most appropriate asset manager. FAIS of course has had a huge impact on the asset class selection. Fearful of repercussions, Financial Advisers have erred towards the more conservative balanced funds rather than pure equity or specialist funds. Whether this centre seeking activity in limiting risk, even for younger clients with many decades to go to retirement, is good for the client is still to be seen over time. So what of the role of the asset manager? Well its role is to put the product on the shelf. The asset manager generally is in no position to identify whether their fund is ‘good’ for every client, and indeed it would be most unfortunate if asset managers were to attempt to offer a one size fits all offering. The job of determining whether the purple and yellow fund is good for a particular client is the task of the Financial Adviser who has undertaken a proper needs analysis.

I sat bolt upright in bed that night!; “What if the little old lady was a stage two diabetic, short sighted and looking for flour? Did I have an obligation in terms of the Assisted Shopping Services Act ?”  


Sunday, August 5, 2012

Big Cheese's eating big Mac's

This month, I cover two snippets of broad interest, the maximum value for which a cheque can be written and an update on the Big Mac index with a political twist.

According to the Payments Association of South Africa (PASA); yes there is an Association for everything! With effect from 16 July 2012 The South African Reserve Bank has reduced the maximum value for which a cheque can be written. The current maximum value per cheque is R5million. This will be reduced to R500 000. One of the main reasons for the reduction is risk related. Less than 1% of cheques in the industry are for values above R500,000, yet these high value cheques account for more than 40% of the total industry’s fraud losses. By reducing the cheque limit, this will directly curb cheque fraud.

In general, there has been a continuous decrease in cheque volumes (24% per year), which can be attributed to the number of different electronic payment options available. Electronic payments are safer, faster, cheaper and increasingly preferred by banks’ clients. Reducing the cheque limit is not a strategy to do away with cheques. Further analysis by banks is required before any major decision on the future of cheques is taken.

Last year at about this time I wrote about the Economist’s Big Mac Index. Although it seems strange, the index does provide a good indicator of the relative ‘real’ exchange rates of various currencies. One can determine whether a particular currency is under or overvalued by reference to the globally standardised Big Mac hamburger. Surprisingly also, the Big Mac has primary and secondary cost inputs which cover a big spectrum of an economy. This includes the cost of packaging, agricultural products, property rental, labour, and delivery costs. Of course one of the challenges is evaluating how the currency under or over valuation relates to the buying power of individuals in each country. To properly compare, one would need to count how many Big Mac’s a person in a directly comparable job could buy, say, per day with their salary in these various economies. The task becomes more complicated by, for example, different tax rates and in getting some sort of standard job description. I started by looking at secretaries which seemed to be a fairly universal job category, but one quickly gets bogged down in the responsibility scales within a secretarial function. In the financial planning world, planners in highly regulated countries earn more, because of the risk they run, than in less regulated economies, and so on.

The Economist and the International Business Times came to my rescue once again, by comparing the salaries of the leaders of various countries. Given that, at least politically, these leaders are at the top of the food chain (the buck stops there!) the work task is a little more uniform. Arguably, the heads of bigger countries should earn more than smaller countries, but as you will read this is not so. Below for your casual interest is the number of Big Mac’s each leader could buy per day in his home country with his salary.

There are a huge number of caveats here so be aware, some heads of state don’t pay tax, the published salary is just that, it may not include the cost of perks or the overall cost of running the head of state’s household. The year applicable to the salary may not be consistent. The ability of some of the Heads of state to consume this many burgers a day has not been assessed.

Monday, June 18, 2012

ETF's and Hedges, derivatives with other names

We cannot keep mulling over Europe; will Greece leave the Euro? Will it stay? Can Germany fund all of this? What about the Greek Elections? All that can be said is, as best it can, the market has absorbed all of these questions and the underlying factors. So, as the experts say ‘it is already priced in’.

A lot has been written recently about ETF’s (Exchange Traded Funds) and now about Hedge Funds in an excellent article in the FM by my old friend Stephen Cranston. These are both strong competitors to traditional ‘long only’ equity funds.

