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30 November 2014 | R24,00 including VAT | www.moneymarketing.co.za
First for the professional personal financial adviser
INSIDE your November issue of MoneyMarketing...
Binder
regulations
Increasing competition in
the UMA market.
Page 8
INVESTING
INSIGHTS
Interest rates…
The combination of
stubborn inflation and a
sluggish growth outlook continues to pose
a difficult dilemma for
monetary policy
MPC, September 2014
SA interest rates
will still have to
normalize over time,
but clearly the pace of
normalization will be
relatively gradual and
certainly more gradual
than many analysts
anticipated just a few
months ago.
Kevin Lings, Stanlib
Equity markets
Are share prices and
underlying company
fundamentals still correlated?
Page 12
Income
protection
Four ways
to combat rising
medical costs
Cover for your most valuable
asset from day one.
Pages 19 - 25
Page 31
Set up a client contract
A
s a financial
adviser you will
have contracts
with those whose
products you are authorised
to sell. Your client will
have a contract with the
financial services institution
whose products they buy.
This forms the basis of the
agreement and any future
dealings. But do you have a
contract with your client?
Changing environments
and legislation make
contracts essential.
Speaking at the August
FIA/Altrisk Power Round
Table, financial adviser
and CFP Anton Swanepoel
proposed that advisers have
two contracts with clients – a
service agreement and an
advice agreement.
These form the basis of a
professional relationship and
define the terms and roles of
each party, and expectations.
Not only do contracts
formalize the adviser client
relationship - and take
it to a more
professional level,
they also ensure
that should a
dispute arise there
is documented
evidence to
present.
“Have an agreement
with your client that
defines obligations and
responsibilities,”
said Gustav
Fichardt of
Webber Wentzel.
“If something goes
wrong this is the
source document
to see if you have
breached and are
exposed.”
Client
Contract?
Financial
adviser
Poor record keeping is
at the centre of many FAIS
Ombud determinations. In an
insurance policy – Swanepoel
observed that a decision to
pay a claim is based on the
details of the contract.
A contactural relationship
exists between the adviser
and client – this needs to
be documented into a legal
agreement.
CONTRACTS AND TRUST
Contract/ policy
Contract/ accreditation Financial services
provider
Writing in a Harvard Business
Review article in 2009, Deepak
Molhatra says that contacts are
designed to reinforce trust and
reduce risk.
“Trust requires that parties
see each other as ethical and
well-intentioned.” Contracts
can enhance transparency and
ensure that each party knows
where they stand and what to
expect.”
When managing investments, we never lose sight of the fact that it is your money we’re looking after, and we do so with fastidious
attention to detail. We even invest in our own funds, so that when we make decisions that affect your money, we’re making
decisions that affect our own money too. It’s just one of the ways we ensure we align our long-term interests with yours. Because
when you understand how hard someone’s worked for their money, you go to great lengths to take good care of it. For more
information ask your financial adviser, call 0800 600 168, email info@psgam.co.za or visit psgam.co.za
Nick & Barry {00065}
Whose money is it anyWay?
Collective investment schemes in securities (CIS) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is
not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A fund of funds is a portfolio that invests in portfolios of collective investment
schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. A feeder fund is a portfolio that, apart from assets in liquid form, consists solely of
participatory interests in a single portfolio of a collective investment scheme. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to
go up or down. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments Limited. Commission and incentives may be paid and if so,
are included in the overall costs. Forward pricing is used. The portfolios may be capped at any time in order for them to be managed in accordance with their mandate. Different classes of
participatory interest can apply to these portfolios and are subject to different fees and charges. PSG Collective Investments Limited is a member of the Association for Savings and Investment
South Africa (ASISA) through its holdings company PSG Konsult Limited. PSG Asset Management (Pty) Ltd is an authorised financial services provider. FSP 29524
80x220_PSGAM_Whose000065.indd 1
09/10/2014 09:08
NEWS & OPINION
2
30 November 2014
Use an ILLI for nondiscretionary spend
E
arlier this year Glacier by
Sanlam introduced the ILLI –
Investment-Linked Lifetime
Income plan. A combination
of a guaranteed annuity and a
living annuity, the ILLI protects
clients from longevity risk and gives
them flexibility in managing their
funds.
Living annuities are popular
for their flexibility in investment
selection and drawdown rates,
and for the legacy aspect with
annuitants being able to leave
funds to beneficiaries.
But, they cannot offer a
guarantee that your income will
last for as long as you live and there
is a risk that you can outlive your
money.
Patrick Sheehy, head of product
management at Glacier says that
the idea behind the ILLI was to
funds that have built-in unit price
guarantees to limit the risk of
incomes falling when markets are
performing poorly.
Why the need to consider
longevity protection? Sheehy says
we are stuck in the paradigm of a
75 - 80 year life expectancy. Today
for a couple aged 65 – there is a
50% chance that one of them will
live to 94. While we may all want to
be able to leave a financial legacy
to our children, for most South
Africans it’s really not a viable
consideration and trying to do so
may seriously compromise our
retirement well-being.
But if this is a requirement you
should consider using the ILLI
to provide for non-discretionary
expenses and an ILLA for
discretionary expenses and to leave
a legacy.
retain many of the features of
the living annuity, while offering
longevity protection. The new
product from Glacier provides
the opportunity to grow income
in real terms by giving clients
the opportunity to invest in asset
classes which are expected to
provide investment returns in
excess of inflation, while offering
longevity guarantees.
In the ILLI, an income in the
form of a set number of units is
guaranteed to be paid for life,
with the value of those units
growing in line with the investment
performance of the underlying
investment portfolio. The client
and their financial adviser will
decide on the composition of the
investment portfolio.
There is a wide range of unit trust
funds to choose from, including
Living annuity
Complete flexibility
Some form of guaranteed
income - ILLI
Discretionary
spend
Non-discretionary
spend
Retirement income
SUBSCRIBE TO
30 November
First for the
2014 | R24,0
0 includ
professional
personal fi
Binder
regulations
Increasing compe
the UMA marke tition in
t.
Page 8
Address:
INVESTING
INSIGHTS
Interest rate
s…
Fax:
ber 2014
SA interest rates
will still have
to
normalize over
time,
but clearly the
pace of
normalizatio
n will
relatively gradu be
al
certainly more and
gradu
than many analys al
anticipated just ts
a few
months ago.
Kevin Lings,
Date:
ADVERTISING
ADVERTISING EXECUTIVE:
Lisa Vermaak
Cell: 082 330 7701
Email: lisa@ontega.co.za
© Copyright Money Marketing 2014
DISTRIBUTION & SUBSCRIPTION
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PRINTING
Four way
to combat risins
medical costs g
Set up a client
contract
A
Page 31
Not only do
formalize the contracts
adviser client
relationship
it to a more and take
professional
level,
they also ensure
that should
a
dispute arise
there
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with your client
Poor record
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at the centre keeping is
tions and
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Ombud determ many FAIS
responsibiliti
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insurance policyinations. In an
said Gustav
– Swanepoel
observed that
Fichardt of
pay a claim a decision to
Webber Wentz
is based on
the
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“If something el.
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Client
Contract?
Contract/ policy
Financial
adviser
Contract/ accred
Whose mo
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yWay?
itation
Financial servic
provider es
CONTRACTS
AND TRUST
Writing in a
Harvard Busines
Review article
s
in 2009, Deepak
Molhatra says
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reduce risk.
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see each other that parties
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d.” Contracts
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09/10/2014
PUBLISHING TEAM
GENERAL MANAGER: Dev Naidoo
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09:08
{00065}
EDITORIAL
Stanlib
Income
protection
Cover for your
most valuable
asset from day
one.
Pages 19 - 25
Nick & Barry
Subscriptions
Mail: P.O. Box 784698, Sandton, 2146, South Africa
Tel: (011) 217-3222, Fax: (011) 217-3209
12 months – R250 (including VAT)
EDITOR: Patricia Holburn
Tel: (011) 615-7002
Email: patlh@mweb.co.za
LAYOUT & DESIGN: Kyle Martin
r
Are share prices
and
underlying compa
ny
fundamentals
still correlated?
Page 12
s a financia
l
adviser you
will
have contra
cts
with those
whose
products you
are authorised
to sell. Your
client will
have a contra
ct with the
financial service
whose produ s institution
cts they buy.
This forms
the basis of
the
agreement
and
dealings. But any future
do you have
contract with
a
your
Changing enviroclient?
nments
and legisla
tion
contracts essentmake
ial.
Speaking at
the
Augus
FIA/Altrisk
t
Power Round
Table, financia
l
advise
r
and CFP Anton
proposed that Swanepoel
advisers have
two contra
cts with clients
service agreem
–a
advice agreem ent and an
ent.
These form
professional the basis of a
relationship
define the terms
and
and roles of
each party,
and expect
ations.
The combinatio
n of
stubborn infl
ation and a
sluggish growt
h outlook continues
to
a difficult dilem pose
ma
monetary policy for
MPC, Septem
email:
Signature:
nancial advise
INSIDE your
November issu
e of MoneyMa
rketing...
Equity mar
kets
Name:
Tel:
ing VAT | www.
moneymark
eting.co.za
EDITOR’S
NOTE
Patricia Holburn
A great divide
Have you read Piketty? I have not (yet).
Thomas Piketty is a French economist – and
author most well known this year for his
work and ideas on inequality. Here in SA we
know about inequality. It goes like this. For
those above a mythical line when you have
no water you shower at the gym. For those
below – you make do with buckets if you
are lucky.
That’s a bit blasé – but noticeable. Our
constitution enshrines basic human rights
and those include access to services like
water. The “Red Book” financial services
roadmap for SA outlines how the financial
sector should look – making it safer and
more accessible to all. Accessibility to
financial services is a South African policy.
Gill Marcus said so – at her last MPC media
presentation. So while you don’t want to
give people loans they cannot afford to pay
back, you do need to ensure they have access to financial services – and that includes
credit. As we near the end of the year I
think the accessibility question we need
to ask ourselves is why is credit the most
accessible product?
Why can you seemingly buy very expensive
credit so easily and yet you cannot buy a
savings product without ten pages of rules
and rigmarole?
Why is it – is it? - so difficult to access a
financial planner who will guide you in the
management of your finances?
Why is the building debit side of financial
service products not as prevalent as the
credit side?
South Africa has lots of big questions to
deal with – and if you ask the most pressing
issues employment and electricity (now
water too) will pop up. These accessibility
issues are about people accessing dwindling resources – and rebuilding these
crumbling services. Financial services are
robust and healthy, well regulated and
world class. We are innovative. We are competitive. Qualified, experienced. Accessibility is the next big challenge.
I wish you a very good month.
Patricia
@MMMagza
patlh@mweb.co.za
Published on behalf of Media24 Magazines
by New Media Publishing (PTY) Ltd.
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John Psillos, Irna van Zyl
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of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, photocopying, electronic,
mechanical or otherwise without the prior written permission of the
copyright owners.
© Money Marketing is not a financial adviser. The magazine accepts
no responsibility for any decision made by any reader on the basis of
information of whatever kind published in the magazine.
YOU ONLY KNOW TRUST
ONCE YOU EXPERIENCE IT
At Auto and General, the opinions and ideas of our
brokers have helped to forge a dynamic and solid
relationship. Join the Auto and General family
as a broker, and be part of a strong and
successful partnership.
Call us on 0800 100 011 to join us as a broker partner.
Auto & General is an authorised financial services provider (FSP licence number: 16354).
NEWS & OPINION
PROFILE
4
30 November 2014
Your product will differentiate you
Ian Middleton is managing director of Masthead, a former legal adviser, a Harley Davidson owner
and fan, and passionate about getting advisers to build sustainable businesses
I have been with Masthead since inception.
In October 2014, Masthead celebrated its 10th
birthday. 10 years have passed so quickly that
it seems like yesterday when Masthead was
launched. Today we work with around 3 000 independent advisers and 1 000 tied agents. In the next
10 years we’d like to increase our base of advisers
and ensure good quality advice to consumers If we
can help advisers build capital value in their businesses then we have achieved an objective.
It is difficult to quantify the impact of TCF.
In terms of focus of mind, it has had an effect,
and at a corporate level there is more awareness
around product pricing and client communications. Advisers feel they have been applying TCF
since the introduction of FAIS. In a way TCF was a
bit of an indictment on the industry – that doing
the right thing had to be legislated.
FAIS has made our industry more
professional. It introduced standards –
competency, ethical and operational.
I am positive about FAIS – but again the impact
is hard to quantify. The headlines don’t always reflect the positive side and benefits of the industry.
The negative headlines need to be seen in context.
Consider that the FAIS Ombud has around 20 to
30 determinations per year, while some six million
are sold long-term policies a year.
Advisers need to demonstrate that they
did the right thing. I like to use the analogy of a
doctor. Every time you go to a doctor, they make
notes about your medical condition. If you
see another doctor, they know what was
discussed if they have your file. In our world
record keeping is critical. You need to keep
records, in writing or on a memory stick,
of what was discussed and the rationale
for the advice given.
lot of people skittish, and if there is no certainty
it is difficult to plan. Advisers are resilient – they
have been through many changes. Certainty will
enable them to plan their business models for the
long term. With RDR, advisers will need to know
their value proposition and what their product
offering is. This will differentiate them from online
calculators and robo-advisers.
You need to take a long term view and know
where you want to go if you are starting out in
the industry. If you are thinking of making lots of
money quickly, don’t start out.
There is money to be made but, like professional
sports, if you base your expectations on the
earnings of say the top ten tennis players, you
are deluded. Many younger advisers have a good
business mindset when entering the industry
and are looking to build a business. They know
what value they add and how to price it. Is there a
potential customer base? Absolutely!
I am part of HOG – the Harley Davidson Owner
Group. I bought my first Harley around 12 years
ago – I suppose in a way it was a midlife crisis. I like
the brand, the freedom of the open road. When I
can, I bike to work. I also play golf.
I like sports and reading sports biographies.
Graham Smith, rugby players, Into Thin Air by
Jon Krakauer. Lance Armstrong was my hero till
he let me down. But the Tour de France has some
fantastic lessons for life and business. For me
balance is important – work is not everything.
Sometimes it is okay to do nothing.
VERY BRIEFLY...
Mazars South Africa announced the
merger of Mazars Business Rescue
Services with insolvency specialists Progressive Administration effective from 1
September 2014.
Maarten Boddeüs, a Figlo specialist
from the Netherlands has joined the
Yellowtail Business Solutions team in
South Africa.
MMI Holdings Limited announced that
the transaction by its Metropolitan International division to acquire a significant
majority stake in Kenyan insurer Cannon
Assurance Limited has been approved
without any conditions.
