The frugal life the safest road to wealth

By Mags Heystek, CFP®

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Temptation can be expensive, especially if you go into debt to satisfy your immediate desires. But it will cost you a lot more if instant gratification distracts your long-term savings goals.

Delaying gratification in the short term can lead to a much bigger payoff in the future. It will take discipline, but resisting the urge now, will be rewarded later, and ultimately brings more peace of mind.

A World Economic Forum (WEF) report released in June found that people around the world will long outlive their retirement savings.

The WEF Report, found that strained government and employee retirement plans have left individuals increasingly responsible for their own retirement, while many find their personal savings to be inadequate.

South Africa’s household savings rate is technically non-existent. According the SA Reserve Bank it was -0.10% in the first quarter of 2019.

To close the savings gap, the WEF report states that individuals and policymakers must take the appropriate steps to ensure investment returns outlive individuals themselves.
Unfortunately, tax policy, for example, is structured in such a way that it punishes investments and income generation.

The more wealth you create, the more taxes you must pay. Wealth taxes as well as regulatory and intermediary levies eat into performance over the long run. Investments are by subject it to a range of taxes, intermediary costs and regulatory charges.
If you want to become financially independent, you will need to save yourself. But you don’t have to go about it alone. An experienced and qualified financial adviser will assist you every step of the way.

One can probably argue that the younger generation is in greater need of financial advice than those before them. They are the most educated generation ever, but when it comes to saving and investing, they remain ill-informed. Growing up in the digital economy has also made them impatient. But they are not alone.

This impatience has also extended to the way a few investors approach investing: they want great returns and they are wanted instantly. This has made investors susceptible to fraudulent get-rich-quick schemes, all at the promise and allure of incredulous gains. Again, an advisor will be available to advise against it, and help investors understand how the supposed ‘greatest investment’ of all time really works, and if it is legitimate or not. Speaking of legitimacy, it is always important to ensure that any advisor, platform, and investment product is fully licensed. Investors have the right to ask all the necessary questions, and at the end of the day, it is their money.

There are no shortcuts to building long-term wealth. Successful investing requires consistency, patience and time. Delaying gratification may be one of the biggest factors to overcome to build wealth.

Studies have shown that those who accumulate wealth tend to be more frugal and live less opulent lifestyles than their peers, even though they can afford it.

While it is never too late to get started, the one advantage of starting at an earlier age is time; millennials could enjoy the added benefit the power of compounding over a longer period, and so build lasting wealth.

The world economy is extremely fragile, and digital options are popping up all over the place. So, chasing yields, making emotional decisions on short term market events and the allure of risky assets like cryptocurrency, will make the independent unbiased guidance from an advisor even more valuable.

But you cannot properly plan for the future without knowing where you stand today. An advisor will assist you in clearly articulating your goals. Objectives goals could be very short term (saving for a holiday), medium term (saving up enough money to buy a property), and long term (saving for retirement).

But what about some of the goals people aren’t even aware of yet? But what happens when things go wrong? Are your expectations realistic? Investors need to understand the good, the bad and the ugly.

The plan put together by a planner will have these outcomes in mind and take personal circumstances into consideration to advise on the most apt options for an investor. There are hundreds of products and services available. Choosing the right one can be a minefield. The advisor will navigate and investor through this complicated environment.

A financial advisor has the expertise and experience to help navigate this complex environment and to instill the principles to achieve your financial dreams and help make sound investment decisions.

He/she will provide realistic expectations on the types of returns one can expect from properly licensed investments. And keep your hard-earned cash out the hands of scam-artists, and your long-term plan intact. So, what are you waiting for?

To speak to a Brenthurst Wealth advisor, view our offering and details about our team here: Brenthurst Wealth

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What exactly is Power of Attorney?

By Suzean Haumann and Malissa Anthony

Suzean Haumann 71 (2) Malissa-2017

Power of attorney is one of those phrases that you hear quite often, and there are some very real implications on an individual if they sign over power of attorney. Understanding what power of attorney is, and how it can affect you after certain life events, is important. This is especially the case when someone suffers a mental condition and becomes mentally incapacitated.

