Issue 37 (2 of 2015)
Official journal of the Financial Planning Institute of Southern Africa
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Contents
Issue 37 (2 of 2015)
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Letter from FPI Profiles Professional practice profiles Member profiles
Top students in financial planning
Official journal of the Financial Planning Institute of Southern Africa
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Implementation poses challenges
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Two key ingredients for long-term company survival
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How financial advisors are using LinkedIn to grow their business
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letter from fpi
Boosting the reputation of our members
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ecoming a true profession will enable our members to earn the trust and respect of all South Africans. We see the current regulatory and legislative changes laden with opportunities to help us achieve this.
Many of you are understandably questioning how the future of financial planning will look amidst the many regulatory and legislative changes happening in the financial services industry. No wonder so many of you are expressing doubt and confusion about what you might and might not need to do. We are often challenged to help members grow their businesses over the short-term, and we support our members in this endeavour in a number of ways, such as toolkits, best practice, Continuous Professional Development (CPD) sessions and with this magazine too. But there is a wider issue going on. As you know, there is a general lack of trust by South Africans that financial advice is worth seeking. The need for advice has never been
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greater but the take-up is still far too low and there is a real lack of awareness amongst South Africans on how to do their due diligence when selecting a financial planner. We, as FPI, are committed to bridging this gap and earning the trust of South Africans by raising professional standards and promoting financial planning to become a true profession. This includes advocating the restriction of the use of the term ‘financial planner’ to those who are members of a recognised professional body. We are also advocating for better differentiation between financial advice and supply of product information with a view to selling, and a number of other related proposals in the Financial Services Board’s (FSB) Retail Distribution Review (RDR) discussion paper. We are and will continue to engage with you – our members, regulators, policymakers and all other stakeholders to ensure that this dream comes to fruition.
But, what does it mean to be a true profession? A defining characteristic of a profession is that its members act in the public interest so that their activities raise the confidence and trust of consumers. It follows that members earn the respect they deserve. A professional body must be able to promote standards of professionalism that are higher than those of the regulator and provide guidance on meeting these standards, as well as carry out effective disciplinary measures where necessary. This means that leading the professional development of members is another core requirement of a professional body.
Consumer awareness As financial planning professionals, one of our main aims is to change our clients’ lives for the better. I am delighted that our members embody this ideal and through professionalism and expert advice, really do make a difference. This difference is being made in many ways; whether it’s through helping a client, suffering illness, battle their way through a health insurance claim, or enabling a client who wants financial freedom to leave their well-paying, steady job to pursue their passion, the result is the same – an improvement in wellbeing and happiness. This is what is important here and a monetary value cannot be placed on it. FPI’s current consumer awareness programme aims to enhance the reputation of financial planners in the community by educating them about the CFP® designation and the value of a financial planner who is a member of FPI. We extend a special thank you to all our members who regularly volunteer to take part in Financial Planning Week and FPI MYMONEY123™ events. These events help shine a light on the services a professional financial planner can provide and is another way we are trying to lead our communities to your doorsteps. We are already seeing tangible signs that the public is responding favourably by actively searching, on our website, for a CFP® professional in their area or contacting us. There is no doubt that we are committed to seizing this opportunity to turn our industry into a profession where we serve the community, and we appreciate your support and participation on this journey. We encourage our members to sign up for these events and devote some time to making a big difference to our profession.
Financial Planning Week This important national event is one where the financial planning community comes together to encourage, educate and empower South Africans to discover the positive difference that financial advice can make to their lives.
qualified financial planner. There are many reasons for this, including a belief that financial advice is something that only wealthy individuals can access, or maybe it is simply a lack of understanding about just how much value good advice can add. Through Financial Planning Week, with your help, we can make more South Africans understand that financial security is not beyond their grasp and that it is an achievable goal. Through our consumer awareness programmes we can reach out to the public and allow them to benefit first-hand from you, the professional financial planners. We hope that for many, this will be an introduction to financial advice and their first step in the journey towards financial freedom. While the FPI MYMONEY123™ events continue to take place throughout the year, this year, the Financial Planning Week will take place from the 7 to 11 September 2015. Visit our website, www.fpi. co.za, for more information about the event and how you, too, can get involved.