The Actuarial Society has approved the
establishment of an unsecured credit
sub committee mandated to investigate
current credit and provisioning practices
in South Africa.
Boutique investment management
firm, Perpetua Investment Managers,
launched its two core unit trust offerings
to the investing public on 1 October
2014.
Compli-Serve SA announced that its
news portal CompliNEWS has been accredited with CPD points.
Two of South Africa’s top financial and
economic commentators -- Chris Hart
and Glenn Silverman from Investment
Solutions -- have written and published
Half Way There, a book that offers a
comprehensive account of the five
members of the BRICS and their
relationships with one another and with
the rest of the world.
I am looking forward to
RDR because it will give
us some certainty. The
first time we heard about
RDR was November 2011.
Questions raised then got a
MAKING AN IMPACT
Collaborating to make a difference
A
ccording to recent statistics
33 million primary schoolaged children in Sub-Saharan
Africa do not go to school.
According to Rob Taylor, director
at Columba Leadership Academy,
“young people and consequently our
society, are at unacceptably high risk
due to poor educational standards,
high drop-out rates at school, massive
youth unemployment, poverty and
HIV/AIDS.”
The Columba Leadership Academy,
started by Taylor, provides valuesbased leadership programmes to
empower young people in tough
realities to connect with their full
potential and create groups to drive
sustainable social change.
With the help of Aon South Africa,
Columba was able to extend the two
year leadership course to students at
Minerva High School in Alexandra,
Johannesburg.
The course began with a three
month community engagement
process, which was followed by a
six-day residential academy at a
game lodge.
The program is concluded with
eighteen months of practical
leadership projects, evaluation
and support.
“Besides sponsoring children to
go on the leadership training with
Columba, Aon also actively recruits
young people from the academy for
our learnerships,” says Leo Morwe,
chief human resources officer Aon.
These students went on to create a
movement called Marking Incredible
Change (MIC) that is aimed at
positively impacting their generation.
Investec Asset Management
announced the appointment of Nick
Marsh as associate principal. Nick joins
from LGV Capital in London where he
was an investment director.
Vitality members will be able to claim
R750 from their Discovery Health Medical Scheme day-to-day benefits if they
have funds available for their Vitalitylinked fitness devices. Vitality currently
has partnerships with Fitbug, Fitbit, Jawbone, Garmin, iHealth, and Polar, and
members can get up to 25% cash back
on a selected range of fitness devices
with the HealthyCare benefit
NEWS & OPINION
30 November 2014
5
Legacy retirement products offer value
P
OGILVY CAPE TOWN 72720/E
eople who invested
in legacy retirement
annuity (RA) products
– also called old generation RAs –typically received
above inflation investment
returns at maturity, according
to research by Sanlam.
The research involved
individual analysis of all of
Sanlam’s pure savings legacy
RA policies that matured in
2013, and was conducted to
determine the value of these
old generation products to
clients, says Anton Gildenhuys,
chief executive of Actuarial at
Sanlam Personal Finance.
The research study found
that by far the majority of
policies achieved positive real
returns (above inflation) after
fees and taxes. Moreover, 60%
of the policies achieved 2%
above inflation.
This, says Gildenhuys, is
despite the impact of early
termination and other
alteration charges, and
despite the low premiums.
The exception is offshore
policies, which achieved
poor investment returns, and
policies where policyholders
paid very small premiums
for less than a quarter of the
policy term.
Policyholders
who do not
terminate their
RA policies
before maturity
receive excellent
value from
legacy products
The policies analysed were
divided into ‘clean’ policies
(where policyholders paid all
their premiums until maturity)
and policies with ‘alterations’
(where policyholders made
their policies paid up before
the maturity date).
“It is important to note that
70% of all the legacy policies
analysed received monthly
premiums of less than R500.
Having access to retirement
products at such low
premiums is extremely limited
today, if not impossible to
find,” says Gildenhuys.
Of the clean policies, all
delivered a positive real return
– returns in excess of inflation.
More than half (57%) achieved
a real return of between 2%
and 4%, and 39% achieved
real returns above 4%. “This is
an exceptional result which
should exceed client expectations,” he says.
The policies with alterations also showed good results.
Where premiums were paid
for more than 75% of the
policy term, 96% achieved a
positive real return. With premiums paid for 50% to 75% of
the term, all but nine policies
achieved a positive real return.
Premiums paid for 25% to
50% of the term resulted in all
policyholders at least getting
their premiums back (with
88% of policyholders achieving
a positive real return), despite
the changes they made to
their contract.
Where premiums covered
less than 25% of the term, only
4% showed a negative internal
THE FURTHER YOU TRAVEL,
THE MORE OPPORTUNITIES YOU’LL FIND.
With a yearly round trip that stretches over 16 000km, the grey whale has
one of the longest migrations of any mammal in the world. The journey is
taxing, but they undertake it to find the most favourable conditions for
welcoming their progeny into the world. Like us, the grey whale knows
that to get the best results, you often have to go a bit further. This is why,
together with our global asset management partner Orbis, we give you
access to investment opportunities beyond the 1% of the global equity
market represented by South Africa. We know that the choices out there
can be overwhelming, so we’ve narrowed down the options to what we
think are the most favourable offshore investment opportunities, in the
Orbis Global Equity Fund. If you share the grey whale’s attitude
towards the future, call Allan Gray on 0860 000 654 or your
financial adviser, or visit www.allangray.co.za
rate of return (with 52% of
policyholders achieving a
positive real return). This
means the policyholder
received less than the sum
of his or her premiums at
maturity.
“The main reason for poor
returns with some of these
policies is due to alterations where premiums were
reduced dramatically, or
stopped, very early in the term
of the policy.”
Gildenhuys says the
research results confirm that
policyholders who do not
terminate their RA policies
before maturity receive
excellent value from legacy
products. With limited
investment choices,
investors generally
remain in the asset
allocation initially
selected for the duration
of the policy, with
above-average results.
“This indicates that
sticking to one’s investment
choices and not switching
regularly between underlying
investment funds usually leads
to good returns.”
“The belief that there is
something wrong with these
products has led to policyholders taking their accumulated savings, paying an
early termination charge, and
transferring to new generation
products that they believe will
offer better value for money.”
Note: Legacy products are
policies taken out at least 15
years ago and usually invested
in a single, balanced fund. They
have low monthly premiums –
sometimes less than R250 – and
are often supplementary to
other retirement provisions of
policyholders.
(iii)
(ii)
(iv)
(v)
(i)
Artist’s impression.
(vi)
Collective investment schemes in securities are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of
underlying international investments to go up or down. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. Commission and incentives may be paid by investors to third-party intermediaries and, if so, would
be included in those investors’ overall costs in investing in the Fund. Subscriptions are only valid if made on the basis of the current prospectus, which is available upon request from Allan Gray Unit Trust Management (RF) Proprietary Limited, a member of the Association for Savings &
Investment SA (ASISA). A schedule of fees and charges and maximum commissions is also available on request. Allan Gray Proprietary Limited is an authorised financial services provider.
72720-Whale 155x220.indd 1
2014/09/29 4:42 PM
6
NEWS & OPINION
30 November 2014
Fiduciary Matters
Brought to you by the Fiduciary Institute of Southern Africa (FISA)
Louis van Vuren
T
he fourth annual FISA
Conference was held
in Johannesburg on 18
September 2014. Following below are synopses of
the ten presentations made at
the conference, under the banner of the overall theme: ‘Are
you fit for the challenges?’
Anne Klein, head of the
Maitland Private Client Team
in Johannesburg, spoke about
the Foreign Account Tax Compliance Act. This new piece of
legislation in the USA will have
far reaching implications for
any entity managing funds on
behalf of anyone with American citizenship or permanent
residence. Although the
international application and
the impact on South Africa is
still being negotiated, it could
lead to even trustees of South
African trusts with American
beneficiaries being placed
under the obligation to report
income and capital distributions to such beneficiaries to
American tax authorities.
Ronel Williams, a fiduciary
specialist at Nedbank Private
Wealth in Cape Town, referred
to the huge compliance burden
already placed on fiduciary
practitioners, with reference
to deceased estates and trusts.
She dealt with some of the
provisions of ten pieces of
Conference stimulates lively
fiduciary discussion
legislation placing this burden
on practitioners, including the
Administration of Estates Act,
the Trust Property Control Act,
the Attorneys Act, the Promotion of Administrative Justice
Act and the Promotion of Access to Information Act.
Rowan Stafford, an associate at Eversheds Attorneys in
Johannesburg, shared some
of his insights on so-called
“sham” trusts, alter ego trusts,
and generally ‘looking behind’
the trust form. Stafford holds
a master’s degree in law (LL
M) and wrote his thesis on this
topic, which was referred to in
a recent Western Cape High
Court judgement.
He reiterated that for a trust
to be declared a sham, none of
the trustees nor the founder
must have had an honest
intention to create a trust.
He also proposed that the
question should be answered
with reference to the essential
elements of a trust in South
African law.
Messrs Anton Maskowitz of
Sanlam Private Investments,
Harry Joffe of Discovery Life,
and Chris Murphy of Legacy
Fiduciary Services, took part
in a panel discussion on the
challenges of dealing with
lay persons as co-executors and
co-trustees.
Technical nature of fiduciary
practice a challenge
Due to the highly technical
nature of fiduciary practice
it can be very challenging to
deal with persons without
any knowledge or experience in these roles. It is also
common for such lay persons
not to comprehend fully their
fiduciary duty and potential
liability. All three participants
agreed that these persons can
play a useful role, but that the
fiduciary professional should
take control and manage the
situation with sensitivity and
professionalism.
Professor Marius de Waal
of the Law Faculty at the University of Stellenbosch spoke
about the potential confusion
between the legal figures of
modus, suspensive condition, and
resolutive condition when drafting wills and trust deeds. He
pointed out how testators can
mean to achieve one goal, but
that inaccurate drafting could
lead to that goal not being
achieved because the wording
used created different obligations for heirs and beneficiaries from those intended.
James Faber from the Law
Faculty at the University
of the Free State dealt with
the tension between the
requirement that a will must
be in writing and in hard
copy on the one hand, and
the technological advances
in communication and
document management on
the other. He referred to
developments in countries
like Australia, New Zealand,
the United States and Canada.
In Australia wills created on
smartphones and of which
only an electronic copy exists,
have been accepted by the
courts in some of the federal
states. He also referred to the
need to authorise someone
to be able to access one’s
electronic accounts, records,
and social media profiles
after death. Valuable material
may be stored in cyberspace,
eg photographs, documents
relating to patents and other
intellectual property.
Professor Leon van Vuuren
of the Ethics Institute of South
Africa posed some challenging
questions about ethical
behaviour.
He suggested a quick ethics
test consisting of five questions
- Is it legal/procedural? How
will it look in a newspaper? Is
it consistent with my professional values? Is it fair to all?
If I do it, will I feel bad?
If one is uncomfortable
with the answer to any of these
questions, it is a good indication that it is a slippery slope.
The Chief Master of the
High Court, Adv. Lester Basson,
spoke about trends in the
number of deceased estates
reported and trusts registered
per annum.
He also reported on
progress with the process to
move to a paperless regulatory
and compliance process in the
offices of the Master across
the country. Adv. Basson
shared his vision of a paperless
environment, with the
exception of the documents
which are by law required
to be in hard copy. Copies of
the above presentations are
available on the FISA website
at www.fidsa.org.za
This article was written by
Louis van Vuren, Acting CEO of
FISA, the Fiduciary Institute of
Southern Africa.
16347/E
WE PREACH
CONSISTENCY
BECAUSE WE
PRACTICE
CONSISTENCY.
Inflation Plus Fund Top quartile over 3, 5, 7, 10 years
Balanced Fund Top quartile over 3, 5, 7, 10 years
Equity Fund Top quartile over 3, 5, 7, 10 years
Global High Yield Bond Fund of Funds Top quartile over 3, 5, 7, 10 years
Enhanced Income Fund Top quartile over 3 and 5 years
Source: Morningstar
If you’d like to benefit from our long-standing philosophy based on prudence and consistency,
speak to your financial adviser or visit www.prudential.co.za/our-funds
Consistency is the only currency that matters.
Source: Morningstar data for periods ending 31 August 2014. Assets are managed by Prudential Investment Managers (South Africa) (Pty) Ltd,
which is an approved discretionary financial services provider #45199. Collective Investment Schemes (unit trusts) are generally medium to long-term
investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to future performance.
Unit trust prices are calculated on a net asset value basis, which is the total book value of all assets in the portfolio divided by the number of units
in issue. Fluctuations or movements in exchange rates may also be the cause of the value of underlying international investments going up or down.
Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Commissions and incentives may be paid and if so, would be
included in the overall costs. Different classes of units apply to the Prudential Collective Investment Scheme Funds and are subject to different fees
and charges. A detailed schedule of fees and charges and maximum commissions is available on request from the company. Forward pricing is used.
All of the unit trusts may be capped at any time in order for them to be managed in accordance with their mandates.
8
PRACTICE MANAGEMENT
30 November 2014
Increasing UMA competition
Yurika Pistorius
Compliance
Corner
H
ealthy
competition is the
underpinning of
our society and
economy. It ensures providers
of service are up-to-date,
efficient and productive.
Competition provides the
consumer with the best
possible product.
In killing or eliminating
the competition, one may
win the battle, but one will
definitely lose the war. In
his book Ishmael Daniel
Quinn states: “Any [group]
that exempts itself from the
rules of competition ends up
destroying the community
in order to support its own
expansion.”
The binder regulations,
which came into effect on the
1st of January 2012, stipulate
that either an Underwriting
Manager Agent (UMA) or a
Non-Mandated Intermediary
(NMI) may be a binder
holder.
The UMA acts as an
agent of the Insurer (ie as
if the UMA is the Insurer)
and does not act on
behalf of a policyholder,
potential policyholder or an
independent intermediary.
The binder regulations
allow an insurer to pay a
binder holder a fee for the
services rendered under the
binder agreement.
This fee must be reasonably
commensurate with the
actual costs incurred by the
binder holder associated
with rendering the services
under the binder agreement,
with allowance for a
reasonable rate of return
for the binder holder. The
criteria are necessary to
deter circumventions of the
commission regulations and
inappropriate incentives.
The regulations do not affect
any commission that may be
payable to an intermediary for
the rendering of services as an
intermediary.
The UMA does not solicit
policies from, or market to,
the public or any segments
of the public on behalf of
the insurer. A UMA performs
binder functions and/or
other outsourced services
on behalf of the insurer
and provides specialist
technical insurance skills
and knowledge in a
particular type of business.
These binder functions are
regulated by the binder
regulations, and also by a
written agreement between
the Insurers and the UMA.