Power of attorney is essentially a notice that gives a third party the permission to act on your behalf and make decisions for you. This can be for specific matters (“special power of attorney”) or for all matters (“general power of attorney”), and is a valuable tool to allow people to make important life decisions when they are overseas or become too frail to physically sign documents.

In South Africa, we have seen an increase in power of attorney being signed over from people emigrating South Africa. Emigration is not always a clean process and often times someone leaves the country before all of their financial matters are completely finalised. In this instance they would sign over authority to someone still in South Africa to expedite the process. Practically it is far easier to sign a document in South Africa than to send it to Australia, sign it and return it.

The most common instance where power of attorney is signed over is with the elderly. Especially when that person is too frail to physically sign documents. It is normally a very stressful time when someone becomes too frail to sign documents, and power of attorney can relieve some of the stress. Power of attorney is also considered where someone does not have the mental capability to conduct their own affairs.

It may come as a surprise though that it is not possible under South African law to sign over power of attorney if someone becomes mentally incapacitated. When a person becomes unable to conduct their affairs due to a mental impairment, power of attorney ceases and at this point professional assistance needs to be brought in. The law in fact states that power of attorney ceases to be valid when the person who signed over power of attorney becomes mentally incapacitated and if someone acts on an invalid power of attorney, it can be considered fraud.

So what can be done then when someone is mentally unable to deal with their own affairs if power of attorney is not an option? Well, there are two options, the relatives of that person can apply to either the High Court to be appointed as the curator or as the administrator of the incapacitated person’s affairs.

Curatorship is quite a lengthy process and involves the signing of affidavits by the family of the incapacitated person as well as the legal appointment of a representative, usually an advocate. The application must include medical evidence confirming that the person is in fact mentally incapacitated. Once the process is concluded and approved, the Master of the High Court will issue letters of curatorship granting authority to the curator. The curator is required to fulfil a number of obligations including the submission of annual reports in a specific format to the Master. It is for this reason that curators tend to be admitted attorneys.

Administration is not as strenuous as obtaining curatorship and although a cost is involved, it is the cheaper obtain and also follows a legal process. Initially the Master will grant temporary administration rights to the administrator and after the investigation by the Master is concluded and they deem that the person does in fact need an administrator, then they will confirm the rights to the administrator.

A very important consideration is that when power of attorney is signed over for someone who is mentally incapacitated, the power conferred is absolute. This means that the person who in effect becomes the curator has full power under the law to conduct the affairs of the incapacitated person indefinitely and as they deem fit. There is often times where the family of the incapacitated person do not fully comprehend that all authority is transferred to the curator or administrator.

To help get around this situation, it is possible to move all the property of the individual into a trust prior to them becoming mentally incapacitated, however trusts can become prohibitively complex and lead to unexpected tax consequences. Trusts should only be executed by trust specialists as they will be able to set up the trust in the best way possible for the situation.

There have been recommendations to change the law and make the power of attorney process simpler, however at this point, the bill that was drafted has not yet been published for comment. Hopefully the delays can be overcome, but right now we are still in this complex environment.

In situations where someone becomes mentally incapacitated it is important that the family members of that person partner with someone that has the experience and ability to assist them. Brenthurst Wealth can help take the burden off the family by guiding them through the power of attorney process. Brenthurst is a licensed financial service provider with a qualified legal and fiduciary department well versed in the requirements of setting up power of attorney as well as applying to the Master of the High Court for curatorship and administration of estates of people who are mentally incapacitated.

* To contact Suzean Haumann, CFP®: suzean@brenthurstwealth.co.za, or Malissa Anthony, wills, estates, legal and compliance officer: malissa@brenthurstwealth.co.za. If you need assistance with your financial plan contact the experienced advisors of Brenthurst. Details here: Brenthurst Wealth

Brenthurst Global Equity fund shows its mettle

By Brian Butchart, Managing Director and CFP®

Brian Butchart

Global politics and economics have caused volatility in financial markets in recent times and reports of an expected slowdown have made investors very nervous. During such times of turmoil and uncertainty, an effective diversified strategy and prudent fund selection can provide assurance to manage those nerves.