FPI Professionals Convention - 2015 The FPI Professionals Convention is all about you, the financial planners, and the valuable advice and work you do to help your clients improve their lives. This event is like no other convention – it is not about selling products and services, it is a celebration of what it means to be a professional and how we set the standards that others follow. It is also about elevating financial planning into a universally respected profession – a goal that many of you know is very dear to FPI. The programme has been built by practitioners for practitioners and is entirely focused on education and learning, giving you the tools to build your business, further your self-development and enable you to assist your clients even more effectively. You will take away with you tips and practical advice to help you build your business putting you in a better position to help your clients. We have a fantastic range of quality professional speakers including: • Master Mariner Captain Nick Sloane, as keynote speaker. • Dr Adrian Saville, businessman and professor, who will contribute some of his sought after expertise in economics; • David Oliver, published author, speaker and trainer, who will share his insights on determining the value of a business. • Dr Clem Sunter who will present on The World and South Africa Beyond 2015: The Latest Scenarios, Flags and Probabilities. • Andrew Bradley, CFP®, CEO of Old Mutual Wealth as talks on Wealth and happiness; and many more. We trust you enjoy the convention!
The aim of this planned activity is to raise awareness, provoke conversation and generate noise about the need for professional financial advice. We all realise that when people feel in control of their finances, their health and wellbeing is improved, yet frustratingly, far too many still do not seek help from a
Godfrey Nti Chief Executive Officer | Financial Planning Institute (FPI)
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profiles All our FPI Approved Professional Practice™ firms have one thing in common; which is the express aim to provide professional financial planning to consumers. Their objective ties in well with FPI’s vision of Professional Financial Planning for All. This vision is made possible when the industry promotes and highlights the importance of professional financial planning, by promoting the CFP® mark among their consumers.
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ccording to the latest results, from the Global Comparator Research Survey: The value of CFP® certification; they revealed that 80 percent of the firms surveyed in South Africa mentioned that employing CFP® professionals has had a positive impact on their clients’ satisfaction and retention. Two of FPI’s Approved Professional Practice™ firms speak to The Financial Planner about what professional financial planning is and why the FPI Approved Professional Practice™ accreditation is so important to them.
manages the complex financial requirements that longer-living clients are likely to face. What this required of them was building a professional business where both clients and financial planners could find peace of mind. Not to mention the confidence that their financial affairs are well thought out and sustained for longer than they originally foresaw. This also makes for a more complex, demanding and ultimately satisfying career for its professionals – hence the strong demand for this career. Such driven individuals will find a home at Consolidated.
Values core to their success
Consolidated Financial Planning Studies have shown that financial planning is destined to become the second most important profession in the world, after the medical profession. In fact, the two are inextricably linked: with improvements in medicine, people are living longer and therefore needing their finances to stretch further and last longer. Research by CareerCast in the United States similarly finds that financial planning ranks among the top 10 best careers. With environmental and lifestyle changes predicated by longer lifespans in mind, Consolidated Financial Planning set about designing its organisation’s governance structures to be at the forefront of this dynamic industry. As environmental conditions have changed, it has focused on improving processes and corporate governance structures. It quickly
The values that have been inculcated by its structure have instilled a high level of professionalism. Consolidated has consistently had its financial planners ranked among the top three of the FPI Financial Planner of the Year competition – with three outright winners and eight finalists – since the competition’s inception. Core to this success is that the company subjects itself to an independent annual client satisfaction survey in which clients rate them. The company has continuously been rated above international best practices. Those values centre on the understanding that as financial planners, their professionals literally have the future of each client in their hands. This responsibility is never taken lightly or for granted. The company believes in financial planning that spans generations: it strives to be a business able to offer the entire family a holistic financial plan. To accomplish this, they apply a tried and tested intergenerational planning process.
Professionalism Financial planning is an industry that receives arguably more new legislation each year than
any other. Their success is in large part due to being ‘legislation-ready’. Its governancestructured approach to financial planning and employment of standardised market leading advice methodology means that, legislation such as Financial Advisory Intermediary Service (FAIS) Treating Customers Fairly (TCF) and Retail Distribution Review (RDR) are engrained into its company values, compliance process and advice processes. Solid and satisfying client relationships are key to its high levels of client loyalty. Clients need to have trust in the organisation looking after their wealth. This requires integrity on the part of the planner who in turn instils confidence by putting in place a solid plan for the different stages of the client’s life. “We enjoy working with our clients. The experience should be, and is, a personal one so that clients feel secure in the relationships we have with them. Technically sound advice is the core element of this relationship, but we also manage to have fun together with our clients,” said Craig Kiggen, CFP®, Head of Advice at Consolidated. Consolidated has been recognised as one of the Financial Planning Institute (FPI) Approved Professional Practice™ firms in the country. This is a certification it holds with immense pride as an indication of its commitment to the advancement of the profession within South Africa. It has regular involvement with FPI with a number of its professionals participating in the various FPI committees. They place a high importance on the CERTIFIED FINANCIAL PLANNER® certification and have a concerted drive to continuously develop the professional skills of its financial planners. It places focus on encouraging its financial planners to achieve their postgraduate qualification in financial planning and reach the ultimate pinnacle of their careers.