The NMI, on the other
hand, acts as a representative
or an independent
intermediary, other than a
mandated intermediary or a
UMA. An NMI simultaneously
acts or may act on behalf
of an Insurer and a
policyholder.
The Insurer ‘outsources’
these binder functions
to technical specialists
or experts. The UMA
predominately underwrites
specialised or commoditised
insurance.
The UMA is
prohibited from
marketing or selling
insurance policies
to the policyholder,
so these functions
are performed by
the Insurer and
intermediaries. Some
reasons why an insurer
would ‘outsource’
functions to a UMA
include the cost of
overheads if the Insurer
performs the functions
internally, as well as if
there is a lack of required
expertise internally to
provide the service or
product offering.
The UMA is
prohibited from
marketing or
selling insurance
policies to the
policyholder,
so these
functions are
performed by
the Insurer and
intermediaries
This is in relation to the
policies to which the binder
agreement relates, or to an
outsourcing fee payable for
the outsourced functions
performed by the binder
holder on behalf of the
UMA
Underwriting
Manager Agent
NMI
Non-Mandated
Intermediary
insurer, provided that the
commission regulations are
complied with.
The UMA is remunerated
through a binder holder
fee, and is not remunerated
through commissions. The
UMA, unlike an intermediary
is solely an agent for the
insurer. Competition in the
market is increasing due to
cut throat margins.
UMA’s are only entitled to a
binder holder fee for services
rendered under the binder
agreement; however, they
can share in the profits of the
insurance business as well.
While an NMI can also be paid
commission on top of the
binder holder fee, subject to
that the intermediary may not
be remunerated for the same
or a similar service twice. The
UMA is in competition with
not only other UMA’s but
other types of binder holders
as well.
What will differentiate
one UMA from another is
not necessarily price, but
rather good, sound technical
underwriting, the selection
of risks, claims management,
the use of economies of scale,
expense management and
the use of technology and
creating efficiencies.
Yurika Pistorius is compliance
officer at Compli-Serve SA
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Money Marketing.indd 1
2014/04/08 11:12 AM
PRACTICE MANAGEMENT
30 November 2014
9
The Gallows of Political Wisdom
Ian Kilbride
The Insider
Chronicles
S
o in a narrow revolt
against the William
Wallace of the 21st
century, Mr Alex
Salmod, the Scots have
‘given up their freedom’,
or at least continue under
Westminster’s rule.
Other than a brief
moment, when the
‘ruling establishment of
Westminster’ panicked
following a poll showing the
YES tartan hordes ahead, a
moment that even saw Mr
Dave Cameron call his own
party the ‘effing Tories,’ was
there ever any real doubt?
Yes there was and at times the
head of the NO vote Alistair
Darling looked seriously like
the YES vote’s secret weapon,
but even that stiff twit could
not get the Scots to jump ship
and go all native!
Because my friends
Independence, be that for
any entity, a nation or even
an individual, is a hard call to
make and take. If you don’t
believe me then just ask any
parent of a teenager or 20
something, who is trying to
get them to leave home and
move out, familiarity may
breed contempt, but it’s a
security blanket and sense of
comfort that is hard to walk
away from!
In this particular case,
an age old state of mutual
suspicion and yet respect,
and after 300 years of Union,
Scotland and England are
like two mighty trees, but
trees from different seeds
who have grown side by side
together. Their strong limbs
are interwoven and have
been supporting each other
for centuries, they are not so
simply separated, they need
each other.
Yet the debate
had me thinking,
what about an
independent,
Gauteng, Western
Cape, Kwazulu
Natal or, bless
them, Eastern
Cape? Or what
if the English
had their
own vote on
independence,
for years the
joke in Britain
was always that
a poll had shown
that only 40% of Scots, 30%
of the Welsh and 20% of the
Northern Irish, but 80% of
the English were happy to let
them go!
This is not that surprising
when you learn that in all
of the four countries, that
make up Great Britain, the
Englishman receives the
lowest amount of financial
support from the tax
spending of the treasury.
We are better together,
or so the politicians in
many countries cry. Bigger
countries, bigger unions of
nations, an expanded US, EU
or even AU, but why not a
‘Free State of Cape Town’ or
a ‘Principality of Durban’?
Were we not once all part
of smaller more culturally
similar types, is the US not
really still a nation of
50 smaller autonomous
states and where would ‘you’
choose to live if such a break
up occurred here in Southern
Africa?
Me, well I would live
in the more egalitarian
and business centred
Johannesburg, but I would
escape the business buzz for
holidays in ‘Europe in Africa’,
namely Cape Town.
So here we are, with the
Scottish seemingly satisfied
and the Russian’s drifting
slowly out of the Ukraine,
and one may think that the
message is a cry for unity, but
do not be fooled my friend.
This is only the beginning,
this is the thin edge of a
growing human wedge,
the need for identity, a
trend that has repeated
and rolled around like
a wheel of ‘consolidation
and disintegration’ since
the Greeks, Romans, English
and others decided in their
great wisdom that bigger was
better.
The super states may have
had their day, in this turn
of history, the independent
individual could be on the
march. My one prediction is
that Scotland’s referendum
only further opens the
debate, rather than closes
it, who decides our fate
and how accountable those
politicos are to us the voters
will open even more debate.
Democracy is not easy,
remember the following the
next time that a politician
pitches to you and thinks
himself or herself very clever.
“The gallows of the world
groan with the
weight of politicians
who boasted of
their foresight,
all of history is
nothing but a lack of
foresight.”
Not today
or even next
year, but one
day William
Wallace, and
many more
like him, will
have their
day in the
sun and then
they will all
have “their
freedom”!
Ian Kilbride
is chairman of
Warwick Wealth
Limited
Financial planning should benefit more
A
s a profession,
financial planning
in South Africa
has come a long
way. But the use of financial
planning remains too
narrow.
Financial planning has
benefits for every person who
is managing their personal
finances. From the basics
of managing a day
to day budget to
detailed estate
plans – there
are more
who could
benefit from
the services
of a professional
financial planner than
those who use their
services.
CEO of the Financial
Planning Institute of
Southern Africa (FPI) ,
Godfrey Nti, says that
their vision is professional
financial planning for all.
“Financial planning is vital
to everybody, especially now
with the high level of debt,”
Nti comments.
He says that there are
a good number of South
Africans in financial
difficulty. “Most South
African households need
someone to hold their hand
and guide them.
Many of those earning
a salary are not surviving
from one paycheck to the
next.
Financial planning
looks at cash flow.”
This is one of the real
values of a financial
planner. Managing your
finances is not just about
an investment and a policy
– it is about how you manage
your money.
And as Nti notes, for many
it needs to be an ongoing
process. There is a lot you
can do in one meeting –
but ongoing coaching and
guiding can add a lot more
value.
This aspect of financial
planning is more important
right now for most
South Africans.
But contrast it with the
more common practice of
selling a product. Do South
Africans need a product or a
financial plan?
An ideal would be for
everyone to have access to a
financial planner – but you
cannot ignore the economics
of the situation.
Financial planners
are highly skilled and
experienced and need to be
paid appropriately for their
services.
You can fill some gaps with
pro bono work, and the FPI
encourages its members to
do this – but as Nti says, “pro
bono can only go so far.”
“We need to come up with
a model that rewards people.
As an industry we need to
find a way to plug this gap.”
For example, Nti says we
could look at an employer
based benefit – here
employees would have
access to say 20 hours with a
financial planner for the year.
And why not make this a tax
exempt expense?
If we do this, Nti says
the industry will be much
stronger, and the public
will have more trust in the
profession.
10 PRACTICE MANAGEMENT
Focus on the
business
Writing on www.
financialplanet.org, CFP
Almo Lubowski says that
nobody is under any
illusion that a financial
planning practice is in the
business to be profitable
and serve as a source of
income for its owners and
employees.
“However, it is
unfortunate that many
still overlook the need to
engage in implementing
some important practice
management strategies
for their businesses in
favour of purely focusing
on sales targets and
production.”
Lubowski says
that these practice
management strategies
are too easily and too
often overlooked because
“they do not directly
relate to generating
revenue or acquiring
clients, at least not
initially.”
But as he notes, they
are an absolute necessity
in “building a foundation
for a practice that wants
to grow and thrive in
the long term. Focusing
too much on sales
targets is a short term
strategy that often takes
focus away from long
term sustainability of a
practice.”
Examples of practice
management strategies
• Creating a compelling
vision and strategy for
the practice’s future
• Defining a unique client
value proposition
• Embracing and
harnessing compliance
requirements into
useful business
processes
• Ensuring clients’ take on
processes are enhanced
rather than shortened
in favour of new
business quickly
• Developing more
sustainable charging
mechanisms for your
practice
• Developing and valuing
staff
30 November 2014
Prioritise your growth steps
By Mimi Pienaar, head of
Practice Management, Masthead
I
n the previous article
we unpacked the first
step which focused on
addressing the current
state of your business. We
looked at both internal and
external data, the state of
the industry where you find
yourself and a comprehensive
analysis of your clients.
Once you’ve conducted an
assessment of your business,
you’ll naturally start to
develop an action plan and
want to start setting goals.
Before you embark on
this, it’s important to stay
focused and adopt a balanced
approach.
The assessment part was
vital in order to help uncover
how your entire business is
geared to drive key strategic
indicators.
As we move into the
prioritisation part of building
business value and long term
sustainability, it’s important
to shift your mindset to
knowing that whatever
you imagine is achievable.
Once you have established
this mindset, you’ll be more
mentally prepared to start
asking yourself defining
questions that will reveal the
core of your strategic and
business plans. These could
be: What would you have to
do or change to reach what
seems like the impossible.
We recommend that
you spend enough time
visualising and defining your
ultimate business objective.
Do this before you jump into
taking actionable steps such
as mentally assigning projects
and deadlines to your various
team members.
To simplify this process,
we have provided a Practice
Management Growth Steps
Checklist which provides
guidelines on the journey
toward building business
value. This will help you to
prioritise your tasks and
ultimately bring you closer
to your overall business
objectives.
It’s the responsibility of the
business owner to identify
gaps within his/her business
(based on the below checklist)
that will have an impact on
its operational effectiveness.
Here are some examples that
illustrate how you can start
expanding on your Practice
Management Goal Checklist:
Marketing Foundation –
We need to find a proactive
plan for creating new sales
from existing client referrals.
Management Foundation
– We need to establish a
recruiting and hiring process
that sources ideal employees
for the business and ensure
that the existing employees
are operating at their most
productive and efficient in
support of business plans.
Financial Foundation –
We need to have an effective
financial management system
in order to track key financial
indicators and manage
annual budgets. Building
long term sustainability and
business value is at the core of
streamlining the business.
It’s important that you
allocate a sufficient amount of
time for applying your mind
to these goals before moving
ahead and addressing the
more tactical components
of your business plan. The
more time you invest in this,
the more creative you will
become throughout the rest
of the planning process and
no matter what your budget
or resource constraints may
be, you’ll be able to take
a significant step towards
reaching your goals.
Building a successful
business only happens
one step at a time and the
initial steps are always the
crucial one’s for ensuring
maximum, long term growth,
business value and long term
sustainability.
Masthead’s Practice Management Growth Steps Checklist:
1. Leadership Foundation –
This requires an analysis of your
current business disciplines.
2. Financial Foundation – This
requires financial planning
through an understanding of
the relationship between your
business budget and your business
activities.
3. Management Foundation –
The purpose of this is to create
business continuity through the
implementation of robust systems
that run every aspect of the
business; and then develop roles
for people who can manage and
monitor these systems effectively.
4. Marketing Foundation – This
aims to deliver a single minded
dedication to your client - getting
to know who they are, what are
their needs and how to engage
them effectively.
5. Lead Generation – This is
where income opportunities are
created for the business by using
structured business processes.
6. Lead Conversion - This is
where potential leads can be
converted into actual income.
7. Client Fulfilment – This is the
bread and butter of your business
and requires you to deliver an exceptional product/service so you
can exceed client expectations
and retain your customers.
FPI partners with Sanlam
Proficiency of financial planners to be enhanced
T
he recent global
Comparator Research
Survey, conducted by
Financial Planning
Standards Board (FPSB), revealed that the value of a certified financial planner (CFP)®
professional to business has
grown in recognition.
According to the survey,
60% of firms surveyed in South
Africa, saw an increased profitability as a result of employing
CFP® professionals while 80%
indicated that CFP® professionals (in general) generate
higher levels of revenue. In
addition, 60% found that these
professionals lowered their
compliance and legal risks.
As a result, these firms
are encouraging financial
planners to attain the CFP®
designation, a trend supported
by the partnership between
the Financial Planning
Institute (FPI) and Sanlam –
through The FPI Corporate
Partner™ agreement.
The FPI Corporate
Partner™ agreement has
been established to raise the
competency levels of financial
planners and financial advisers
through various up-skilling
initiatives.
60% of firms surveyed in
South Africa saw an increased
profitability as a result of
employing CFP® professionals.
80% indicated that CFP®
professionals (in general) generate
higher levels of revenue
“Sanlam is excited about
becoming an FPI Corporate
Partner™.
This positive development
is confirmation of Sanlam’s
continued drive to
professionalise our financial
planning business to
the benefit of our
clients,” says
Kobus Vlok,
chikef executive
of Sanlam
Personal
Finance.
INVESTING 11
30 November 2014
Old Mutual Investment
Group picks up global award
O
ld Mutual
Investment Group
has been awarded
the Best African
Fund Manager award at
the African investor CEO
Institutional Investment
Summit and Index Awards
2014, a prestigious ceremony
which took place at the New
York Stock Exchange recently.
The Africa investor (Ai)
Awards are unique panAfrican business and capital
market investment awards
that recognise and reward
the achievements of the
private sector including stock
markets, regulators, listed
companies, fund managers,
stockbrokers and analysts
who follow African equities.
Alongside each annual
Africa investor Institutional
Investment Summit, Ai
offers a set of awards to that
focus on the capital market
successes across Africa.
Old Mutual Investment
Group director of
Investments, Hywel George
says that the asset manager
is immensely proud of this
achievement.
“Our submission for
the award highlighted the
performance of the African
Frontiers Active Equity Fund,
managed by Cavan Osborne
and his team at our Old
Mutual Equities boutique,”
he explains.
“As the largest private
investment manager in
Africa, Old Mutual has a large
African footprint, with a full
complement of both listed
and unlisted capabilities
across the continent.
With access to in-country
expertise and contacts, we
continue to ensure that our
customers benefit from the
outstanding investment
potential of Africa’s stock
exchanges, via both actively
managed and index-tracker
funds.”