A popular investment solution to reduce costs and provide effective diversification are index tracker and exchange traded funds (ETFs). An ETF is a fund which tracks a stock market index and trades like regular stocks on the exchange, whereas index funds track the performance of a benchmark index of the market. Research has shown some passive investment solutions have surpassed some of their active counterparts in terms of capital and income growth and as a result, passive solutions have become increasingly popular.

The debate between active vs passive has been raging on for decades. The late John Bogle, founder of Vanguard, was the poster boy for promoting low cost Index funds and there is no doubt based on historical evidence, Index trackers are effective as part of a long-term portfolio to provide cost effective accessibility to multiple asset classes and markets across the world. Vanguard, one of the best-known and established passive asset managers has been very successful in delivering long-term returns to their clients.

The greatest benefit of these type of products is they provide multi – company, industry, country and tradeable asset class exposure at a relatively low cost. The range of nuances within these offerings have also expanded including focus areas like dividend yield, volume, quality or geography with access to multiple themes such as renewable energy, robotics or healthcare to name a few.

ETFs and index trackers are usually low cost, with significantly lower fees than those of actively managed funds. They are easy to understand and use, and investors’ expectations are easy to manage. If you invest in a market index, you know you are going to get the market index return (less a small fee). This all means diversification or risk management can start at a much simpler level. ETFs and trackers allow clients to pool their money in order to allow smaller investors access to asset classes which may be difficult to hold in small denominations.

Although passive investing provides some obvious benefits, various index funds these days give exposure to almost anything. This means that you still need to have some sort of stock picking strategy, which then is no longer passive investing anymore. The combination of a passive selection of investments then becomes an active decision.
Passive investors can also have very different returns as there are multiple indexes that can be tracked, and an explosion of ETF’s to choose from. This is especially relevant as passive investment solutions have increased significantly over the past 10 years. This means the returns passive investors achieve, might vary across the board depending on which index, asset, ETF or market you are tracking.

Therefore, skilled active managers can still add significant value and alpha to long-term portfolios and supportive of an investment solution which combines both active and passive strategies.

There are a number of ETF and tracker funds offering a multitude of investment opportunities and solutions globally, most of which, such as the Vanguard range of index funds are not FSCA approved.

For these reasons and to further ease access to low-cost international equity solutions, Brenthurst established its own fund of this nature in 2018 in association with Momentum Global Investment Management (MGIM) called the Brenthurst Global Equity Fund.

This unique opportunity allows investment into passive ETFs and trackers, actively managed by Glyn Owen at MGIM.

This fund is used as part of our core portfolio together with other passive and actively managed funds to construct bespoke international investment strategies. This investment offers local investors exposure to the top index trackers and ETF’s in the world including Vanguard, Black Rock and other global giants. It not only offers investors exposure to global stock markets but as far as we can determine is the only Financial Sector Conduct Authority (FSCA) approved international fund investing entirely in ETF’s and trackers. The fund is the latest addition to our range of funds giving exposure to leading companies, regions, currencies and countries at a fraction of the cost of other internationally managed equity funds.

The current Top 10 ETF and tracker holdings in the fund:

Fund

These types of investments provide diverse allocation across geographies, investment styles and themes, reduces risk and the recipe has been tested over three, five and ten years. The annual volatility was shown to be substantially lower than most international equity funds due to the diverse nature of the portfolio which outperformed the MSCI world index over 10 years on a back-tested basis. In addition, the lower cost resulted in better outcomes than some of the managed general equity funds over the same period.
The fund delivered a stellar 17% YTD, with assets under management in excess of $18 million and gaining traction.

This combination of both passive and active strategies complements one another and potentially offers superior long-term outcomes as opposed to either investment strategy in isolation.

Any investment strategy, however, should be carefully considered in consultation with an advisor who can address the risks and assess suitability to individual circumstances.

 

Facts and Fallacies of Investment

By Sonia du Plessis, CFP®

Photography for Brenthurst Wealth Management in March 2016 by Jeremy Glyn.

We have all been there, it is a Saturday afternoon and the fire is lit. You are standing around the braai chatting with your friends and one of them pipes up with “you need to get in on this fund, I am getting 20% returns, don’t waste your time with your provider”. Sound familiar? Well, as a financial advisor, I must stress that moving to the fund with 20% returns based on a conversation you had around a braai is one of the most dangerous things you can do. Investments are very tricky to get right, and when you do get it right, it is often not that way for long. The process around selecting the right investment is a critical component in the long term success of an investment.