About Consolidated Financial Planning Consolidated Financial Planning is a fully independent, fee-based financial planning practice with offices in all the major regions of South Africa. It offers holistic financial planning to its private clients as well as a comprehensive corporate financial planning solution that includes employee benefit services and employee financial education. It currently advises over 3 550 private clients and family trusts, as well as more than 60 corporate clients, in total representing more than R6 billion in funds under advice.
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Netto Invest For Netto Invest as a business, adopting a professional financial planning approach has been both the basis of their business and also the reason for the long-term success of their practice. “Accreditation as an FPI Approved Professional Practice™ underlines our commitment to upholding the highest professional standards,” says Ian Beere, CFP®, Managing Director of Netto Invest. He further stated: “By our definition, professional financial planning is: • Client-centric and holistic – the client's needs and lifestyle goals are central to our process, and we look at every aspect of their life, not just parts of it in isolation; • Starts with a needs analysis – the first step must always be identifying the client's objectives for their retirement, as well as other lifestyle risks and factors; • Independent and objective T – the financial planner must be able to make recommendations based on the best solution for the client's needs, without being influenced by remuneration structures. For this reason, we are in favour of fee-based financial planning; • Preferably fee-based to enhance independence of advice – being paid a professional fee to provide a financial plan is a cornerstone of our operations; • Outcomes are measurable and monitored – the outcome of a professional financial planning process is the fullydocumented plan which can be revisited and adjusted over time and as needs change; and • Competent, qualified individual dispensing advice – every financial planner should have sufficient qualifications and experience to give the client peace of mind as to the validity of the advice offered.
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They believe that using the FPI Approved Professional Practice™ branding enhances their reputation as being a leading Financial Planning Practice, and aligns with their core passion, which is to provide trusted, independent investment advice…. for life, which benefits their clients both personally and financially. Offering professional financial planning is important and to make sure this is achieved, they have incorporated the Financial Planning Institute (FPI) Six Step Financial Planning Process into their own processes which are: Step 1: Initial appointment – This first appointment is without charge or obligation. It helps them establish whether there is a mutual rapport as well as outline their ideal working relationship for the client. Step 2: Information gathering – The client completes a questionnaire which helps the financial planner to take their unique circumstances into account. They gather information on the client’s current financial situation, commitments, and short to long-term financial goals. Step 3: Financial assessment – Client and financial planner sit together to analyse and assess the existing financial situation and model different scenarios to determine the required financial strategy that will help the client to achieve their goals. Step 4: Recommendations – The planner then offers strategic financial recommendations that address the client’s goals, and will go over the recommendations in detail to help the client make an informed decision. Step 5: Implementation – Once the client is completely satisfied with the recommendations, they sign an authorisation form to proceed with implementing the plan. Step 6: Ongoing care – Based upon the client's requirements, regular review meetings are scheduled with the financial planner over the ensuing years. At these meetings, the
agreed strategies and investments are reviewed proactively to ensure that they continue to meet the client’s financial objectives.
Mentoring to support FPI’s strategic objective of member growth Netto Invest has seven CERTIFIED FINANCIAL PLANNER® professionals, five graduates who are currently on the mentorship programme and studying towards their certification, and two more students who will begin their studies shortly. The programme is designed to provide relevant financial planning experience to potential financial planners entering the industry.
What does it all mean? According to Netto Invest, their success has come from using a professional financial planning approach to build long-term relationships with their clients. They believe that, while the FPI Approved Professional Practice™ accreditation process is relatively new and still gaining traction, they are confident that being recognised as an FPI Approved Professional Practice™ is a long-term asset to their business.
About Netto Invest Netto Invest is a practice of CERTIFIED FINANCIAL PLANNER® professionals based in Pinelands, Cape Town. They specialise in helping clients in three distinct categories: • Retiring and needing appropriate investment strategies to maintain their lifestyle; • Entrepreneurs or self-employed professionals; and • Employees earning in excess of R650 000 per annum. The practice was founded in 1989 by Debbie Netto-Jonker, CFP®. The directors of the practice are Ian Beere, CFP®, Morné Bezuidenhout, CFP® and Cameron McCallum, CFP®. Both Ian Beere, CFP® and Debbie Netto-Jonker, CFP® have been awarded the esteemed Financial Planning Institute/Personal Finance Financial Planner of the Year award, the ultimate industry recognition for excellence in financial planning in South Africa.
