After you have engaged a financial planner to conduct a comprehensive financial needs analysis, the financial planner should have a subsequent meeting with you, to give you a proposed financial plan and discuss the findings with you. This meeting can be called Strategy Meeting or Recommendations Meeting. So what do you do when you have received the financial plan?
1. You are the co-creator of your financial plan. The financial planner is equipped with the professional knowledge and experience, to craft a financial plan that takes into account your personal circumstances, future inflation rate, investment returns, life expectancy and tax. However, the proposed financial plan is the starting point; this should not be your final plan. The proposed financial plan is what I call the theoretically ideal scenario. In practice you are in charge of the path you want to take. You need to decide what you want to do, how you want to do it, to achieve your financial and lifestyle goals. You give inputs, ask the financial planner to make changes, to get to a financial plan that is workable for you.
2. Ask questions. No questions are stupid questions. A good financial planner is also a good teacher, ready to answer your questions and explain financial concepts, relating to details of your plan, assumptions, terms and conditions, details of the financial solutions proposed to meet your needs. At times these financial jargons and concepts can seem daunting. Don't pretend you understand them if you don't. Ask questions. If a financial planner wants to rush through things, only interested in selling you the financial products he wants you to buy, without explaining to you all the details you would like to know, you should rather walk away.
3. Highlight issues not taken into account in the financial plan. There can be times a financial planner did not consider certain information discussed in the initial meeting, in developing your financial plan. Or you forgot to disclose material information. You should then bring it to the attention of the financial planner, so you can discuss about it, and the financial planner may have to re-work the plan.
4. Think about the implications of the recommendations. The value of a financial plan lies in the ability of the client to execute the plan successfully, over the long term, with the help of a financial planner. You need to think about the action items, whether you can mentally and financially commit to such actions over the long term. Does the plan give you flexibility? If your circumstances change, say you have one more child, or are retrenched, how would it impact your ability to continue with these financial products? Would you lose cover, benefits, or suffer financial penalties and charges? If your financial planner nudges you to be disciplined, would you toe the line?
5. Discuss the plan with the people affected by your plan. You do not live in a vacuum. You do not live alone. You have families and friends in your circle, that are going to be impacted by your financial plan and decisions. Specifically, people that are financially dependent on you, your spouse, children, sibling and maybe even parents. Discuss your financial plan with them, so you can consider their needs and inputs, in amending your financial plan.
On the other hand, do not be a slave to your families' every wish. We do need to take care of our parents and siblings in need. However, every person needs to take own responsibility, to be useful and productive. In the Bible, 2 Corinthians 12:14 says, "... After all, children should not have to save up for their parents, but parents for their children."
6. Your are the owner of the financial plan. After you have discussed and finalised the changes to the financial plan with your financial planner, take ownership of the plan. It's your financial plan, not your financial planner's. Use the plan. Implement the plan. From time to time you may have to revisit and make changes to the plan, as your circumstances and needs change. The plan is the roadmap, to take you to your final destination, to realise your dreams and goals. There may be detours along the way, but adapt like our winning Springboks, be steadfast, and you will lift your own Webb Ellis Cup one day!
This is a real-life client question I had recently. The client had invested for 2 1/2 years, the actual return after fees is 0.5% annualised. Understandably the client questions why staying invested in the same funds if the actual returns have been poor.
Most clients will invariably compare the return to what they could get in a safe bank deposit. A bank deposit would have easily given the client at least 7% interest per annum over the same period. In comparison, the mere 0.5% is hard to accept.
It is important to pay attention to the following:
1. What was your original investment objective? What was the initial time horizon? If the original investment objective has not changed, the investment funds are in line with the objective, then you should listen to your financial advisor and do nothing.
2. Are the fund managers still fit for the job? Fund managers are questioned and criticised a lot when they under-perform, especially in a long-period of under-performance. The things investors should ask are: Does the fund manager follow the same investment philosophy and process? Does he have the experience to manage the money? Does he follow the investment mandate? If the answers are yes, then leave the fund manager to do his job.
3. Active fund managers do go through periods of under-performance. True active fund managers do not hug a specific benchmark, their portfolio make-up most of the times do not look like index constituents. There will be periods of under-performance and periods of over-performance relative to the benchmark. It is human nature (me included) that when fund managers do well, investors are happy. When fund managers don't do well, investors are unhappy and want to switch out.