Investment return does not happen overnight. One of the most important considerations is something called the investment horizon, essentially how long you need to hold an investment for. Risk is good for high returns, but only in the long term. In the short term, risk can be very dangerous because it is volatile. A long investment horizon allows for the compounding effect to really take effect. For example, if you were to invest R100 every year for 10 years, and each year your return was 10%, after year 1 you would have R110. After year 2 you would have R231, and so on. By the end of 10 years you would have R1753. Now, if you took that R100 payment and each year took the 10% return as cash, you would have effectively received R1100 (10 X R110). The difference of R653 is due to the compounding nature of the investment. By keeping your money invested you are not getting a 10% return on the R100 you are investing, you are getting a 10% return on all the money you have in the investment.

Asset managers refer to “timing the market” versus “time in the market”. What this means is that it is almost impossible to tell when exactly the markets will rally and when is the optimal time to invest, so in order to give yourself the best opportunity you should make sure you are invested before the rally. This is termed “time in the market”.
One of the most important decisions to make when choosing what investment is most appropriate is asset allocation. The main asset classes are equities, property, bonds, and cash. The highest risk is normally equities and the lowest risk is cash. Risk and return are linked, over time, the fund with the highest risk will have potentially the highest potential return. It is not reasonable to expect a cash investment to provide you a return on 15%, while at the same time it is not reasonable to expect an equities investment to have no volatility.

When you take out an investment, there are 3 entities that charge fees, the asset manager, the administrator and the financial advisor. Altogether these fees are known as the Effective Annual Cost (EAC). Depending on the type of investment and the amount being invested, the EAC can be anywhere from 1.5% to 5%. There are certain circumstances when the EAC could be outside that range, but as a financial advisor, an EAC of between 2% and 3% is normally appropriate. If your EAC is greater than 3% that is not say you are being ripped off, it might just mean that your investment requires a more hands-on approach and consequently the asset manager is charging more.
Investing offshore has a romance about it, it makes one sound like a savvy investor. The merits of investing offshore versus investing locally makes for a lively debate. When people are looking to invest money offshore they are more often than not looking to protect their capital. Investing in a German bond is perceived to be a much safer investment than a start up on the JSE.

South Africa is a developing country with a liquid currency, this means that asset managers in New York, Zurich, or London will invest in South Africa and divest too based on the mandate of their funds. If the mandate says that 10% of their assets must be invested in emerging markets, then the asset manager will to find the best available emerging market asset to invest in.

Making money through investments is an exercise you need to go through with a qualified financial advisor. Ask questions, but also understand that investing is not an exact science, but there are some concepts that you should keep in mind. The investment horizon is very important, a longer horizon allows for more time to generate a greater return and thus allow for investing in riskier asset classes. Staying invested for the entire investment horizon also opens up the potential for compound interest to work in your favour. Choosing the most appropriate asset mix for your investment is critical, too much risk and you open yourself up to volatility and losing money, but too little risk could result in lost gains. Evaluating the fees being charged and questioning your financial advisor if your EAC is above 3% is a conversation you should be having.

Your investment needs to be suited to your specific needs, and what your risk appetite is. Do not chop and change your investments based on what a friend says around a braai, rather get a financial advisor to investigate options best suited to your needs and give you a professional opinion.

A new option for retirement … the hybrid annuity

By Suzean Haumann, CFP® professional

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From March this year all retirement funds must offer their members annuity (pension) options that conform to regulations that came into effect in September 2017. The aim of the regulations is to improve the likelihood that you, the fund member, will choose a pension that will last for the rest of your life.

These so-called default regulations affect three important areas of retirement saving: how your contributions are invested while you are accumulating savings (Regulation 37 of the Pension Funds Act), how easy it is to leave your savings invested when you change jobs (Regulation 38) and the options you have available to convert your retirement savings into a monthly pension for life when you retire (Regulation 39). Members will also benefit from retirement benefits counselling to provide information and explain the implications of these default options.