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Member
Profile “A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves," – Lao Tzu At the Institute we would like our missionary leaders to be known and in this issue we caught up with former FPI board member, Andrew Bradley, CFP®, and current board member, Denver Fortuin, CFP®. We take a deeper look at their thoughts on leadership and their contribution to moving our profession forward.
Both CFP® professionals’ interviews were conducted by Mandisa Magwaza, Value Proposition Consultant at the Financial Planning Institute. Want to share feedback on the profiles? Interested in being featured on our next issue? Write to us at communities@fpi.co.za.
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es Andrew Bradley, CFP速
Denver Fortuin, CFP速
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w e r d An y e l d Bra Andrew 速 Bradley, CFP
Chief Executive Officer, Old Mutual Wealth 2013 FPI Harry Brews' Award winner Why is professionalising financial planning important to you and how were you instrumental in introducing the CFP速 mark to South Africa? I think there are many aspects; first and foremost being a financial planner and helping people achieve their goals forms a core part of my being. I grew up in a family that was not wealthy, we had to budget very well and only had the necessities to get through. I always had what I needed and very little of what I wanted. My father, unfortunately, lost everything that he had when I was in university, which had a huge impact on me. So making sure that it never happened to me was the start and main driver of me wanting to understand financial planning to ensure financial security for myself.
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I was intrigued by the profession and realised that it was evolving around the world but not yet in South Africa. I tried to push the concept that financial planning is a valuable profession to society and should enjoy the same astute as the legal, medical and accountancy profession. I also felt that financial firms were lagging behind and were product focused more than holistic financial planning centred. The product focus did not resonate with me. Having to study accounting and law I came from a different frame of reference as well. In the early nineties, as South Africa was coming back into the international fold, I was thinking of how we were going to compete in South Africa if international players came here. We as local practicing financial planners needed to be globally
competitive. A few colleagues and I visited the United States of America, Canada, United Kingdom and Australia and returned with advanced concepts; we saw the then Institute of Life Pensioners Association (ILPA) as the mechanism to introduce the institute and the CFP速 mark. For me, this was a purpose quest more than anything that I fundamentally and deeply believed in. Within the Financial Planning Institute (FPI) and outside FPI, I have tried very hard to raise our profession. I see it as a fundamental and critical service to society. I served on the board and when the end of my term arrived, I still continued to promote our profession in my personal capacity by doing radio talks, writing books, articles and doing television appearance to promote the concepts and principals of financial planning.
In your opinion what do you think financial planners can do raise our profession so that it can share the same astute as the medical, legal and accountancy profession? One should ask themselves if they are making a contribution to society. The mentioned professions in their earlier years went through similar challenges and dynamic. As a lawyer, some people may question their contribution to society. To me, what we as financial planners need to focus on is our contribution to society. I think for too long we have focused on the distribution of products and that has been viewed as our contribution to society. Quite frankly it is not. It is not that the products are wrong, but product distribution is not a profession. It is useful in some respect. A profession is where you add value to clients – helping someone change their patterns of behaviour, making sure that you help them instil discipline to achieve their objectives from a financial planning point of view. The medical profession will be the most important profession in the world because we all want to live longer and healthier lives and the financial planning profession, if we do our job properly, will be the second most important profession in ensuring that our clients can afford to live healthier and longer lives and that it is not a trivial undertaking.
we dealt with some older people who had a lot of money and that their wealth did not bring them much happiness. So then we started doing some research to understand why people behave the way they do.
Our profession can be seen as providing a parallel service to the medical profession. We can sit with people, conduct a needs analysis and review their current behaviour, thereafter recommend better behavioural patterns. That is where the value is. A good financial planner who takes time to engage with their client can make a client feel better within an hour because they will have a sense of where they are and be more at ease; similar to a visit to the doctor. You can immediately show value but if a financial advisor sells you all the funds they possibly can, then that to me creates a disconnect with clients.
In the book, we unpack our initial findings of how there is a correlation between happy people and wealthy people and the correlation between unhappy people and un-wealthy people. The initial insights called for deeper investigation and what emerged was that happy people have money and not that people with money are happy.
You have co-authored a book titled How much is enough? Tell us about it?
The book also gives guidance to how you can invest to enable your happiness. There are a couple of hypothesis as to why happy people make good investors. In our opinion, we find that happy people have their frame of reference they are happy with who they are and don’t get sucked into what the crowd is doing and the emotions of other people. So when they invest they only make changes within their frame of reference and not in that of other people’s. People who are bad investors are often quick to panic.