In the case of hedge funds as Stephen says, many accuse them of being “a remuneration policy (for fund managers) masquerading as an investment”. Hedging is, in fact, a strategy adopted by managers to limit the downside risk in a conventional portfolio and many would argue that this is where it should stay; Hedging is not an asset class. The questions to ask are; why would you invest in a hedge fund? What are you hedging against? How does one know what the manager of the hedge fund is hedging against? Finally, there are the fees involved, usually 2% per annum and 20% of the profit earned. Are the fees worth the result?

ETF’s have also been in the headlines recently. These are, normally, passive funds which simply follow an index. Put simply, this means that the manager buys the correct percentage of the underlying shares to match the index that it follows. These are a rapidly growing class of funds. Of course, weirdly, these funds could not survive if there were no traditional managers. Take for example an EFT that tracks the ALSI 40 index in South Africa. The components of this index are determined by the consolidated views of active managers and market participants. Their views, in turn, are influenced by the skills of the executives in those listed companies in both enunciating their future prospects and more importantly delivering on them. If the whole market were to consist of ETF’s then the components of these indices would remain static, regardless of the success or otherwise of the underlying company. This status would continue until the underlying company mysteriously disappeared, through delisting, insolvency or a takeover and then another company would mechanically move into the vacant slot. Thankfully, since the market consists of a blend of decision makers; stock brokers, private individuals and other professional managers, it is unlikely that this situation would arise. The ETF therefore ultimately reflects the average views of all these players.

ETF’s have become critical components of what is known a core-and-satellite approach to asset allocation. Sasfin itself uses this model in its retail and retirement fund portfolios. Here the manager uses an ETF as a cheap core portfolio and arranges for high conviction active managers as a high performing satellite which will over time cause the whole fund to outperform the index. The exclusive use of ETF’s as an alternative to active asset management is however questionable. It is the financial equivalent of flying in an aircraft on auto pilot with no pilot! In a case study prepared by Magnus Heystek, three mainstream funds (and I suspect many more) have performed comparatively better than the previously high flying SATRIX40. Whereas the SATRIX40 has returned 27% since June 2007 the Investec Opportunity Fund achieved 57.4% and the Stanlib Balanced and Aggressive Income Funds achieved 24% (with significantly lower volatility) and 58.7% respectively. This is not because SATRIX 40 is worse than these funds, but because the South African Market reflected by the top 40 shares is very exposed to commodities stocks. So understandably, when resources/commodities do well then Satrix 40 will do well, however active managers would never hold the level of commodities in a properly balanced portfolio, this would present too much volatility.

The bottom line is that a portfolio investment in ETF’s has to be as actively managed as any other asset. The truth is, however, that no-one is actively managing exposure to ETF’s. This means over time investors will land up with seriously imbalanced portfolios with an investment result, good or bad, arising out of luck rather than good planning.

Thursday, May 10, 2012

Global issues and Domestic Mandates

OK, here we go again! As I am writing this the Greek government is unable to manufacture a coalition and the French have, unsurprisingly, moved to elect a President that has promised no/lower austerity measures. Yesterday the world stock markets trended lower by between 1 and 2% as market traders tried to work out the consequences of these developments.

As an aside, one thing that has not seen a lot of airtime is that the politicians in many of these countries are cutting back on social pension benefits. This is because pensioners are a soft political target. It happened here in South Africa as well, civil servants got an 8,6% increase and social pensioners only 6%.

Amongst all the negative headlines I spotted this one “Warren Buffet says he’s buying stocks amid market dip”. There is a simple rule being followed by Warren Buffet; one must buy assets when they are relatively cheap, not expensive. Although we all know this is true when shopping at a supermarket, it also is true of investment assets like shares, listed and other property, Bonds etc. So any market weakness is a time to be buying not selling. The real skill of Warren Buffet and fund managers in general lies not in whether to buy but in what to buy in times like these.

Research done mainly in America but also in the UK shows that somewhere between 80 and 90% of the performance of one’s investment portfolio whether it is positive or negative is generated by the asset mix of the portfolio. These assets are; Property (usually listed), Bonds, Cash and Equities (other than Property). So if your portfolio falls by, say,10%, somewhere between 80 and 90% (8-9%) of that loss relates to the asset mix that you chose, the rest (1-2%) has to do with market timing (the decision by a fund manager when to buy or sell a particular share) and the shares that a fund manager bought (stock selection).