Old Mutual was chosen
as the winner of ‘Best
African Fund Manager
2014’ from a list of eight
shortlisted candidates which
included FBN Capital Asset
Management, Investec Asset
Management, Franklin
Templeton Investments,
Momentum Asset Managers,
Emerging Capital Partners,
Ashmore Group and Soros
Fund Management.
“It’s always an honour to
be recognised for our work
in Africa,” says Old Mutual
South Africa CEO, Ralph
Mupita.
“Old Mutual has a long
history of investing in
Africa through retail and
institutional life and pension
funds. In addition to the
contribution to growth and
development in the region,
our customers have also been
rewarded with good returns.
The African investor award
motivates our business
in its continued objective
to become an African
Financial Services
Champion while
growing our other
emerging market
businesses.”
Delegates at the
Awards ceremony
included heads
of African stock
exchanges, leaders at
the United Nations,
Public Investment
Corporation, large
pension funds, the
World Bank, the Central
Bank of Central African
States and CEOs, as well
as senior government
ministers in Africa.
HOW MUCH IS ENOUGH TO GIVE
YOUR DAUGHTER A DREAM
WEDDING & STILL GROW YOUR
INVESTMENTS LOCALLY & OFFSHORE?
Let Old Mutual Investment Group deliver on your ‘enough’ by putting
its 169 years of investment expertise to work.
The rand’s performance is up today, down tomorrow, but one thing that doesn’t
change - your dreams and goals. Whatever the rand does, what you really need to
know is how many rands invested is enough for your lifestyle, today and tomorrow?
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 those goals. Solutions like the Old Mutual Global Equity Fund – a
consistent top quartile performer over all periods and since inception*. 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 periods to 30 September 2014. Since inception 1994.
FCB10016100JB/E
12 INVESTING
30 November 2014
Correlations not immutable
… current events prove it
By Chris Botha
R
ecently, correlations between share
prices and underlying
company fundamentals – as well as global stock
markets – have broken down
somewhat. The main reasons
are excess global liquidity
and the search for yield by
investors. The principal driver
of markets has been expectations around the timing of US
interest rate hikes.
Emerging markets have
benefited due to higher real
yields on offer compared to
developed markets that in
most cases yield negative real
returns.
Equity multiples in most
emerging markets have
expanded rapidly due to
this carry trade, with prices,
in general, not being supported by sufficient earnings
growth, though the recent
JSE pullback of 5% somewhat
diminished this mismatch.
The US and the Eurozone
are juxtaposed in terms
of economic growth and
interest rate cycles. The
Eurozone remains
characterised by too much
saving and hardly any
spending.
The Fed is in a
different cycle and will
remain data dependent in
its decision on the timing
of hiking interest rates
(expected by mid-2015).
I believe hikes will be
implemented cautiously in
order not to derail economic
recovery. The dollar may
therefore stay firm relative to
other major currencies on expectations of higher US yields,
with a potentially negative
impact on commodities and
emerging market assets. In
these circumstances, the carry
trade will probably reverse as
investors chase the prospect
C
M
Y
Sculpture by Beth Diane Armstrong
The principal driver of markets
has been expectations around the
timing of US interest rate hikes.
I believe hikes will be implemented
cautiously in order not to derail
economic
recovery
Prescient Money Mktg 1-4 Goose Ad_r.pdf
1/6/14
12:47:53
of higher US yields at lower
perceived risk.
In many cases, foreign
portfolio flows into emerging
markets fund large current
account deficits. Once funding dries up as investors exit,
severe currency weakness will
be a threat, forcing these markets to hike interest rates to
realign their rate cycles with
that of the US.
Earnings optimism in the
US, in particular, is likely to
support equity prices for the
foreseeable future, with the
main risk being the timing
of interest rate hikes. This is
reflected in decreasing equity
risk premiums, which are
trading at near record lows on
a medium term basis.
Faced with deteriorating
economic fundamentals in
Europe, the ECB recently
surprised markets by further
cutting key policy rates.
Mario Draghi announced
PM
that the deposit rate is now
-0.20%, with the benchmark
refinancing rate set at 0.05%
while the marginal lending
facility was reduced to 0.30%.
These and other measures will
likely cause a major expansion
in the ECB’s balance sheet
and hopefully in the balance
sheets of commercial banks.
The ECB set a target for its
balance sheet to expand to
EUR3000 billion – similar to
2012 levels. However, doubt
remains whether this will
translate into credit demand
in the consumer economy,
due to continued deleveraging and low consumer
confidence. The need for
further ECB action cannot be
ruled out.
Volatility will remain in the
near term until global interest
rates normalise.
The JSE All Share fell 5% in
September, with heightened
volatility. Foreign selling may
put further pressure on our
market in the short term, as
indicated by the weakening
rand. The currency impact on
earnings, however, should be
positive. The market currently
trades on a trailing price earnings ratio of 17x after reaching a high of 19.2x in May and
is offering far better value at
current levels.
Reported earnings remain
robust and our view remains
that our market will largely
be driven by expected interest
rate movements by the Fed
and the SARB reaction.
Correlations between local
share prices and underlying
company fundamentals may
therefore remain fuzzy for
some time as the key driver
could well be US rate hikes.
Chris Botha is director: Fund
Management of Imara Asset
Management, South Africa
WHILE OTHERS
ZIG AND ZAG,
WE STAY IN FORMATION.
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proven way to reduce investment risk, and increase wealth.
CMY
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and
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v i s i t w w w. p re s c i e n t . c o . z a .
INVESTMENT MANAGEment
LOCAL AND OFFSHORE INVESTMENT MANAGEMENT / UNIT TRUSTS / STOCKBROKING / RETIREMENT PRODUCTS
UMBRELLA FUNDS / PROPERTY / ADMINISTRATION / AUTHORISED FINANCIAL SERVICES PROVIDER
INVESTING 13
30 November 2014
Look offshore for equities
G
lobal equities are
the preferred asset
class for diversified
portfolios going
into the last months of 2014,
as South African equities look
relatively expensive, and fixed
income investments like bonds
possibly face more volatility as
interest rates rise both locally
and in the US, according to
Graham Mason, chairman
of Prudential Investment
Managers.
“Many global equity
markets like the US remain
reasonably priced despite
having experienced good
gains so far this year.
For the MSCI World Index,
both the forward price-toearnings ratio and the priceto-book ratio are still below
their long term averages.
Meanwhile, the FTSE/JSE All
Share Index, with a price-tobook ratio of around 2.3, is
expensive by historic measures
– about 20% more expensive
than global equities,”
says Mason.
“As active managers, we
have been tempering our
local equity exposure in
multi-asset funds like the
Prudential Balanced Fund
while remaining overweight
global equity.
Together, our local and
offshore equity holdings make
us overweight equities in total
– this reflects our belief that
equities should still provide
better returns than other asset
classes over the medium term.”
While industrial and randhedge shares remain expensive
generally, Prudential sees
pockets of value in financial
stocks (like Investec) and
diversified resource companies
(like BHP Billiton), Mason
says. Sasol has also been an
overweight holding.
“However, while many
would consider resources a
MSCI WORLD AND FTSE/JSE ALL SHARE PRICE-TO-BOOK
buy, we are more cautious for
two main reasons: 1) the time
we think it will take for global
commodity prices to turn; and
2) the quality of many resource
companies.”
Generally, he says, equity
investing conditions have
gotten tougher.
“There are fewer
opportunities for value
managers like ourselves
to find attractively valued
shares that have the potential
for outperformance going
forward.”
Meanwhile, listed property
also remains a preferred
asset class in the Prudential
Balanced Fund. The solid
earnings underpin from
rental income, despite a stillweak office sector, should
boost property companies’
distribution growth and
contribute to attractive total
returns of between 8-11% pa
for the sector over the next
few years. This compares
favourably with longer-dated
bonds.
While South African bonds
are vulnerable to rising
interest rates both locally
and overseas, the pricing
of long bonds in the 20-30
year area is such that they
offer fairly good value. Or
put differently, says Mason,
we believe that the yields at
the long end of the curve are
high enough to provide a
cushion against the automatic
transmission of rising rates
in the US. Our bond holdings
therefore favour longer-dated
government bonds, as well
as corporate bonds for the
enhanced yield.
So with the potential for
unusually volatile markets
as QE ends and interest rates
normalise in the US, Prudential
sees offshore equity as one
of the preferred asset classes
for diversified portfolios.
Adds Mason: “The outlook
for the rand is of course a
critical element. Although we
estimate that, at around R11/
USD the rand is undervalued
by about 20% on a longer term
fair-value basis, we remain
Graham Mason
Equities should
still provide
better returns ,
global equities
preferred for the
rest of 2014
concerned by the lack of
export response, as evidenced
by the large current account
deficit. We are therefore
retaining a full weighting
of offshore assets in the
Prudential Balanced Fund.
Source: Bloomberg and FactSet 31.08.2014
Fund Management • Asset Consulting • Portfolio Management
South Africa • Guernsey • Singapore • Isle of Man
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October 2013 Banner Ad.indd 1
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12/6/2013 11:29:35 AM
14 INVESTING
30 November 2014
Private share portfolios versus unit trusts
By Doug Turvey,
private client portfolio manager,
Cannon Asset Managers
M
ost investors and
financial planners
often only consider unit trusts
as a way to access investment
markets, and in many cases are
unaware of, or don’t understand the option of using
private share portfolios (PSPs).
In this article, we highlight the
difference between pooled investment vehicles such as unit
trusts (UT’s) and PSP’s. This
will help investors to make informed decisions that best suit
their needs and objectives.
Broadly speaking, PSP
investing typically involves
a bespoke investment
portfolio in which shares
and other securities are held
in the client’s name, and are
bought and sold on behalf
of the individual client by
the investment manager (a
PSP can also exist within a
wrapper such as a RA or
Preservation fund).
In other words,
asset allocation
and stock selection
within the portfolio can
be customised to suit the
client’s current objectives, risk
profile, return expectations
and future needs.
This may range from an
equity-only portfolio that
consists purely of listed shares,
through to more moderaterisk or conservative portfolios
that focus on giving investors
a high income yield while at
the same time enjoying some
capital growth.
PSP’s also typically entail
a high level of engagement
between the investment
manager and may even
involve the investor having
a say in some of the stock
decisions. Hence, clients that
are interested in investment
markets, feel closer to what
is going on in their portfolio.
Fees are also incredibly
transparent in a PSP, as any
charge in the portfolio has to
be levied as a line item in the
PRIVATE SHARE PORTFOLIOS
UNIT TRUSTS AND OTHER POOLS
Portfolio can be tailored to individual needs
Generic, one size fits all approach
Direct ownership
Pooled ownership
Negotiable management fees depending on portfolio
size
Fixed management fees
Transparent costs clearly shown on monthly statements
Standardised Total Expense Ratio (TER) which do not
always reflect all costs
Comprehensive monthly statements showing individual
stock holdings
Single line item showing number of units, price and
total value (NAV) and quarterly holdings
Customised face to face reporting on the contents of
the portfolio.
Usually quarterly holdings statements
Immune to cash flow impacts from other investors
Performance and expenses can be affected by the
activities of other investors.
Greater investment choice and opportunity, especially
among smaller cap shares
Large Units Trusts may restrict certain investment
opportunities in smaller shares
No lock-in periods or penalties on withdrawal
Some pooled investments may have a term or notice
period.
Require larger investible assets
Cater to the smaller investor for monthly and lump sum
contributions
Allows Financial Planners to bring additional assets
under advice, where Unit Trusts are not attractive to
the client
Typically preferred by IFA’s for compulsory portfolios
monthly statements which the
clients see.
On the other hand, unit
trusts and other pooled funds
are investment vehicles in
which a number of investors
co-invest their assets alongside
other investors so they can be
managed on a collective basis.
Investors are issued units in
the fund, which are re-priced
regularly to reflect changes in
the value of the underlying assets. Capital Gains Tax (CGT) is
only levied when investors sell
units in a fund, whereas every
time a share is sold in a direct
PSP, there will be a CGT event.
While regulators have tried
to standardise the measure of
total cost to investors in a UT
through a Total Expense Ratio
(TER), not all costs associated
with a fund are included in the
TER, and the actual costs can
be higher than those advertised. Interestingly, there are
many cases where a pooled
investment is ironically more
expensive than a bespoke one.
The table alongside
highlights some of the
differences between each type
of investment choice.
Given the choice available
to individual investors, making decisions about investing
for a better future can be a
daunting task. There are a
raft of products and solutions
suited to a number of investor
archetypes. These range from
the newly employed young
saver through to a sophisticated high net worth executive.
The investment industry
can, and given recent FAIS
requirements, must do all
it can to align itself with
investor interests, the onus
is also on the investor to
understand fully the types
of investment vehicles
available to them. Things
are constantly changing and
global trends show that as
investors and advisers demand
greater transparency, there is
increasing appetite for private
share portfolios as part of an
overall solution.
While unit trusts have
typically been the primary
investment vehicle for most
investors due to their ease
of access, the demand, not
only for transparent but also
bespoke solutions has been
growing significantly over the
last few years, particularly in a
Global context.
Given this wider choice,
flexibility on fees and greater
transparency of bespoke solutions, South African Investors
are now following suit.
IMARA
INVESTING
IN AFRICA
FA - Imara lower than average risk Ad 2014.indd 1
2014/08/25 2:36 PM
16 INVESTING
30 November 2014
Scale and margins in focus
As regulatory costs escalate, fund managers look to build scale and improve margins
A
lthough fund management is a growth
industry internationally, in South Africa
an onerous regulatory burden
is contributing significantly
to rising costs and squeezed
margins.
According to Eldria Fraser,
chief investment officer
at Prescient Investment
Management, “fund managers
always have an eye on costs
but these have become harder
to control with increased
regulation, compliance and
reporting requiring more
systems, software and staff.
“That’s not going to change
in the near future and fund
managers, reliant on trust and
confidence, will need to ensure
that their businesses remain
robust to ensure performance
is maintained and the risks
of compliance breaches are
mitigated.”
Fund management fees are
under scrutiny as the National
Treasury looks to broaden the
savings base, improve preservation and reduce the costs
of saving, which are regarded
as important because they
impact the end result.
“That it is now compulsory
to publish a total expense
ratio (TER) on fund factsheets,
which encapsulates management fees and costs, has also
placed the focus on fees,” says
Fraser. “However, a point often
missed is that the asset management fee is only part of the
overall cost of saving.”
A pension fund, for
example, can pay a negotiated
asset management fee based
on institutional bulk rates. But
the fund will also need to pay
an asset consultant, actuary or
employee benefits consultant
and administrator - resulting
in multiple layers of fees and
costs, all of which need to
be looked at. Fraser says that
when it comes to pricing,
South African fund managers
are competitive at both
the retail and institutional
levels when compared with
international norms.
This applies especially to
equity and balanced funds.