However, in investments, we need to be counter-intuitive. When good active fund managers seem to be down and out, we should increase out investments, to maximise returns thereafter. Buy low, sell high. It is a lot easier said than done.
4. Fund managers do make mistakes. Fund managers employ highly intelligent people armed with relevant qualifications, such as CFA, CA(SA), Actuary and MBA, with years of experience to manage your money. Despite their best research, analysis and efforts, good fund managers will be honest and tell you that not all of their investment ideas work out. In fact, even best fund managers only get 60% to 65% of their stock picks right (making money for investors).
5. Equity funds are volatile and go through cycles. Equity funds invest in shares listed on the stock markets. They will be affected by market ups and downs. Performance from equity funds, or any funds with a significant exposure to growth assets, do not come in a straight line. The worst an investor can do is to sell at the bottom, when he feels this investment is not working out.
6. South African economy has been struggling. The South Africa GDP growth rate has been 0.6%, 1.3% and 0.8% for 2016 - 2018 respectively. The average was 0.9%. This year Finance Minister Tito Mboweni projects to be 0.5%. With the Eskom debt burden and electricity capacity constraint, increased tax burdens for consumers, the economy has been sluggish. This will filter through to the earnings (profits) of domestically focused companies. Hence the JSE has produced mediocre returns over the last 5 years. This will also lead to equity funds producing mediocre returns.
7. Patience is required when investing in equity funds. Equity funds and other aggressive risk profile funds require time, to allow fund managers to invest in their ideas and reap the rewards from these investment ideas. Investors should stay invested for at least 5 years.
It is human nature to want to react and take action when something is not working as expected. In the case of investing with good fund managers, the best action to take is - do nothing!
Sirago has some great great updates and additions in 2020 which are:
Below are the benefit comparison update for Ultimate Gap cover & Plus Gap cover for 2020:
o Physiotherapy consultations and treatment
o Biokineticist consultations and treatment
o Dietician consultations and treatment
o A smoking cessation programme
o Blood tests
o New moms will also be able to access vouchers offering up to 70% off baby products at Baby City
The Fund announced that the increases for 2020 range from just 6.2%, with an average increase on risk contributions of 9.4% and an average increase of 9.9%. The increases were as follows:
Click here to download the 2020 product brochure
Please contact Namhla or Tammy in our Health and Wellness Department, email email@example.com, if you have any queries about Bonitas
Click here to read more on Medical Aid enhancements
Please contact Namhla or Tammy in our Health and Wellness Department, email firstname.lastname@example.org, if you have any queries about Discovery Health
It’s now time to review your medical aid scheme cover for 2020. This means you have a window within which you can switch to a different plan for the new year. This window usually closes at the end of November (depending on your current provider), so don’t delay collecting the necessary information. This is not a decision to be rushed.
Why do I have to decide now?
Medical aid providers allow you to switch to a higher plans once a year (at the end of the year) without penalties or consequences. If you want to save on premiums or you need to increase benefits, now is the time to do it.
What if I want to change providers altogether?
If you are unhappy with your medical aid provider, you can switch to another at any time of the year. But before you do, consider the following:
Medical Aids by law must accept anyone who applies to join their scheme. To protect themselves from older or sickly members that join without having contributed to the risk pool, they usually impose a waiting period of between 3 and 12 months.
Waiting periods will apply if 1) you have not been a member of another South African medical aid for the past three months or more, 2) if you change medical schemes before 2 years of being covered with your previous medical aid provider and 3) if you have a pre-existing medical condition.
Finding out about any waiting periods is extremely important before deciding to change providers.
Late joiner penalty
As an additional means to manage the risk of older or sickly members joining without having contributed to the risk pool, medical schemes (according to the Medical Schemes Act) are entitles to add a late joiner penalty to your premium if you were not part of a medical scheme before 01 April 2001. The late joiner penalty is calculated (using a prescribed formula) based on the number of years that you were not on a registered South African medical scheme. The late joiner fee can range between 5% and 75% of the total contribution, depending on the number of years that you were not covered by a medical scheme.
Please contact Namhla or Tammy in our Health Department, email email@example.com, to find out about different Medical aid options
Let us use a case study to illustrate how financial planning can help a young family.
Gavin lives in Joburg, 29 years old, is married to Ntombi with a 1-year old son Siya, named after the Sprinbok captain Siya Kolisi. Gavin works in a family business with a monthly salary of R30,000. In addition, he gets extra income of about 2,000 US dollars per year from YouTubing. The monthly expenditure of Gavin's family is R18,000. He can save about R10,000 a month.