Retirees are faced with two choices on how to use their savings: choose a life insurance annuity and be guaranteed a life-long income , or go with a living annuity that allows for more control over and access to capital, and the ability to grow capital through investing in the markets. Those are the benefits. The cons include the facts that life annuities don’t allow access to capital at any time and at death the insurance company – not beneficiaries – keeps the balance of the investor’s retirement savings (unless the option to leave a portion of income to a living spouse is exercised). With a living annuity there is a very real risk of running out of money before the investor dies.

A newish hybrid annuity product provides a flexible set of options to optimize balance between self-insuring and being insured for retirement, to counteract these shortcomings. Many financial institutions now offer such an annuity that conforms to the default regulations, and balances retirees’ need for income security with their desire to leave a legacy to their loved ones. This unique solution is known as a hybrid annuity: a life (or guaranteed) annuity inside a living annuity.

A hybrid annuity gives investors more allocation options than a standard annuity. It allows investors to choose the how they want to allocate assets. Currently investors have the choice of investing in three different balanced funds within the guaranteed living annuity. They can then skew their assets to more conservative, fixed-return investments that offer a lower but guaranteed rate of return, or weight them toward more volatile variable annuity investments that offer the potential for higher returns in the remaining living annuity part.

The one-product solution host both a living annuity and guaranteed life annuity in your chosen configuration for example 40% guaranteed and 60% living annuity. The future annuity income escalations (from the guaranteed annuity portion), rest on personalised portfolio construction and return results, which allows for flexibility and higher annual income escalation. The hybrid option also provides for partial capital conversion from an existing living annuity at any given time and compared to a living annuity provides a much more transparent and comparable cost structure.

Other benefits include the fact that the remaining investment capital in a living annuity can still be bequeathed to beneficiaries and the medical underwriting available on some guaranteed life annuities, could now result in a higher monthly annuity income payment, from the insurer.

So, for example let say an investor’s total retirement savings amounts to R1 million and, like most people have done, it is fully invested in a living annuity that offers no longevity protection. There’s a very real risk of funds running out before death. Now, if the investor had invested 50% of his/her retirement portfolio in the lifetime income asset class and the other 50% in traditional asset classes such as equities, bonds, cash more, than 90% of their lifetime spending needs should be met. The proportions will, however, depend on individual circumstances and goals, which should be discussed with a financial advisor.Sygnia and Allan Gray were some of the first organisations to launch a hybrid product, which combines the benefits of both a living and a life annuity: guaranteed income for life and capital to invest and access for emergencies. With this ForLife Living Annuity product the specialist retirement income company – Just Retirement Life – handles the compulsory annuity and Sygnia and/or Allan Gray handles the living annuity portion.

The lifetime income fund as a specific unitised asset class pays an income while the investor is alive. This essentially enables advisers to holistically review an investor’s circumstances and within one product trade-off and balance between the two competing goals in retirement. It’s only the percentage allocation between the traditional asset classes and the lifetime income fund that will differ. Investors can choose to have any percentage of the portfolio, from 0% to 75%, invested in the lifetime income asset class, which provides an income for life and the income depends on the performance of the balanced portfolio.

Like any investment choice, there are drawbacks to hybrid annuities. They allow for a once-off option at retirement to split savings between the life and living annuities. Investors can add to the hybrid annuity, but the guaranteed portion will be insured at the rate and date when the addition is made and not at the initial rate when the investment was started. For this and other reasons it is best to consult a qualified and experienced financial advisor to set up a financial plan best suited to individual needs.

Why it is important to understand your risk tolerance when investing

By Renee Eagar, Certified Financial Planner®

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Many people think they can remain rational when markets are volatile and when investment values are going through a dip. The truth, however, is quite the opposite. People become overly emotional when markets behave badly to the point of selling off valuable stakes of their portfolio. But selling shares when values decline is never a good idea.

History has proven that panic-selling for long-term investors almost always ends poorly. Investors who kept their wits during a financial slump ended up recouping not only all their losses but were also still around to benefit from a market recovery.
Often, it’s hard to really know what you’re comfortable with until you’ve experienced losses. It is therefore important to make an honest assessment of your own risk tolerance.