With bond mandates, some local fees are higher than those
charged internationally where
the ultra-large global index
bond managers, because of
their size, can charge unusually low fees.“What clients pay in
terms of fees depends largely
on whether they’re buying
passive or active investment
management services. Those
paying 3% or more are likely to
be invested in an active fund
where the fee is a consequence
of a performance component.
“Many institutional clients
prefer combined strategies
that utilise lower cost passive
or smart beta products
with others that
target active outperformance.
This core-satellite approach
can work well by maintaining
costs while also building in
a component to deliver outperformance,” she says.
Managers negotiate fees
either on a sliding scale
basis with no performance
element, or as a base fee plus a
performance fee.
Says Fraser: “Performance
fees have received a lot of bad
press, but can work well for
both the investor and the manager. Investors should consider
which is appropriate for them.
One of the things to keep
in mind when evaluating a
performance fee is that the
base fee should be lower than
the opposing sliding scale fee
offered. This ensures that the
manager is giving up on the
ongoing fee in favour of an
added performance fee when
doing well.
The performance
participation rate must be
reasonable with the market
norm to share between 10%
and 15% of outperformance.
The performance element
must be linked to an
appropriate benchmark and
hurdle. Whether a composite
index plus hurdle or inflationlinked hurdle, the benchmark
must fit the mandate. It is also
good to consider a cap on the
total level of performance fee
paid.”
“After that, it’s a case of
measuring the fund manager
against the hurdle. In this
regard, investors appointing
managers will look for longer
term consistency in an effort to
avoid chopping and changing
because of the costs involved.”
Although there has not
been a big reduction in the
fees charged by traditional
asset managers, new costeffective products like index
funds have been introduced to
the market.
With retirement reform
underway, these products have
an important role and ETFs in
particular have grown strongly
internationally, while in SA
the growth has largely been
limited to commodity and
offshore ETFs.
However, it’s important to
look carefully at what you’re
paying for ETFs
as the management fee or TER
may not be the full cost of
investing.
If you buy the ETF on the
market, take note of the
difference between the bid
and sell price and also check
if there is an additional
brokerage fee or entry charge.
This all affects the actual
return you achieve when
buying the product, which
is not reflected in the NAV
performance.
It can often be cheaper for
a larger client to buy an index
unit trust or negotiate a segregated account with a fund
manager rather than buying
an off the shelf ETF.
In terms of building asset
volumes, Fraser notes that the
distribution of investment
products in the institutional
market is set to change as part
of the reform of the retirement
industry. Stand-alone pension
funds will be encouraged
to become part of umbrella
platforms where fund mangers
will need to be represented
with the right products backed
up by performance.
Laurium Flexible
Prescient Fund.
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Investment Schemes in Securities (CIS) should be
considered as medium to long-term investments. The
value may go up as well as down and past performance
is not necessarily a guide to future performance.
INVESTING - EMPLOYEE BENEFITS 17
30 November 2014
Member choice: does it add value?
Too much member choice may not be in members’ interest
T
rustees of retirement
funds have become
used to giving
members choice with
regards to their benefits and
investments. While members
may like to be given these
choices, they may actually be
to their detriment.
Trustees should consider
the value of choice
Michelle du Toit, principal
consultant at Old Mutual
Corporate, says that
retirement fund members
often make decisions that are
not in their best interests.
“Trustees often give
members choices regarding
retirement fund contribution
levels, flexible risk benefits,
investment options,
retirement decisions and
whether to preserve their
retirement savings. Before
offering choice to a member
trustees should ask whether
it adds value to the member’s
retirement fund. Choice
should encourage the
member to consider the
long term repercussions of
their decisions, but often
too much choice allows
the member to make a
decision that negatively
impacts their retirement
fund by eroding their
contributions,” explains Du
Toit.
Trustees need to look at the
value that each choice adds
to the member’s retirement
fund. “Does it encourage the
member to save more? If the
answer is no, then the choice
offered may not deliver the
best value to the member’s
retirement savings.”
Consider the member’s
frame of mind
Du Toit says that the
member’s frame of mind
must be considered before
offering too many options,
as when it comes to options
at retirement, members’
decision-making is often
based on taking the highest
current ‘cash’ value.
“Choices such as
contribution rates of 2,5%,
6%, 7,5% or 10% of one’s
salary are usually given to
new members. However, if
only the option of 10% were
presented to the member,
would the member still
want to choose another
contribution rate? Members
often want to maximise their
take-home pay, so removing
the choices that are easiest
to make, would actually
increase the retirement fund
value to the member.
“Preservation has always
been a choice offered to
members exiting a fund,
but members do not
necessarily take the option
of preservation, as they do
not always take the long
term benefit of increased
savings at retirement
into account.”
Targeted
communication
strategy needed
Du Toit says
that a targeted
communication
and education
strategy on
investment
choice should
be put in place by
trustees
for members.
Studies show that
the greater the choice,
the more likely it is that
members will be conservative
and risk averse, which is not
necessarily the best strategy
for the individual.
“Trustees should weigh
up how much time they
versus their members spend
on reviewing investment
choice options, whether
members fully understand
high risk versus low risk
portfolios and whether the
information provided to the
member will have a
long or short term
impact. Providing
these choices
adds a huge
administrative
burden to
trustees.
If the
choice offered
does not add
value to the
retirement
fund, then it is
best to reconsider
the structure of
communication
to members.
In addition,
a clear and
targeted
communication
strategy should be deployed
to ensure that members
understand the risks
associated with choice.
Key questions every
trustee should consider
before offering members
choice • Are you considering
the member’s wants or
needs when offering the
choice?
• Does the choice add
value to the member’s
retirement plan?
• What is the member’s
mindset when making
the choices being
offered?
• Is the appropriate
default option in place?
• Is there an appropriate
communication strategy
in place to educate
members about their
investment decision?
• What would happen if
this choice was removed?
• What are the costs
involved in offering this
choice?
• What are the long term
consequences of getting
the choice wrong?
Investment choice badly managed
FedGroup recommends abolition of member investment choice for retirement savings
F
edGroup, South Africa’s
only independent life
insurance provider,
believes that the
practice of offering member
choice, in which members
of retirement funds choose
the assets in which their
savings are invested, should
be discontinued in the best
interests of the public.
FedGroup’s recommendation comes in the wake of
the publication of the 2014
Sanlam Benchmark Survey,
which shows that member
choice retirement savings are
badly managed by those who
select the option.
“What this means is
that people who opted for
member choice are retiring
with far less money than
they should,” says CEO of
FedGroup Life, Walter van der
Merwe.
“Certainly, their retirement
savings are typically well
below what they should have
been, making it much more
difficult for them to maintain
their standard of living.
“Research indicated to us
many years ago that we had
a duty to refuse to include
member choice in our
retirement savings options.
This latest survey not only
provides objective validation
that member choice is a
wasteful product choice,
it also makes it imperative
that the dangers of member
choice are pointed out to
the public and that steps
are taken to eliminate it as a
People who opted for member
choice are retiring with far less
money than they should
retirement savings option.”
People who opt for member choice pay a substantial
premium for it because it
costs retirement savings
providers more to administer
individual choices.
“However, because the
cost for the member choice
is levied from the retirement
savings this additional fee is
not transparent, and most
people don’t realise that this
cost is actually eroding their
ultimate savings,” Van der
Merwe says.
In addition, the man and
woman in the street are
not trained to understand
either the various financial
instruments available or the
financial markets in general.
“Because they’re not
industry professionals, they
tend to be heavily influenced
by sentiment and make
irrational decisions about
where to invest their money,”
Van der Merwe says. “As a
result, they try to time the
market but do so after the
markets have already moved.
Increasing their exposure
when the instruments are
expensive and decreasing
their exposure when the
instruments are cheap exactly the opposite of what
should be done.”
“If you’re not looking at
your returns at least weekly
and you don’t know what
your risk profile is, how do
you avoid damage to your
retirement savings when
something like the collapse of
African Bank happens?” Van
der Merwe says.
“When you choose member
choice, you’re setting yourself
up as an asset manager.
But, if you were to choose a
professional asset manager,
you certainly wouldn’t choose
one that had no qualifications
or experience, made
emotional decisions, couldn’t
remember where your assets
were invested, and didn’t
watch your returns on a daily
basis – and charged you extra
for making you lose money.
94% look at returns
less than 4 times a year
65% look at returns
less than 2 times a year
42% do not know what
risk profile they are
invested in
Sanlam 2014 Benchmark Survey
“It really is very difficult to
understand why members of
the public are being allowed
to be bad asset managers
and deprive themselves of a
liveable pension.”
The benchmarking survey
shows that of the people who
choose member choice, 70%
are not actively using it and
are simply defaulting to the
standard portfolio of assets
offered by the retirement
savings provider.
“They’re the lucky ones,”
van der Merwe says. “They
might be paying unnecessary
fees but at least they’re not
gambling with their life
savings.”
18 INVESTING - EMPLOYEE BENEFITS
30 November 2014
Costs and value
C
osts are an increasingly contentious
concern for clients of
the financial services
industry, especially given the
effects they can have over the
long term, writes Anne CabotAlletzhauser in the Benefits
Barometer. Cabot-Alletzhauser heads up the Alexander
Forbes Research Institute.
“Knowing whether costs
are reasonable means we have
to understand what functions
add or detract value and how
and when this takes place. It
also means we have to understand how different pricing
structures will affect individuals in different circumstances
and the range of ways that
the effects of costs can be
measured.”
Costs are continually in focus and have taken up a large
chunk of the recent retirement reform debates.
“If there is any debate
destined to keep the financial
services industry alienated
from its clients, it’s the issue
of costs. In an environment
where successful outcomes
depend largely on partnership
and trust, the issue of costs
will remain a constant source
of questioning unless we can
convey to clients a sense of
fairness and transparency in
the various pricing structures
that they participate in,” notes
Cabot-Alletzhauser.
She says that we care about
costs because they provide
an undeniable drag on what
value we can deliver to clients.
“But the problem is not as
simple as just saying costs are
too high. If they were, it would
be simple: determine how
much it costs the provider
to produce the service, tack
on a sustainable margin and
problem solved.”
Cabot-Alletzhauser
asserts that value to
clients is the real issue, and
“we need to broaden our
definition of the problem and
we need to understand all the
dynamics at play.”
Understanding fees
Cabot-Alletzhauser says
there are three aspects of
price setting we need to
understand:
• The actual cost of production. This includes
time and energy, talent
level required, quantum of complexity,
time frame for delivery,
responsiveness, and
complexity of client
receiving a service.
• The value-add of the
service. This includes
economic value to
clients, strategic
importance, time
horizon of
value-add, uniqueness of
offering, degree of risk
sharing, and intellectual
property ownership.
• A sustainable profit
margin.
Understanding costs
involves both objective and
subjective measures. Costs
can be quantified, - value?
“One further complication
in price setting,” writes
Cabot-Alletzhauser, “is that
supply and demand must
also be part of the debate. As
with all products and services,
prices can far exceed any
justifiable value if they are
on services that are in high
demand. Two such examples
PLACING YOUR
OWN RETIREMENT
INVESTMENT ASSETS?
PLACE YOUR BETS.
We’ve long been against the ‘member choice’ option for retirement savings.
That’s because individuals who choose where and how to place their own
investments invariably make wrong decisions. A recent survey, for example,
shows that around 65% of people checked their returns less than twice a year.
Seriously, would you hire an asset manager who did that?
To find out how FedGroup can help,
speak to your broker, or visit www.fedgroup.co.za.
FedGroup
FedGroup is an authorised financial services provider
would be the cost of the best
advocate in the country, or
perhaps what the market
perceives as the best fund
manager.”
But perceived value can
be “easily manipulated with
effective advertising.”
She also notes that
perceived value can also be
manipulated by capitalising
on behavioural finance
factors. “Investors, for
example, will happily overpay
for downside protections
simply to address their
‘sleeps well’ needs – coined
in Hodgson, Breban, Ford,
Streatfield & Urwin (2000) –
in spite of all the literature
that suggests that over the
long term, the cost of such
protection far outweighs the
actual value.”
According to CabotAlletzhauser, the challenge
for trustees and investors in
general is that the cost discussion is often couched in an
absolute framework. “It’s easy
to compare different fees for a
specific service, but who is determining what the value side
of the equation is worth?”
“The problem in pension
fund management is that
every step in the value chain
of delivery needs to be
understood according to how
it fits into the hierarchy of
outcomes.
This is more important
when a ’product’ is made
up of separate services, each
subject to their own pricing
negotiation. Which aspects
of that value chain absolutely
have to excel to maximise the
ultimate value to the member? Which actually make a
difference in the 30- to 40year scheme of things?”
Pension fund investing is
a very long term activity, and
as Cabot-Alletzhauser notes,
over such a long time frame,
the compounding of costs
overwhelms any potential
value delivery if that delivery
is inconsistent over time. And
in asset management, performance can be notoriously
inconsistent.
“If we understand which
areas add value over time,
then perhaps these are the
ones worth paying a fair
price for to ensure value gets
delivered.”
Read more on costs
in pension funds in a
four part series on www.
benefitsbarometer.co.za.
INCOME PROTECTION FEATURE 19
30 November 2014
The best way to protect your future income?
By Brad Toerien, CEO, FMI
Income protection
The term ‘income protection’
is most often associated with
disability. If you can’t work
due to an injury or illness, income protection will pay your
income until you are able to
return to work or retire. At
FMI, however, we believe that
income protection is much
broader - it’s about protecting
your future income against
risks such as temporary disability, long-term disability,
and death. Looking at income
protection this way means
that most individuals will be
forced to re-think the cover
they have in place.
Protecting your most
important asset
Your greatest asset is not your
house, bond, or car, or even
the insurance policies used to
protect those items - it is your
ability to earn your income.
Without an income (even for
a short period), your entire
livelihood is at risk. When one
considers your ‘worth’ in the
context of the value of future
earnings, it gives a surprising
result.
That’s why protecting your
ability to earn your income
(rather than just protecting
yourself against a particular
risk) should be your first
financial priority.
How much are you worth?
Kevin is 30, earning R30 000
per month. Assuming 7.5%
annual increases, Kevin would
be expected to produce gross
income of around R46 million
by the time he retires!
His monthly premium for
buying disability cover? R300
per month – 1% of his monthly
income going towards
insuring both his on-going
monthly liquidity and the
capital value of his income
earning potential.
Looking at income
protection differently
We believe all risk products
should work to protect your
ability to earn your future
income. You are essentially
protecting the same asset but
against different risk events
- temporary disability, longterm disability, or death. A
properly constructed income
protection plan will help
protect that ability against
short-term liquidity risks, as
well as safeguard your longterm ‘capital value’.