Initially, I co-authored another book with Arun Abey called Fortune strategy, and that book was about how to develop the perfect investment strategy. The book was not a best seller, but the important thing is we applied those principles in our business. Arun was running his business in Australia and I ran a business in South Africa and both the businesses were exceptionally successful. What perplexed us both was that although the principles were nothing profound and very easily accessible most people were not applying them – this concerned us and we wanted to understand why. We also found that
The second thing we explored is whether happy people perceive themselves as good investors. The title of the book How much is enough? is not about a number, it is about a state of mind.
Your thoughts on the pending legislation? My view is that the regulatory reform is fantastic. In my opinion, the regulators
are well intentioned. The aim of moving our industry from being product-driven to advice- and service-driven will be a benefit to society. Commission structures, particularly where they are different for different products, creates a disconnect between the client and the financial advisor’s needs. I have great sympathy for financial advisors because if their form of validation and remuneration is heavily dependent on commission and that has the potential to create a gap as one would be more tempted to sell a product not because of its suitability but because of the commission it can generate for themselves. When we remove that, there is a greater focus on the financial advisor and their client value proposition making way for a deeper sense of client trust and promotion of our profession.
As a very accomplished CFP® professional, are there any plans on the horizon for you? I have been fortunate and blessed to have the opportunity of living my passion. I really love what I do. I would love to continue adding more value to clients, help others become better financial planners, better investors whenever and however I can assist people I will continue to do so. I have been invited to be a keynote speaker at various conferences and I’m also willing to do so if people see value in me doing that then that would be an opportunity for me to give back.
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r e v n De n i u t For Denver 速 Fortuin, CFP
Executive Director: Risk and Compliance, Unisa
Which career achievement is significant to you so far? My current role as the executive director: risk and compliance at Unisa is the highlight for me. The university had a vision of pioneering a compliance function, and I was recruited to set it up. After a year has passed since my appointment as director: compliance, I was promoted to my current position and now have the added responsibility for enterprise risk management and sustainability. This is a compliment to me as Unisa was the first higher education institution to introduce a compliance function ensuring as an institution it meets all its legislative
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and regulatory requirements. I also appreciated that my employer recognised my potential and expressed confidence in me to excel in what I was appointed to do and by involving me in other key projects.
in my new environment, it was necessary to acquire new skills that inevitably lead to personal development.
What has this meant for your personal growth?
What prompted you to want to become a board member of the Financial Planning Institute (FPI)?
I believe that career growth should mirror personal development otherwise there is no real progression. The personal growth has meant exposure. My exposure previously was limited to the financial services industry so when the opportunity arrived to expand my horison to the higher education sphere I took a leap as it presented an exciting new challenge. For me to operate
I view myself as a mission member who believes in the purpose of the Institute and the importance of advancing our profession. I saw the advertisement that was released to all members, calling for nominations. I felt it was the right time and opportunity to offer my skills, commitment and time to serving my professional community.
I applied and just like all shortlisted candidates I was interviewed by the former chairperson Prem Govender, CFP®. I was very grateful to receive the news of my appointment as a nonexecutive director of FPI. Naturally as a board member one is tasked or has the responsibility of facilitating the overall direction and strategy of the organisation while developing a governance system. What I am also looking forward to is being part of the robust discussions on how FPI plans to grow membership. I strongly feel that membership is the lifeblood of any membership organisation. The other key focus is member retention and reinforcing membership value as well recruitment of new members.
Tell us one specific insight that will inform the endeavour you just mentioned? One thing I can attest to, from my experience being a part of a service industry, is that service delivery is critical to the person on the receiving end. People who pay for a service have an inherent expectation of valuable service. I hope to channel everything I’ve learned from serving in similar professional bodies to grow our profession further.
Unisa’s Graduate School of Business Leadership (GSBL) that resulted in an occupational qualification being offered, by the GSBL, to compliance officers or those who want to enter into the profession. The course will ensure that compliance officers are properly trained and equipped to deal with the demands of their work. In a nutshell, identifying a critical need in the industry and being proactive in fulfilling that need is what’s gratifying for me.
What attributes does a nonexecutive director need to possess to enable him or her to fulfil their role? One needs to have the appropriate qualifications. The appropriate qualifications depend on where you wish to serve. Having more than the appropriate qualification also serves one well especially if they are transferable. For example, my Postgraduate Degree in Financial Planning and Advanced Postgraduate Diploma in Financial Planning served me well at FPI.