Any financial planner worth his/her salt will tell you that a proper assessment of your risk profile is the first step in the creation of a robust financial plan. If you’re not aware of your own risk profile, chances are you’ll end up taking regrettable investment decisions at least a few times in your life.

Risk tolerance is a measure of willingness to accept higher risk or volatility in exchange for higher potential returns in portfolio selection and risk profiling helps you invest in the optimum and diversified asset allocation to reach your investment goals.
It also aims to simplify the process of understanding your underlying attitudes towards investing and hence predicting your probable reactions to future events. It is an important part of the financial planning process.

All types of investments require that you take on some degree of risk. Cash, for example, carries an inflationary risk, property carries the risk of not being occupied and equities the risk of capital loss through corporate failure or devastating economic factors.
Investment risk measures how sure you can be of achieving your investment objectives. The relationship between risk and return is fundamental to all investments. The more risk you’re willing to take on, based on market performance over long periods, the greater the potential return should be.

Your financial planner will assist you in understanding your risk profile by way of a questionnaire. Based on your requirements, a decision can be made on asset allocation. The more detailed it is, the more it’s likely to capture your risk profile accurately. It will test the investor’s responses to his/her limitations in taking financial risk, past decisions in financial situations, and his/her attitude towards investing in various risk/return scenarios.

Once you know how much spread is to be maintained between risk assets like equity and low-risk assets like cash, you can identify the funds and products where you would like to invest. You will also realise your preference for either consistent growth and a slow uptick, and the level of volatility you can withstand to get a better result.

The rate of return that an investment is going to generate is generally the first thing that is discussed at the time of investment. While this is definitely a very important aspect to be noted, it is equally important to consider the risks associated with that particular investment.

Once you are better versed in the products and assets you are invested in and what percentage is invested either locally or offshore, you will be less likely be panicked into a decision when the market turns.

Proper risk profiling ensures that your asset allocation is in alignment with your attitudes and current situation. This will allow you to take wiser decisions with your money – not panic and sell out or invest out of greed. In the long run, you’ll be happy with the returns you’ve earned.

Investors must understand the dangers of changing strategy in a portfolio just to chase last year’s performance and how getting the timing wrong can have a detrimental effect on a portfolio. It is very important to leave emotion out of it and ignore the noise, as an overaction will only lead to losses.

A better understanding of your risk profile will also make it easier for you to adapt your financial plan. It will also hone your focus on future events that matter like retirement or the death of a family member, which are the real determinants of a risk profile.

Proper risk profiling ensures that your asset allocation is in alignment with your attitudes and current situation. This will allow you to take wiser decisions with your money – not panic and sell out or invest out of greed. In the long run, you’ll be happy with the returns you’ve earned.

Careful consideration required by public servants considering early retirement

By Brian Butchart, Managing Director and CFP®

Retire

The decisions we make at retirement are probably the most important and daunting decisions we will ever make, ultimately determining the success of our retirement plan and financial well-being in later years.

As part of government’s measures to reduce the public wage bill, all public servants between the ages of 55 and 59 years will be provided an opportunity for early retirement without incurring any penalties between 1 April and 30 September 2019.

South Africa’ Public sector wage bill is currently one of the largest drains on the national budget, accounting for almost a third of government’s total spend, ballooning above the half-a-trillion Rand mark in the last year. Wages paid to state employees are currently at 14% of South Africa’s GDP – the second-highest proportion in a recent World Bank survey, just behind the UK.

In the present economic conditions, it is important to balance spending on public servants and resources required for service delivery and other expenditure items, such as health, education, social security and infrastructure. Government is cognisant of the strain in public finances as a result of the sluggish economy as well as the urgent need to contain the escalating wage bill.

Therefore, as from 1 April 2019 to 30 September 2019, National Treasury will carry the cost of the penalty in relation to pensions for the identified group of employees whilst those aged 60 and above can opt for normal retirement as per current legislation. Currently, there are about 127 000 public servants aged between 55 and 59 years who will need to make some very important decisions in this regard.

If you are a public servant considering this opportunity, I strongly advise that you carefully consider all the implications of opting for early retirement and seek independent financial advice, in order to assess the risks and opportunities this could pose to your retirement and financial future.

To learn more about our solution and see details of our team, click here: Brenthurst Wealth