While the industry has
traditionally offered lump
sum solutions, we believe that
income-based solutions are
a more effective alternative
when it comes to replacing
future income as they
remove timing, investment,
inflation, and longevity risks
by providing benefits that are
the exact match for the asset
being insured.
However, the level of
cover selected needs careful
consideration – in most cases,
less life cover is required as
the life insured will no longer
be around and the remaining
beneficiaries require
less income to maintain
their current lifestyle.
Advocating for an incomebased approach to income
protection does not mean
dismissing lump sum payouts. Lump-sum benefits are
ideally suited to providing for
once-off expenses for example
settling debts or providing
for estate expenses. Thus, to
be truly effective, the best way
to protect your future income
is through a combination of
monthly income and lump
sum benefits.
How does current
industry behaviour
compare?
Research* into the South
African life insurance market
shows that 60% of cover sold
is life cover, 30% is disability
cover, and 10% is critical
illness cover, meaning that life
cover sold is at double the rate
of disability cover.
This raises the first warning
bell as we believe that, in most
cases, an individual requires
more disability cover than life
cover.
The second key finding was
that only 17% of the disability
cover sold related to income
benefits while the balance
being lump sum benefits.
There are two concerns here –
lump sum disability benefits
only provide for permanent
disabilities and they are a poor
match for needs that are often
primarily income in nature.
By correcting the above two
concerns the disability income
market has the potential to
increase ten times in size!
And this is before we consider
the possible impact of the
development of life income
benefits.
The time has come to
look at income protection
as essential insurance for
your most valuable asset and
to structure your insurance
portfolio accordingly.
* Disability Cover: Assessing
the efficiency of the South
African insurance market in
its provision of disability cover.
True South Report Actuaries and
Consultants (2011).
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in the life insurance industry.
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•
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•
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Only Myriad gives them access to this unique and affordable risk
and retirement solution.
For more information, simply contact your Momentum
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Terms and Conditions apply.
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2014/10/13 11:15 AM
20 INCOME PROTECTION FEATURE
Temporary
or permanent?
Most periods where
you cannot work
are temporary, says
Petrie Marx of Sanlam.
This can be a bit of a
challenge – because
clients often perceive
disability as something
physical, and cover
has traditionally been
focused on permanent
disability.
“Temporary disability
is a need that is often
overlooked.”
Marx says, and there
is a big education job
to establish the need
for temporary income
protection cover for
when you are unable to
work.
“In terms of the
numbers, the likelihood
of a temporary
disability is far more
likely than permanent
disability.”
Gareth Friedlander
says that at Discovery
Life they see a mix
of permanent and
temporary claims.
“One tends to think
of income protection
benefits as shorter
term, but people
underestimate the value
of longer term claims.”
Andre Froneman of
Altrisk, says that they
do see early claims,
very few of which relate
to permanent disability.
Comparing temporary
and permanent cover
can be misleading –
think of comparing
cover of R3million
versus a monthly
benefit for R10 000.
The R3m just looks
bigger – but over a
longer period of time
– the R10 000 may
offer more value. The
question is – does the
client understand this?
“Income protection is
a sophisticated product
- it is a challenge to roll
out,” says Marx.
30 November 2014
Review ahead of 2015 changes
Quick recap
The premiums for income protection benefits are currently generally tax
deductible, but the claims paid out under these benefits are taxable, says
Ryan Switala, head of risk product development at Liberty. “Insurers have
designed their products around this tax treatment of the benefits.
From 1 March 2015, the tax treatment of income protection benefits
change so that the premiums are no longer tax deductible and claims paid
out will no longer be taxable.”
I
ncome protection is a
product that receives a
lot of focus - and that
focus will continue
in the new year with the
coming changes to how
these products are taxed.
Sanlam actuary Petrie Marx,
says that some changes will
be necessary when the tax
changes are implemented
and this will change the
income protection market
a lot. “But the need for
income protection still stays
the same.”
Gareth Friedlander, head
of research and development
at Discovery Life, says that the
industry is gearing up for the
tax changes – and this will
mean new product options.
Friedlander says that the
changes will also require
looking at risk management
issues – for example existing
clients, and sums insured.
Marx says that the
“industry needs to get clients
to have the right amount
insured.” He says the tax
changes may allow for
innovation in the products
on offer. For example –
products now need to cover
income loss in order to
WHAT WILL HAPPEN TO EXISTING CLAIMANTS?
Existing claimants are affected because their claim payouts will no
longer be taxable. The question then becomes whether the insurer
should continue to pay out the benefit at the current level and redirect
the portion that would have been paid over to SARS to the client (in
other words the after tax claim amount for the claimant would effectively
increase) or whether the insurer should reduce the claims amount so that
the claimant is in the same after tax position as they would have been
prior to the tax changes.
In some cases, insurers might not have the contractual right to reduce
claim amounts and in our view they would be obligated to continue
paying the same claim amount, with the result that the claimant would
benefit from the higher claim amount. Even where insurers do have the
contractual right to reduce or alter benefits after such a change in the
tax legislation, they may choose not to make a change simply because of
the risk that doing so might be perceived to be unfair when somebody
is already in claim (whether it would or would not be fair is a different
discussion altogether).
As stated above, the key problem that insurers face is that if claimants
suddenly receive a higher after-tax claim amount, for certain types of
claim, the likelihood of the claimant ever returning to work significantly
reduces. This means that insurers are likely to have to pay claims for
longer than they were previously expecting, increasing the cost of these
claims.
Ryan Switala, Liberty
make their premiums tax
deductible. When this falls
away – more covers may be
added. How much cover to
take will need to be revisited
in light of the tax changes.
Andre Froneman, product
specialist at Altrisk, says that
clients would previously
have been insured for gross
amounts of salary but will
in future need to consider
income replacement net of tax
amounts.
“Overinsurance is not a
good thing,” says Marx, it can
create an incentive to claim.
Liberty’s Switala says that the
practice of taking no more
than 100% cover ensured that
“claimants are unlikely to be
in a better financial position
claiming than they would be
if they continued to work.”
This risk management
feature, he says, is allowed for
in the expected rates of claim
and the expected amount of
time claims will last for in
pricing the benefits.
“It enables consumers
to benefit through lower
premiums than would
otherwise be charged.”
Clients with
income protection
benefits should
review their
cover
If there are no changes to
policies when the changes
are implemented – this could
result in an incentive to claim
- “a higher net of tax income
as a result of claiming,” and
this will lead to an increase in
costs – ultimately increasing
premiums for these policies.
Ryan Switala
Switala says there are
complexities in dealing with
the changes – and insurers
are likely to amend product
design to take account of
these.
Marx says he expects most
companies to offer a sliding
scale of maximum benefits
depending on the income.
While the tax changes
are due to take place
from 1 March 2015. Marx
encourages advisers to start
looking at their books now to
see if any adjustments might
be appropriate.
Switala says they
recommend that everyone
with income protection
benefits review their cover.
“Existing cover may be
appropriate,” but even in this
case tax issues may require
changes.
Froneman of Altrisk says
that in addition to getting
the right sum insured at
inception – making sure this
amount stays in line with the
client’s salary is critical and
this can be done by adding a
voluntary escalator option as
well as an in-claim escalator
on to the sum insured.
Froneman says the
majority of their advisers are
making sure policies have
this.
INCOME PROTECTION FEATURE 21
30 November 2014
Income tax and
income protection
By Schalk Malan director,
BrightRock
T
he Draft Taxation Laws Amendment Bill announced last year is
expected to simplify tax benefits
for life insurance premiums.
While this should benefit policyholders in the long term, many advisers
will need to review their IP contracts
to check for over-insurance during the
transition to the new, simpler life insurance tax regime.
As things currently stand, premiums for recurring income protection
insurance policies are allowed as a tax
deduction. The premiums for lumpsum life cover and permanent disability
payments, whether temporary or permanent, are non-deductible. These differing tax treatments have been known
to cause confusion for policyholders,
adding complexity to the advice task.
In light of this inconsistency in the
legislation, Treasury has proposed that
the same principles that apply to lumpsums (non-deductibility of premiums
and tax-free pay-outs) be extended to
recurring income protection policies
too. This will ensure that there is uniformity in the treatment of policies that
relate to personal cover for individuals.
It will make things
significantly simpler
for advisers and
clients, and reduce
risk and uncertainty
It will make things significantly
simpler for advisers and clients, and
reduce risk and uncertainty. Previously,
because financial advisers had no way
of knowing the income tax table that
would apply to a specific client at the
time of a claim, at policy inception
advisers had to guess by what amount
to increase the client’s cover to make
provision for tax deductions. When
there is no income tax liability on
pay-outs, clients and advisers have the
certainty of knowing that the cover
amount they bought is what will be
paid out and what they’ll receive at
claim-stage.
Once the Amendment Bill is
passed through, as expected,
in parliament in March
next year 2015,
insurance products
will be expected to
adjust accordingly.
Because savvy advisers and their clients
would have upped
their sum insured for
recurring income payouts to make provision for
taxation of benefits, many
policyholders will in effect be overinsured once the new regime applies.
Where the insured amount exceeds the
client’s take home (after tax) pay, cover
will need to be reduced. Fortunately,
recent innovations in the structure
of life insurance products mean that
not all policyholders and financial
advisers will face these headaches. Two
years ago, BrightRock launched a ‘best
of both worlds’ feature – that allows
policyholders to change their choice
of a lump-sum pay-out to a recurring
income pay-out at claim stage, with
no impact on taxability of benefits
(the pay-out, whether lump sum or
recurring does not attract income tax).
The pay-out with this option capitalises the expected future income into a
once-off lump-sum and is an industry
world-first. It is particularly beneficial
where a client’s long term prognosis
(only known at claims stage) is poor.
Compare the value it offers a 45-year
old, who becomes disabled and has a
poor prognosis. This client will enjoy a
much greater benefit from an up-front
lump-sum of R6 million, versus receiving just R35 000 per month for a few
months. Making this choice at claims
stage ensures the client gets the ‘best of
both worlds’.
For policyholders who’ve taken
advantage of this new thinking, the
product is already suited to the changes
in tax treatment of life insurance, and
no adjustments will need to be made,
helping to ensure their life insurance
cover is already tax-change-ready.
Advisers in the rest of the market will
need to check each income protection
client’s cover, and review all the income
protection products they’ve recommended, and make downward cover
adjustments to ensure their clients
aren’t over-insured.
The timing of this reduction is also
important as it could cause the client to
be exposed. Reducing the cover before
the legislation change means that if the
client claims between the cover reduction date and the legislation change,
their (lower) pay-out may still be taxed,
all the way to retirement. Waiting to
after the change means that premium
is effectively wasted, as if there is a
claim, it will be reduced due to overinsurance. The reduction in cover will
also require time and effort from the
adviser and may incur a commission
claw back for newer cases.
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INCOME PROTECTION FEATURE 23
30 November 2014
Detailed underwriting required
I
ncome protection policies have
a wide range of benefits and are
designed to pay out when there is
a loss of income. Dennis Booysen,
head of underwriting at FMI says that
these policies can pay out from the first
day that income is lost.
For many years the focus in the
market was on lump sum insurance
and permanent loss of income but
temporary protection of income is possibly even more critical for the business
owner.
Because the products are so flexible
– underwriting is detailed and onerous.
“Without slowing down the process, we
pay a lot of attention at the underwriting stage,” says Gareth Friedlander of
Discovery Life.
Andre Froneman of Altrisk says that
because the benefit is for temporary
loss of income there is a higher chance
of a claim; and this means that underwriting is generally more thorough.
Sanlam product actuary Petrie Marx
says that underwriting can be a lot
more intricate. “You have to quantify
cover,” and financial underwriting is
necessary along with medical underwriting. Income protection products
serve specific needs - but they are more
complex and clients need to understand this, says Marx.
Occupation is an important part of
any income protection policy especially
at underwriting stage. The duties and
roles in an occupation are also important to note – and these are likely to be
more important than the actual job
title, Booysen observes. Duties and roles
also change over time, and can be both
manual and administrative. Booysen
comments that we used to think of
manual work as not sitting behind a
desk – but consider a mechanic who
owns their own business - they have
both manual and administrative duties.
A general approach may not always
work in this market – and applications
will require more detail to ensure accurate underwriting and ultimately a
good claims experience.
Underwriting a temporary income
protection policy is different to underwriting life and permanent disability
products.
Booysen explains that for a life
policy an underwriter will look at
the likelihood the individual may die
earlier than expected. Information is
provided by the proposer. If there are
any disorders the severity of these need
to be understood and “severity is easy
to establish.” In underwriting a policy
where temporary income benefits are
offered, you have to consider more
complex elements - for example if there
is a disorder that is being treated – is
there compliance with the recommended treatment guidelines - and
could there be a recurrence of symptoms, because even a minor occurrence
could result in a claim.
According to Booysen, you have to
determine the claims scenarios that
may occur around conditions. There
may also be situations where outside of
work occupations could affect the ability to work. Booysen adds that another
important point to consider is that a
policyholder’s change in health is likely
over years, and maintaining benefit
levels in line with income growth over
the years, even if substantial, can be
allowed through guaranteed future
insurability, which at FMI, happens
without further medical underwriting
How does waiting period affect
underwriting? This can affect what
conditions may be covered. For example some conditions may be temporary
and of very short duration – minor
impairments. In a policy with a 30 day
waiting period minor impairments
would not be likely to give rise to a
claim – but in a 7 day waiting period
policy they could.
Financial underwriting is also
important in income protection – and
very different to that on a life policy.
“We really need to know that you are
earning the income you say you are
earning,” says Booysen. Business expenses may also be covered and these
need to be confirmed.
In general he says around 70% of
policies are accepted at standard rates
and that underwriters may offer a
different final solution to the client
if necessary – for example additional
benefits, or a change in waiting
periods.
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24 INCOME PROTECTION FEATURE
30 November 2014
Three questions you must ask
By Nic Smit,
product actuary, FMI
C
lients have more
options than ever
when it comes to
choosing a provider
for their income protection
needs. How do you decide
who to place this important
cover with? Our research
shows that the three most
important questions you
should ask of an income
protection product are:
1
Will my claim get
paid and how much
will I receive?
We buy insurance so that it
will pay out when you need it
so the question of claiming is
the most important question
you can ask about your
income protection product.
Most insurers have recently
added more claim criteria.
However, there is too much
focus on the number of claim
criteria and not on how each
criterion works at claims
stage.
Income protection
insurance replaces
the income lost
through your
inability to work due
to injury or sickness.
It doesn’t matter
whether or not you
have children or
other dependants
– if illness would
mean you couldn’t
pay the bills, you
should consider
income protection
insurance.
www.moneyadviceservice.
org.uk and www.
moneysmart.gov.au
Occupational Disability
is still the criterion under
which most income
protection claims are paid
and is therefore the most
important criterion to focus
on.