The corporate governance and compliance management qualification is relevant to the role I play at the Compliance Institute of Southern Africa plus my Masters in Business Leadership which is generic enables me to sit at almost any board and provide input. Being a good listener is an important personal trait to have. Often one is tempted to be heard and to pre-empt what will be said. As a board member, you are expected to listen as the executives or management team present their reports on how they are effectively implementing the strategy. Listening becomes useful and important as one is able to understand what is being presented to them and also able to ask informed questions. Lastly is the skill to challenge; this does not mean being brash or confrontational. Ultimately as the board we are responsible for governance and at times need to interrogate whatever is being reported.
Having said that, the other issue I want to include on the agenda is sharpening the way we communicate to our members. We need to tap into the fundamental practices of communication science so that our key messages to members are intellectually fascinating, received on time, understood, accepted, relevant and sent within balanced intervals.
What benefit do you derive from your association with different member bodies? Personal growth. By belonging to the various member bodies, I want to serve and also grow personally. It is definitely a reciprocal relationship, as I bring in my skills and share my insights with fellow board members, I also learn a lot through my engagements with them. The other major benefit is growing and shaping the profession. For example in my tenure at the Compliance Institute of Southern Africa (CISA) and I facilitated collaboration between the Institute and
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Management can sometimes tell you what they think you want to hear, and it is for this reason that the board must be objective and read more than what is provided in the report.
Please share your opinions on the legislation facing our industry? We sometimes view regulation in a negative and punitive way, however, some legislation has its merits. It is overregulation that should be cautioned and lobbied. For example, when FAIS was introduced there were a lot of fears and prediction of negative consequences. During these times of uncertainty is where FPI's advocacy work has been consistent. Institutes like FPI also assist members to navigate and apply the legislation.
As a strategy expert what learnings can you share when it comes to strategy formulation and execution? Often I have observed that when it comes to strategy formulation organisations do not plan enough. Critical and divergent thinking should be embedded into the planning process as well as environmental scanning as this will affect the sustainability of the organisation. The other let down is that too
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often people fall into group thinking; this happens because of strong personalities in the team being headstrong about their point of view, usually excluding others. In terms of strategy execution, the organisation must have a visionary and competent leader to drive strategy otherwise all the great planning would be in vain.
Which leaders do you look up to and what is it about them that fascinates you? I admire a type of leadership style rather than individuals. Servant leadership is the type of leadership style that I admire; leading through serving others and setting an example. It is through serving that you are elevated to become a leader.
things happen and letting things happen. This does not mean that one should adopt a laid back approach to things but rather have the wisdom to know when to be proactive and when to allow circumstances to unfold.
If you had not chosen the current career path what would you be doing? I would be a full-time mentor or life coach. I would want to help people make a success of their lives looking at the individual holistically, delving in all facets of their life. I like seeing people develop and knowing that I have contributed to their growth makes me happy. So I am quite curious to see how the group of compliance students which I am lecturing will advance in their careers.
Which life experience has taught you the biggest lesson?
How do you strike that worklife balance, if it exists for you?
When I was so much younger, I was an impatient person, I guess it is the driver in me. Looking back, the failures I have experienced (personally and professionally) have been due to my impatience and need for instant gratification.
I don’t think there’s a balance for me. My energies are unevenly dedicated on a daily basis. Depending on the crisis that may arise, my time and energy will be focused on that. So some days, work will require more of my time, causing my personal life to suffer some neglect, but there is always calm after the storm, which allows me to give my personal life the attention it needs.
I have worked on these weaknesses so that I strike a balance between wanting to make
Lowe Cape Town 16838/E
BECAUSE WE GET UP AND DO THE RIGHT THINGS RIGHT, DAY AFTER DAY, OUR CLIENTS SLEEP BETTER, NIGHT AFTER NIGHT. Top quartile 10 year performance: Prudential Equity Fund Prudential Dividend Maximiser Fund Prudential Balanced Fund Prudential Inflation Plus Fund Prudential Global High Yield Bond FoF Source: Morningstar
For more information contact our Client Services on 0860 105 775 or visit: prudential.co.za
Source: Morningstar data for periods ending 30 April 2015 in the relevant ASISA categories. Prudential Portfolio Managers Unit Trusts Ltd (Registration number: 1999/0524/06) is an approved CISCA management company (#29). 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 the future and the Manager provides no capital or return guarantees. Unit trust prices are calculated on a net asset value basis, which for money market funds 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 can engage in borrowing and scrip lending Unit trusts are traded at ruling prices. 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. Performance figures are sourced from Morningstar and are based on lump sum investments using NAV prices with gross income reinvested. Purchase and repurchase requests must be received by the Manager by 13h30 (11h30 for Money Market and 10h30 for Dividend Income Funds) SA time each business day. All online purchase and repurchase transactions must be received by the Manager by 10h30 (for all Funds) SA time each business day. General market performance data may have been provided for illustrative and explanatory purposes. This information is not intended to constitute the basis for any specific investment decision. Investors are advised to familiarize themselves with the unique risks pertaining to their investment choices and should seek the advice of a properly qualified financial consultant or adviser before investing.