There is a very big ‘however’ or irony in the statement above. The decision about asset mix (how much in Bonds, Cash, Property and Equities) relates to each individual’s financial lifestyle requirements weighed up against how much volatility he/she can tolerate. No fund manager makes these decisions for you. You decide your lifestyle and our task as your adviser is to select the most appropriate fund manager/s to manage that targeted mix of assets.

A word (or two) about Mandates

One of the overlooked factors in selecting a fund is answering the question; What is the fund’s mandate? The mandate is a statutory and/or contractual requirement that reflects the agreement between the Fund manager and the investor. So for example, a unit trust that has an equity mandate usually may not hold less than, say, 90-95% in listed equities. The important thing to realise is, even if the fund manager of this fund is convinced that the equity market is about to collapse he/she may not disinvest from the Stock Market or he/she will be in breach of his/her contract (Mandate) and have broken the law.

Because of the above facts, a number of fund managers have made funds available with a broader mandate. These are the so-called “flexible” or “managed” funds. In these funds the manager’s mandate allows a shift in the asset mix. The manager can move between property, equities bonds and cash. So these funds are generally less volatile, but they still do not link with your own targeted financial lifestyle and selection of which of these funds to invest in remains your decision.

As a rule of thumb if you have more than 7-10 years to go before you will need to use your invested funds, then you can select a fund with a high equity content/mandate. These funds should generate high returns to compensate for high volatility. On the other extreme if you have less than 3 years to the point where you will need to use the accumulated investment, the fund selected should be a lower volatility which of course means that the returns will be lower.

Sunday, April 8, 2012

Inter-generational Wealth

April 2012
Many will know that I serve in a volunteer capacity on the board of the Financial Intermediaries Association (the FIA). I also chair their Financial Planning Sub-committee. The FIA is the trade association which looks after the interests of the financial intermediary community, their interaction with clients, the industry and the authorities in Southern Africa. In this role, the FIA provided contributions to a recent request for input from the Financial Services Board (FSB).
In preparing our input, I was reminded of one of Sir Winston Churchill’s lesser known quotes;
"If I had my way, I would write the word “insure” upon the door of every cottage and upon the blotting book of every public man, because I am convinced, for sacrifices so small, families and estates can be protected against catastrophes which would otherwise smash them up forever. It is the duty to arrest the ghastly waste, not merely of human happiness, but national health and strength, which follows when, through the death of the breadwinner, the frail boat in which the family are embarked, founders and the women and children and the estates are left to struggle in the dark waters of a friendless world.”
The above statement was made by Sir Winston at a time when there were many people returning to the UK after the war and where the infrastructure was in serious need of restoration; I am sure much to the delight of many insurance salesmen at the time!
One wonders whether the current South African circumstance do not carry similarities. Like post war Britain, we suffer a serious structural poverty cycle and a degrading infrastructure. Subsequent generations, inherit this poverty of their forebears with little hope, in the main, of a break in that cycle. Life Insurance and Life Insurers can, as identified by Sir Winston, play an enormous role in the inter-generational wealth creation that is required to break the cycle.
This happens at two levels firstly; In exchange for a relatively modest premium, a breadwinner can ensure that his or her income generating capability is replaced with capital, thus ensuring that dependents are able to complete their education and prepare themselves for life without a financial overhang to contend with. Where a breadwinner has the foresight, or is cajoled, to effect life insurance, the second generation starts out its life better off, even if slightly, than their parents. Thus the cycle of poverty is broken.
The second role that insurers fill is that they invest the premiums, not required for claims settlement into the economy. This activity contributes to the wealth of a broader society in many ways, including market investments, which either directly place capital in the hands of businesses, which in turn grow employment or indirectly assist in access to capital by lowering the cost of capital overall. In the managing the assets emanating from their life book, the insurers are also free to invest outside the areas where investment clients would demand that they invest.
So, using a simple rule of thumb, of securing ten times one’s annual salary in provision for ones loved ones, is an essential component of a well considered financial plan. Of course this amount can be reduced by the actual investible capital that has been accumulated up to that point. For those in the role of an employer, it is important to educate, if not provide, perhaps through Group Life, some of this cover for less fortunate staff members.