Assessing claims on this
basis requires expertise
and experience in both
claims assessment and
underwriting. It is important
to select an insurer that has
the required experience in
disability cover.
Also, some insurers allow
you to submit claims for
certain common temporary
conditions (like fractures)
without requiring a full
occupational assessment.
These fast track options
make it easier to claim for
certain conditions and
thus to receive your benefit
pay-out as fast as possible.
Any criteria that allows you
to claim quickly with fewer
requirements is to your
advantage.
Remember that 20% of all
temporary disability claims
are for partial disabilities.
Partial claims are either
assessed on percentage
disabled approach or a loss of
income basis.
Neither approach is
better than the other, which
means it is important to ask
if your insurer allows you to
choose to be assessed on the
approach that is best for you.
Finally, you need
to consider what the
requirements are around
aggregation and proof of
loss of income at claims
stage. These can reduce your
benefit pay-out and different
insurers have different rules.
2
Can I get cover that
matches 100% of
my needs?
It is important that you
obtain cover that is flexible
enough to match your
specific needs. You should
check whether you can cover
100% of your income until
the day you would have
retired.
Some insurers only allow
you to cover 75% after the first
two years of your disability,
meaning that you retain 25%
of the risk that you cannot
work after two years of disability.
You should also consider
waiting periods. Shorter
waiting periods cover more
of your disability but longer
waiting periods have a
cheaper premium.
A variety of waiting
periods, as well as the option
to select multiple waiting
periods, will allow you to
select the best cover at the
lowest premium.
For benefit terms, shorter
benefit terms allow you to
plug the gap in the existing
PHI cover provided by your
employer. For example, if
you have a 3 month waiting
period on your PHI cover, a
24 month benefit term results
in you paying for cover you
don’t need.
Can I change my
cover at a later
stage without
further underwriting?
3
Your income protection
needs are likely to change
over time, for a variety of
reasons.
It is impossible to predict
these events upfront so it is
important to consider what
options are available on your
policy to update your cover,
without requiring you to
be medically underwritten
again. Medical underwriting
is a risk because you may be
healthy when you initially
apply for cover, only for
your health to deteriorate
before you need to change
your cover. If this happens,
you are less likely to be able
to update your policy.You
should compare the options
available to update your
benefits once a policy has
commenced.
It is important to dig deep,
because some options have
restrictions buried in the
small print.
For example, you may not
be able to use the option if
you were accepted with a
loading, exclusion, or if you
have previously claimed.
There are a number of
different products on the
market but to be effective it
is important that they cover
the fundamentals of income
protection – protecting
your future income with
cover that is complete and
flexible.
Not just for the self employed
I
ncome protection is
an incredibly powerful
product, says Discovery
Life’s Gareth Friedlander.
It fills a need and is very
appropriate.
Income protection policies
have a lot of flexibility – you
can select how much of your
income to cover and when
to take cover from (waiting
periods).
This makes the product
suitable for those who are
self-employed, those who are
employed but don’t have an
income protection employee
benefit, and those who are
employed and do have an
employee benefit but need a
top up to cover gaps in cover.
Temporary income
replacement policies are no
longer the sole domain of
Replacement
ratio:
Sum assured
relative to income
Andre Froneman
Gareth Friedlander
the business owner – Dennis
Booysen says at FMI they
see a 50/50 split of business
owners and employees taking
income protection.
Friedlander says that
income protection that tops
up existing group cover is
very relevant. Many benefits
offered do not often cover
100% of income, and many
benefits can take a few
months to kick in.
If you are employed and
have sick leave – cover with
a notice period of more than
a month makes sense as
sick leave for an employee
working a 5-day week is
typically 30 days in a three
year cycle.
If you are self employed
shorter waiting periods need
to be considered, says Andre
Froneman of Altrisk.
“On average our clients
select a one month waiting
period.”
INCOME PROTECTION FEATURE 25
30 November 2014
Assessing claims
C
laims assessment is a
different process to
underwriting. Most policies
are underwritten at inception
– and when it comes to claims the
intention is to pay as quickly as
possible. But an assessment process
still needs to take place. Magda Briers
is head of claims at FMI, and says
that assessing a claim can be done
within a day – if all the client, and
doctor forms are complete. But for a
standard claim a typical turnaround
time is three days.
Andre Froneman of Altrisk says
that every claim is unique – and each
claim needs to be validated.
Assessing claims involves looking
at both doctor and client forms and ,
international medical guidelines for
recovery periods.
In claims, Briers says nondisclosure (which may not be
intentional) is a much bigger
problem than fraud, making it the
main reason claims are rejected.
Briers says around 50% of their
claims are as a result of surgical
procedures, and around a quarter
of claims relate to musculoskeletal
problems.
Almost 40% of claims are paid to
individuals with previous claims on
their policy.
Magda Briers: 50% of claims a result
of surgical procedures
Underwriting
versus claims
A claims assessor will look at
an event that has happened –
how valid the event is and the
duration of the event.
An underwriter looks into the
future and predicts the risk –
the likelihood of a claim.
FMI’s average claim duration is 76 days, and 80% of
claims are within the 90 day period – so most are of a short
duration with an average claim amount of R20 – 25 000
per month. Only around 5% of claims are for the full term.
ABILITY TO EARN AN INCOME OFTEN YOUR BIGGEST
ASSET EARLY IN YOUR CAREER
According to our claims statistics report for 2013, retrenchment was the largest unnatural
cause for claims on Loss of Income Protection insurance benefits (13.4%) and premium
waiver type benefits (60.7%).
Retrenchment accounted for 41.9% of loss of income claims in the under 35 age group,
37.2% in the 35 – 44 age group, and only 20.9% in the over 45’s age group
Retrenchment was the second largest cause of loss of income claims for males younger
than 35 at 11.6%, and it was the third largest cause for the same claims among females in the
age group at 13.2%.
Ryan Switala, Liberty
26 RISK - SHORT-TERM
30 November 2014
Robbery on the increase
T
he South African Police Services release annual crime
stats. Their most recent stats were released in September
for the 12 months ending 31 March 2014.
In all the categories of robbery there were increases.
On average, 53 homes were robbed violently each day, 714
homes were burgled, 31 motor vehicles were hijacked every day
and each day 394 vehicles were broken into and property stolen
out of them.
Violent property crimes
These are robberies where “armed perpetrators threaten or use violence
against their victims in order to steal their belongings.
When perpetrators use a weapon, it is recorded as ‘aggravated robbery’.”
The number of aggravated robberies increased 12.7% from 105 888 cases in
2012/13 to 119 351 cases in 2013/14
• Street or public robberies increased by 8 598 cases to a total of
69 074 incidents. This is 14.2% higher than the previous year.
• House robberies occur when people are confronted by armed gangs
while they are in their homes. This crime increased by 7.4% to 19 284
incidents. On average 53 households were attacked each day in 2013/14.
• Business robberies increased by 13.7% to 18 615 incidents.
It is 461% higher now than it was in 2004/05. There were an additional
2 238 armed attacks on businesses in 2013/14 compared to the
previous year.
•
Vehicle hijacking increased by 12.3% to
11 221 incidents. This means that 31
motor vehicles were hijacked every day
on average in 2013/14. This is
of particular concern given that most of
these cases are as a result of organised
crime syndicates.
• Truck hijacking increased by 5.1% from 943
incidents in 2012/13 to 991 incidents
in 2013/14.
As with vehicle hijacking, this crime is
generally perpetrated by organised crime
syndicates and the increase in both types of
hijacking suggests that organised crime is on
the rise in South Africa.
Property crime
Where property is stolen without the use of violence
or force. Between 2012/13 and 2013/14:
• Residential burglary decreased by 0.6% (a
reduction of 1 653 reported cases) to a total
260 460 incidents. This means that each day, on
average, 714 households were burgled.
• Business burglary has remained largely
unchanged (a reduction of 30 reported cases) to a
total of 73 600 incidents.
This means that each day, on average, 202
businesses were burgled.
• The number of cases of theft out of and from
motor vehicles increased by 3% (an additional
4 154 cases) to a total of 143 812 incidents.
This means that each day, on average, 394
vehicles were broken into and property was stolen.
• Commercial crime incidents (which include
several crimes like fraud and corruption)
decreased by 13.6% (a reduction of 12 460 cases)
to a total of 79 109 incidents.
A single incident can involve tens of millions of
rand.
• The catch-all category called “all theft not
mentioned elsewhere” increased by 1.6% to
368 664, an additional 5 848 reported cases.
Source: Africa Check a non-partisan organisation which
promotes accuracy in public debate and the media.
Twitter @AfricaCheck and www.africacheck.org
Quality advice vital for business insurance
T
hese days insurance
cover is just a phone
call or website click
away, and the temptation to take short-cuts when
arranging commercial insurance is always present. The
reality is that seeking quality
advice will assist a business
in making sure that they purchase the correct commercial
insurance solution for their
business, says Standard Bank.
“Even though most
reputable insurers have the
facilities to offer business
insurance over the phone or
via the Internet, these services
have their limits,” says Bryan
Verpoort, head of Corporate
and Business Insurance at
Standard Bank. “If a business
is the same as many others,
as is the case with Quick
Service Restaurants (QSRs) for
example, obtaining quotes
this way can suffice. The reason
being that the cover required
would not differ markedly
from other QSR businesses.
Insurance would then be of a
‘one policy fits all’ variety.”
“However, as soon as a business is unique, or operates in a
defined niche, it is advisable to
contact a professional adviser
so that a detailed needs analysis can be undertaken. By taking out a generic policy only
to find out that the business is
either over or under- insured
when lodging a claim could be
costly at best, and disastrous
for the business at worst.”
Advantages of using an
accredited adviser:
• Offering a thorough
audit of a business, its
equipment and assets.
This ensures that an accurate value assessment
is made and the replacement costs of machinery,
equipment and assets are
accurately documented.
Premiums would then
reflect the true value of
replacing equipment.
• The adviser’s needs
analysis would become
As soon as a business is unique,
or operates in a defined niche, it is
advisable to contact a professional
adviser
a part of the insurance
company’s records. This
reduces the possibility
of disputes arising about
the assets involved and
their value if a claim is
lodged.
• The insurance company’s
assessor will point out
shortcomings in safety,
security or fire prevention equipment, such as
fire extinguishers that
have not been checked or
maintained. As these vital
elements could impact
on a claim, the business
owner has an opportunity to rectify the situation
and mitigate the risk
before the policy is written. If not rectified within
a stipulated period, the
insurance company could
either accept or reject
the risk. Acceptance of
the risk, in these cases
generally means that the
insured will pay a higher
premium and excess until
such time that the risk is
mitigated
• Advice can be extended to
include insurance against
specific risks, such as the
possibility of business
interruption caused by
non-delivery of materials
or components locally
and internationally
following an insured
event.
As with all services and
products offered by an
insurance company, the
quality of cover depends
largely on the information
provided by the client.
“It is therefore in the interests of the insured to disclose
all relevant information about
the premises and operational
risks being insured.”
JHB 46757
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doing right by our brokers and partners. When we get accolades like this from people
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get better, so that we can help you to make everyone’s lives a lot less worrisome.
Proud winner FIA Personal Lines Insurer of the Year 2013 and 2014,
thanks to our brokers and partners.
personal
• commercial • corporate • investments
The Hollard Insurance Co. Ltd, Hollard Life Assurance Co. Ltd and Hollard Investment Managers (PTY) Ltd
are authorised Financial Services Providers.
28 RISK - HEALTH
NHI has been widely
misunderstood and it is
evident that many view it as a
threatening development. I do
not believe that the introduction
of NHI will mean the end of the
private healthcare sector or
medical schemes.
Medical schemes will continue
to play an important role for
those individuals who wish to
have healthcare cover over and
above that which NHI will offer.
The NHI process will bring about
a greater degree of co-operation
between the public and private
healthcare sectors. The challenge
is to develop innovative
approaches to promote such
collaboration and enable it to
flourish.
Professor Yosuf Veriava, CMS
chairperson, CMS Annual
Report
Medical scheme
beneficiaries and
contributions
52.4% female
beneficiaries, 47.6% male
7.1% pensioner ratio –
8.2% for open schemes,
5.7% for restricted
schemes
Average age 31.9
2014 contributions
Average risk contribution
cost for a principal
member:
R1 653
Average risk contribution
for an adult dependant:
R1421, for a child
dependant: R560
30 November 2014
Look at solvency objectively
S
olvency is always
mooted as a
consideration when
choosing a medical
aid scheme. According to the
latest Council for Medical
Schemes Annual Report,
schemes are required to have
solvency of a minimum level
of 25% of gross contributions.
More commonly expressed as a
solvency ratio of 25%.
The industry average for
2013 was 33.3% solvency. Open
schemes have a slightly lower
solvency ratio than restricted
schemes – 29.7% versus 38.2%.
“While some schemes
continued to face solvency
challenges in 2013, the
industry as a whole remained
fairly stable.”
When does the solvency
level of a scheme become
an issue? The CMS monitors
schemes whose levels fall
below the 25%, and those that
“have reserves that are rapidly
diminishing.”
Six open schemes had
reserves below the required
The CMS report
says that the most
important factors
impacting on
solvency are:
solvency level, three restricted
schemes fell below 25%.
Two of the largest schemes
whose solvency levels fell
below 25% include Discovery
(52.9% of beneficiaries in the
open market) which had a
solvency of 24.3% (this which
since moved above the 25%
level); and GEMS.
GEMS covers 47.2% of
beneficiaries in the restricted
market and had a solvency
level of 11.7%. Although
relatively new, GEMS has been
operational since January
2006.
Size of the scheme and
reasons for low solvency
levels must also be taken into
account. Smaller schemes
may be more vulnerable when
solvency levels fall below the
required minimum.
•The pricing of
contributions relative
to benefits provided,
including whether
such benefits are
provided from the
risk pool of the
scheme or from
members’ savings
accounts.
•Non-healthcare
expenditure.
•Investment income.
• Membership growth.
“The membership profile
of a medical scheme further
affects its solvency.”
This includes variables such
as average age of members,
pensioner ratio, gender and
dependency ratios.
“All of these impact on
the frequency and extent of
claims.”
PMBs
The provision that entitles all members and beneficiaries of
medical schemes to a set of PMBs is arguably the most striking feature of the Medical Schemes Act. This guarantee protects
members against health events which could otherwise result in
financial ruin.
Schemes must pay for PMB conditions in full, according to the
healthcare provider’s invoice, from their risk pools. Schemes are
not allowed to use members’ personal medical savings accounts to
pay for PMB conditions.