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We Challenge You! CFP® Professional Competency Challenge Status Examination The exam was approved at the FPI board meeting held in November 2014 After discussions with members, education partners, students, Financial Planning Standards Board (FPSB) and various other role players in the financial services industry, the CFP® Professional Competency Challenge Exam was approved at the FPI board meeting on 28 November 2014.
Requirements to gain access to the CFP® Professional Competency Challenge Exam The challenge exam is offered to individuals who hold certain advanced degrees or professional credentials, but have not completed one of the FPI approved qualifications. FPSB as the licencing authority for the CFP® designation, approved that FPI may accept specific professional credentials as fulfilling the education requirement for CFP® certification. Furthermore, FPI may extend the availability of the Challenge Exam to individuals that are performing in senior positions in the industry, but that does not necessarily hold the prescribed qualification of study. FPI has the right to determine the types of qualifications it will accept for challenge status. FPI will be required to verify the qualifications and credentials of candidates for the challenge status with appropriate oversight bodies. (Adapted from: FPSB Certification Standard)
The following designations will be considered when allowing for Challenge Status exams with a minimum of 10 years’ client facing financial planning experience as a pre-requisite:
Designation
Awarded by / registered with
Underlying qualification
Master Tax Practitioner
South African Institute of Tax Practitioners (SAITP)
Postgraduate Diploma in Tax Law, M Com (Tax), LLM (Tax)
CA(SA)
South African Institute of Chartered Accountants (SAICA)
B Com Hons (Acc)
Registered Auditor
Independent Regulatory Board for Auditors
Postgraduate degree /diploma accredited by SAICA
Admitted Attorney with relevant qualification
Law Society South Africa or General Council of the Bar of SA
Postgraduate degree equivalent to NQF Level 8
CFA Charter holder
Chartered Financial Analyst Society
CFA Level 3
Apart from awarding access to the challenge exam to any of the above designation holders, the following qualifications will also allow access to the challenge exam:
Qualification
Experience
Bachelor of Laws (Only if registered on NQF Level 8 with 480 credits)
10 years client facing financial planning related experience
Postgraduate diplomas in: • Finance banking and investment management • Financial management • Investment banking/planning • Insurance law • Taxation • Tax strategy and management
10 years client facing financial planning related experience
Qualification
Experience
B Com Honours in the following specialisation areas: • Accounting or Financial Accounting • Actuary / Actuarial sciences • Auditing • Banking • Economics • Finance or Financial Management • Financial analysis and portfolio management • Financial taxation or Taxation • General • International trade and finance • Investment Management • Monetary and Financial Economics
10 years client facing financial planning related experience
Masters degrees in business and or finance related areas
10 years client facing financial planning related experience
Doctorate degrees in business and or finance related areas
10 years client facing financial planning related experience
While individuals may be highly qualified in a specialised area of financial practice, it does not necessarily guarantee their success on the CFP® Professional Competency Examination. FPI could encourage candidates seeking to sit for the CFP® Professional Competency Examination via challenge status to consider completing an examination review course or reviewing the currency and completeness of their education against the FPI’s Financial Planning Topic List. Challenge status candidates may benefit from retaking courses or taking additional courses to improve currency and mastery of specific topic areas. The challenge exam will be exactly the same exam that the current candidates write as the Professional Competency Exam. Challenge status exams are limited to two lifetime opportunities. If the candidate is not successful in passing the exam, it will become a requirement that the person must enrol at an FPI Approved Educational Provider to complete the Postgraduate Diploma in Financial Planning or the B Com Honours in Financial Planning.
How to apply to write the exam In order for any candidate to be considered for the CFP® Professional Competency Challenge Status Examination, they are required to submit: • A motivational letter; • Certified copy of their identity document; and • Certified copies of the qualifications which allow them access to the exam.
Contact us If you have any questions, please feel free to contact our membership department: Office: (011) 470-6000 or 086 1000 384 (FPI) Email: membership@fpi.co.za
Top students
in financial planning Well done to the 2014 financial planning top students for achieving an outstanding pass rate. We are super proud of you and wish you well on your journey to attaining the CFP速 designation.
Karin Muller Cyan Clarke
Dale McCarthy
Haylee Renzulli By: Mandisa Magwaza, Financial Planning Institute
Doret Jooste
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Cyan Clarke
3.What is the secret behind a successful student?