Looking at Gavin's personal balance sheet: He has no house, no car under his name, and no loans. He has R200,000 in bank deposit. He has a 10% stake in the family business.
He has a life insurance policy with the following benefits:
Life insurance R2, 361,000.
Lump Sum Disability R2, 361,000
Severe Illness Benefit R944,400
Income disability benefit R7,300 per month
He contributes R1,277 per month to a retirement annuity, retirement age 55, and current value R61,500.
Gavin's family is on Discovery Essential Saver option, plus a gap cover policy to cover for medical expense shortfalls.
The marriage between him and his wife is in the community of property. His wife is a housewife. His financial dependants are his wife and son.
Gavin would like to buy a house of his own and invest overseas. Asked about his retirement planning, he says that he would like to retire at the age of 55 (although he knows it might be an unreachable dream), with a monthly income of R15,000 in today's money, plus travel abroad every year. The house and car loans will be paid off and there is an emergency reserve.
For his children, he wants to provide for their education, until they complete their university degrees.
I use a professional financial planning program to do financial needs analysis for Gavin and produce a financial need analysis report. Then I draft a proposed financial plan, with some preliminary recommendations to Gavin and Ntombi:
1. Risk planning
Since Gavin has a single-income family, his child is still young, his life insurance is insufficient. He needs an additional R4,700,000 cover to provide protection for his family, especially his child's future education and living expenses.
According to the financial analysis, he has enough severe illness insurance coverage and lump sum disability cover. His income disability benefit needs to be raised to R13,700 per month. The objective of income disability benefit is that when the insured is temporarily or permanently unable to work, the insurance company pays a monthly income as compensation until he goes back to work or until his retirement age.
The cost of additional insurance benefits is R412 per month.
I recommend that Gavin buys Discovery Global Education Protector, private school option. If he dies, is disabled or has a major illness, Discovery will cover the cost of tuition and extracurricular activities until the age of 24. It also includes a University Funder Benefit, which helps to pay part of his child's tertiary education fees . Monthly premium R358.07.
2. Investment planning
I use the three-bucket approach to financial planning, which is easy for clients to understand.
The first bucket of money is the money needed in the next two years. It needs to be capital secure and highly liquid. It can be withdrawn at any time. It can be an emergency fund. I suggest that Gavin has R200,000 in the bank, in a high-interest account such as money market account or call account, which can withdrawn at any time.
The second bucket of money is the money needed for years 3 to 10. It can partially invest in growth assets, but seek stability. A suitable investment vehicle is a conservative fund. Part of the child’s education fund belongs to this bucket.
The third bucket is the money that is needed only after ten years, usually for retirement funding, child’s education fund and long-term capital growth. I suggest that Gavin invest in equity funds, which have shown to have the highest long-term returns over the long term, but have short-term fluctuations (volatilities). It can be done on a debit order basis, to benefit from a disciplined investment approach and Rand cost averaging. In addition, I suggest that he invest overseas, in US Dollars, to benefit from investment opportunities internationally, diversify risks, and hedge against long-term depreciation of the South African Rand. He can open an account with a minimum investment of 1,500 US dollars.
3. Education fund
The analysis points out that Gavin needs to invest R6, 898 every month for the next 18 years, for his son's education. I suggest that he can start a tax-free investment account in his son's name and debit R2,750 from the bank each month to invest in a long-term growth portfolio. The investment value is expected to be R1,121,886 after 15 years.
4. Retirement planning
In calculating the capital required for retirement, I used the following assumptions:
Retirement age 65 (not client's wish of 55)
Monthly income, today's value of R22,100. This is not the R15,000 Gavin indicates to me in the initial discussions, as after taking into account the medical expenses in the old age and the desire to travel abroad, this is the more realistic figure.
Inflation rate 6%
Investment return 8%
The retirement capital required is R31, 415, 100. Gavins existing Retirement Annuity is expected to reach R6,077,840 on retirement. In order to achieve the retirement income target, Gavin needs to invest an additional R5,390 per month, increasing by 6% per year.
5. Estate planning
I recommend that the Gavin and his wife make a joint will to distribute the estate in South Africa as he wishes.
From this case study, you can get a glimpse of the process, details and the wide areas covered in personal financial planning, tailored to the needs of a person or a family. The more assets and the more complex a person's financial situations, the more complicated is the financial, tax and estate planning required.