PMBs go hand-in-hand with the system of designated service
providers (DSPs). These are doctors, pharmacists, hospitals and
other healthcare providers that medical schemes select as the first
option for beneficiaries when they need care for PMB conditions.
Beneficiaries are entitled to use non-DSPs but may have to pay a
portion of the bill as a co-payment should they do so.
According to the CMS annual report, the scheme
community rate for PMBs varied between R 332.30
and R 1,150.40 per beneficiary per month for 2013. The
large variance in PMB cost across all medical schemes
is symptomatic of the differences in membership profile
between schemes.
This highlights the unfair playing field and the fact that
schemes are not competing fairly in terms of cost.
The huge variance also points to the need for risk
equalisation to level the playing field and allow schemes
to compete on efficiency rather than membership profile
amount; a point that the CMS acknowledges in the report.
The expected industry community rate for 2013 was
R 508.2 per beneficiary per month, which is an estimate of
the cost of the PMB benefit package for 2013 while the total
paid for PMBs in 2013 was R 54.01 billion. This amounted to
53% of all risk benefits paid out.
Anthea Towert, head of Scheme Consulting for
Technical and Actuarial Consulting Solutions,
Alexander Forbes Health
The Medical Schemes Act makes provision for the review of
PMB regulations every two years. Draft regulations reviewing
PMBs were submitted to the Ministry of Health in 2010 and were
expected to be published in the Government Gazette in 2012/13.
This had not happened by March 2014. The CMS has further
undertaken to review the definition of various PMBs.
Members of medical schemes are encouraged to familiarise
themselves with PMBs, a fundamental provision enshrined in
the Medical Schemes Act which sets schemes apart from other
forms of health insurance. Most complaints that the CMS receives
from members are related to schemes refusing to pay for PMB
conditions as prescribed by law.
Daniel Lehutjo, acting chief executive & registrar, Council for
Medical Schemes
Complaints to the CMS
5 609 complaints received in the year 2013
10.9% down from previous year
3 078 complaints resolved in 2013 related to clinical matters
2 116 of these relate to short payment on PMBs
620 non payment of PMBs
8 complaints for broker conduct and 6 for incorrect advice
(Total number of accredited brokers 31 March 2014 8 757, 2146 broker organisations)
Complaints resolved in favour of
Complainant - 2 763
Medical Scheme - 1 845
Both – 400
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healthcare cover if you
can fund it through your
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30 RISK - HEALTH
30 November 2014
Client needs at the core
A
nnouncing an
average annual
contribution
increase of 7.9% for
2015, Momentum Health
cited stability in terms of
its product, financials and
service offering against the
background of a volatile
industry as the main factors
contributing to the Scheme’s
favourable outlook. The
Scheme also noted that it was
one of very few that managed
to grow its membership
without seeing a decline in its
average member age.
Explaining how the
Scheme manages to continue
growing its membership
with a favourable member
profile, Damian McHugh,
head of Momentum Health
Marketing and Sales, says
Momentum’s HealthReturns
pioneered a new approach to
healthcare funding – one that
puts the member in control
and, unlike most incentive
programmes, does not cost
anything.
“HealthReturns really
set the ball rolling in terms
of engineering healthcare
benefits through a positive
lifestyle,” he continues. “Our
offering continues to gain
popularity due to increased
consumer demand for
control over their benefits
and budget. With the option
to pay HealthReturns into
a HealthSaver account,
members can increase or, if
they so choose, decrease their
day-to-day funding as their
needs change and can do so
without having to change
their option too.”
The flexibility in the
Momentum Health product
range is further seen in terms
of its provider choice model
where members can save
more than 35% on monthly
contributions by choosing to
make use of certain selected
service providers.
With affordability a
key concern to healthcare
consumers today, McHugh
points out that an
approach that encourages
both members’ health
and financial wellness is
paramount. The South African
healthcare environment has
seen a lot of change over the
past years, with consolidation
and closing of schemes in
many instances. As part of a
greater global response to the
burden of disease, and in an
effort to prevent absenteeism
in the workplace, healthcare
funders are increasingly
seeing the need to focus on
pro-active health awareness
and lifestyle changes.
Contributions and
benefits
With medical inflation that
outweighs CPI year-on-year
and factors such as changing
medical technology, usage
of benefits and the pressure
on schemes to maintain
or reach a 25% solvency
level, containing annual
contribution increases can
often prove challenging in the
healthcare industry.
With an average annual
increase of 7.9% for 2015,
McHugh noted that
Momentum Health has
provided for all the above
factors and is well positioned
to continue innovating
healthcare solutions in the
year to come that will speak to
both the needs of its members
as well as the longevity
of the Scheme. Given the
flexibility associated with the
Momentum Health product
range, he pointed out that
family increases will vary
based on the actual option
and provider selections made.
On the back of this
increase, the Scheme still
managed to increase benefit
limits without having
to increase any of its copayments. Other benefit
changes endorse the focus
on preventative wellness,
and include the extension of
benefits for mammograms to
members from the age of 38.
Momentum’s wellness
and rewards programme,
Multiply, is also continuously
enhancing its offering
through the addition of new
partners and 2015 will be
no exception. For instance,
Multiply members will enjoy a
25% discount on membership
fees at SmokeEnders, a
unique way to assist smokers
in giving up the deadly
habit, and 30% discount
on membership fees at
EatForLife. With sponsorship
support from Momentum,
Multiply members will
enjoy a host of golfing
discounts and benefits,
ranging from a significant
discount on joining and
monthly membership fees at
playmoregolf SA, World of
Golf and Golf Village practice
and play packages, as well as
discounts from the ProShop.
Damian McHugh
Technology has also
brought about innovation
to help today’s consumer
better manage their time and
increase access to healthcare
information, through mobile
sites and mobile apps. “Who
would have thought ten years
ago that you would be able to
instantly check your Savings
balance on your cellphone,
then request authorisation
for a procedure while you
are in the doctor’s room – a
network provider in your
neighbourhood that you
located via that same app?”
McHugh enthuses.
“Catering for members’
needs throughout different
life stages and allowing
clients greater control over
the future of their healthcare
is what schemes will rely on to
distinguish themselves from
the market going forward.
The resulting innovation will
in turn ensure that South
Africans continue to enjoy
world-class healthcare cover,”
McHugh concludes.
Innovation and better risk management vital
T
he future of medical
schemes lies in
preventative healthcare
and wellness. This is the
view of Peter Jordan, principal
officer of Fedhealth, one of the
larger medical schemes in the
country.
Jordan says to try and break
the spiralling cycle of costs and
high claim volumes, coupled
with a diminishing member
pool, member education
will become increasingly
important as well as a genuine
commitment from schemes to
generate conversations with
members. “Not only will this
enable the schemes to address
their members’ concerns
directly, but also to gain a
better understanding of their
wants and needs.”
“Medical aids have a massive
responsibility towards their
members and transparency
will be a key differentiator
in future.
We also need to change the
way members view Medical
Aid, thus a big focus for 2015
will be the coordination
of members’ care through
a 360 degree approach,”
he says. This entails GP’s
becoming the coordinator of a
member’s care.
Doctors and patients will
work together closely, so that
all healthcare needs are met
and so that fragmented care,
which is not only costly and
time consuming, but also dangerous, can be avoided.”
Identifying high-risk
members who are likely to
develop conditions that can
be managed or even avoided
is another way of ensuring
sustainability.
Networks will remain key
in the coming year with the
primary objective of ensuring
members have access to
first-rate healthcare without
resorting to unnecessary
out-of-pocket expenses.
Jordan says schemes need
to ensure their networks are
wide enough to ensure access
for the majority of members.
“Ultimately this assists in
managing scheme costs,”
he says.
He suggests that members
of medical schemes ensure
that they use a designated service providers (DSP) or health
provider within their scheme’s
network in order for their
prescribed minimum benefits
(PMBs) to be paid in full.
An excellent way of
maximising your benefits
is by using the health care
provider networks or DSPs
specified in your particular
medical scheme.
“These networks have been
created with scheme members
and health providers’ interests
at heart,” explains Jordan.
“These partnership models
ensure that medical scheme
members have access and
cost certainty when visiting
one of the DPS providers and
this ensures that their scheme
benefits are maximised.”
Jordan goes on to explain
how these partnership models
or networks of DSPs benefit all
involved.
Healthcare providers gain
because they are ensured costcertainty, and the schemes
in turn are able to anticipate
future healthcare provider
related costs via these models.
This kind of collaboration
is essential to ensuring the
medical aid industry remains
sustainable.
From an intermediary perspective, brokers will continue
to play a key role in helping
consumers become more
aware of the various options
available to them, and how
to get the most out of their
medical aid. “While it may be
tempting to select the cheapest
option, members deserve reliable and value for money medical aid. Intermediaries guide
members in choosing the best
option for their budget and
their health requirements,”
explains Jordan.
“We all want to get the
most out of our medical aid
schemes. The key to achieving
this is by understanding and
using your medical scheme
benefits to their best effect.”
30 November 2014
RISK - HEALTH 31
Four ways to combat rising costs
C
ost-management techniques may be assisting to reduce overall costs
within medical aids.
This in turn reduces the contributions you have to make to your
medical aid, but this doesn’t help if you end up paying more out of your
back pocket. One key problem with this is that when the cost is inside your
medical aid, it’s handled by experts.
COMMUNICATION
When it’s handed over to you, you may have far less information and
knowledge to make a good decision. So, we need to find a way of keeping that
expert insight available to you when you do make your decisions.
What do we do?
Kristin-Ann Cronje, Alexander Forbes, www.benefitsbarometer.co.za, looks at four
ways to combat rising healthcare costs.
SCREENING
One solution would be communication. Medical aids need to ensure that
you have adequate access to information, but balance this with the need for
you to understand this information.
This doesn’t mean throwing reams of information at you that nobody would
understand if they ever bothered to read it at all.
• The reality is that most people only check what their medical aid covers
once they’re being affected by it directly. For instance, when you get
diagnosed with a condition, you want to know if your medical aid will cover
it. Of course, by then, it’s often too late.
Early diagnosis of conditions through screening tests at wellness
days could assist in reducing overall costs by treating
diseases before they become too complex.
Many medical aids now cover preventative care
for this very reason.
• So, check what kind of preventative
cover your medical aid offers,
and use it!
TECHNOLOGY
This is where advances in
technology may actually assist
in bridging the gap between
individuals and experts, so that you
can make appropriate decisions about
your medical treatment:
• Health information technology (HIT)
is helping to provide doctors with more
information on patients from a variety of
sources. This enables the doctor to get a more
holistic understanding of you, your medical history and
the treatments that have or have not worked
historically. With this information at hand, doctors
should be able to prescribe more effective treatment,
which should reduce overall costs in the long run.
•
Online mobile health applications (or apps) can also
help in providing immediate information on where to
go in an emergency or what medicines are approved
under various treatment plans, helping you to make
the correct decision quickly.
• The use of telemetry can simultaneously assist
medical providers and members where this technology
is used to better manage the care of certain
conditions.
The reality is that balancing complexity and affordability is likely to remain a
challenge into the future. Where possible, we need experts to manage this complexity
for us as individuals, and then provide us with the information that is crucial for
HEALTH EDUCATION
Health education with the
intention of improving health
literacy is extremely important.
This should ensure that you seek
medical assistance where necessary
and before it is too late.
Health education should give you a
better understanding of your conditions and
required treatment so do a bit of reading and
ask your doctor, pharmacist or medical aid for more
information if you feel you don’t understand
something fully.
us to know in an easily digestible form. On the other hand, as members, we should
also be as proactive as possible in ensuring that we understand our health and our
healthcare benefits.
NEWS 32
30 November 2013
32
CLOSING
30 November 2014
ONE FOR THE BODY, TWO FOR THE BRAIN...
Health Care in South
Africa 2014
If you want to know about health
care in South Africa this is the
book to read. Author Liz Still
shares her insights into the industry, health care worldwide, and
the many complexities in the local
environment. Published by Profile
Media this book is a must read for
everyone in the industry.
National Health Insurance remains
a topic in the political arena, as
does the discrepancy between
private and public health care.
While this polarising view
continues to dominate some lines
of thinking, health care carries
on, medical aids continue, and
many seek care from providers
for medical conditions. How much
does this cost, how much should
it cost, what does it cost in other
countries are just some of the
issues Still looks at. Along with
chapter on medical inflation and
interviews with key role players,
Still also looks at the ever popular
topic of costs – health care and
admin. With an independent eye
she sheds light on how we could
look at these more objectively.
Brain rules
How and why does your brain
work? John Medina authored this
best seller in 2008 –that includes
12 brain rules (things like exercise,
sleep, repeat, explore) and a
look at the differences between
men’s and women’s brains. Stress
also gets a chapter – the good
and bad. And in case you were
wondering – treadmills in the
office and classroom are not a new
fad – Medina writes emails on his
treadmill.
The book is an extremely
interesting read and covers
12 principles for surviving and
thriving in 12 chapters. Filled with
anecdotes and examples – he also
gives a few practical ideas that we
can use to improve. Do one thing at
a time is an example : “The brain is
a sequential processor, unable to
pay attention to two things at the
same time.”
The chapter on gender is an
interesting one – is there a
difference between men and
women’s brains? Yes says Medina
– women are genetically more
complex.
A very worthwhile read.
Acronym heaven
How well do you know your acronyms?
Take our quick quiz below and see how you do
1.Which country is in the
MIST but not the MINT?
a) India
b) South Korea
c) Tanzania
d) Indonesia
2. What would make the
MINT a MINI?
a) India
b) Indonesia
c) Iceland
d) Iran
3. Which country is the
needle in the PINE?
a) New Zealand
b) Norway
c) Nigeria
d) Northern Ireland
4. Which two African
countries are part of the
CIVETS?
a) Egypt and Sudan
b) Ethiopia and South Africa
c) Ethiopia and Sudan
d) Egypt and South Africa
c) Emerging and Growth
Leading Economies
d) Endangered and Growth
Losing Economies
5. The Eagles are..
6. KETU is exclusively
African
a) An underperforming
football side
b) An endangered species
a) True
b) False
Know your acronyms!
MINT – Mexico, Indonesia, Nigeria, Turkey
MINI – Mexico, Indonesia, Nigeria, India
MIST - Mexico, Indonesia, South Korea, Turkey
PINE – Philippines, Indonesia, Nigeria, Ethiopia
EAGLES – Emerging and Growing Leading Economies including
Brazil, China, Egypt, India, Indonesia, South Korea, Mexico, Russia,
Taiwan and Turkey.
CIVETS - Colombia, Indonesia, Vietnam, Egypt, Turkey and South
Africa
KETU – Kenya, Ethiopia, Tanzania, Uganda