Milpark Education
• Develop a study plan. Figure out what study method works for you, and start studying from day one. I only just got through all of the material, and I literally studied every day. • Stick to your plan. There were many social things that I had to miss out on, because studying had to come first. • Use the resources that are available to you, and try to form a study group. If you don’t understand something, ask.
1. One word that describes you, and why? Determined; from my personal point of view I am someone who likes to get things done, and once I have committed to something I have a strong sense of responsibility to finish it. I have also never been afraid of hard work. 2. Why did you choose to study financial planning? Financial planning is fast becoming a highly specialised and professional industry, and I can see myself going forward in this industry and choice of career. I feel that I am really contributing to the financial security of my clients. The completion of the diploma has raised my level of professionalism and confidence.
Dale McCarthy Nelson Mandela Metropolitan University 1. One word that describes you, and why? Passionate. I’ve always loved the quote by Galileo: “passion is the genesis of genius”. It is a simple quote, yet complex and meaningful at the same time. To truly master anything in life, one must be passionate about it. 2. Why did you choose to study financial planning? I initially wanted to become a chartered accountant, then an advocate. In the fourth and final year of my degree, the BCom Rationum (Law), I realised that following either of those two professions would not resonate with the person I am. Although I enjoy aspects of each career path, neither would have been “the full package” that I wanted for myself. After much deliberation, I decided to complete my degree and study a post-grad in financial planning. Being a financial planner affords me the opportunity to incorporate aspects of both accounting and law into my daily work life,
4. Tell us about your current role and how your employer supported you on your journey? My current role is a combination of paraplanning and administration management for Asset Protection International (API). From the outset, I was encouraged to study and improve my skills, and my employer has supported me both financially and practically to make sure it was possible.
with an added extra, that of being able to build relationships and help people. Furthermore, our industry has created a less than desirable name for itself and I want to ensure that, through my actions and dealings with clients, they come to realise that it is actually an industry that is here to help people attain financial freedom. 3. Tell us about your current role and how your company supported you in your studies? I work at a professional practice called Client Care as a financial planner. My boss, Dirk Groeneveld, CFP®, supported me in all aspects of my studies. The practical experience that I gained while working with real clients assisted greatly in class and exams. Client Care provided me with paid study leave for all four of my block weeks, including a day before each exam and the day of the exam. Dirk and I worked on many client portfolios together, giving me the opportunity to ask questions when I needed to, and debate decisions when I thought there was a better course of action. Dirk always took the time to listen to my views and helped me to guide our clients along the best path.
In addition to this, the founder of our practice, and now our senior advisor at API Port Shepstone, Ian Smith, has generously shared his time and the knowledge and experience he has gained in his twenty-seven years as a financial advisor through an open door policy. Working in the field, getting to practice what I was studying on a daily basis and having the opportunity to discuss pretty much anything with Ian was a great platform to work from. We worked together to structure our office work in such a way that would allow me to have a day or two free for study leave prior to each exam. 5. What was your most challenging distraction while pursuing your studies and how did you overcome it? As a wife and a mother, I sacrificed a lot of family time. I owe a massive thank you to my husband and my mother-in-law for their support and for shouldering many of my responsibilities while studying.
I found it relatively tricky to balance my work and my studies. Work often demanded a great deal of my time. I overcame this distraction by planning my week in advance, ensuring I had sufficient time to deal with my studies, and surfing in the evenings to clear my mind. 5. How did you celebrate your achievement of being the top student? I was fortunate enough to have my girlfriend, Kate-Lynn, attend the prize giving with me. The following day, after graduation, we went to lunch at a fancy restaurant and enjoyed a good bottle of red wine together later that evening.
4. What was your most challenging distraction while pursuing your studies and how did you overcome it? In life, there are many aspects we need to take into account that are often difficult to prioritise.
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Doret Jooste University of the Free State 1. One word that describes you, and why? Adaptive; my strategies, actions and sometimes even personality are based on what the situation requires, in order to do the task at hand to the best of my ability 2. Why did you choose to study financial planning? I’ve always been interested in being financially responsible in my personal life and also in helping others to achieve financial independence. I also wanted to gain a better understanding of our industry to propel me to construct best-fit financial solutions. 3. What is the secret behind a successful student? To be successful in your studies, especially while working full time, takes commitment and dedication. I found it best to get up very early in the mornings so I could put in a good two to three hours of study before going to the office. It wasn’t always easy (especially during winter!), but if you want to succeed in anything you have to dedicate time and attention towards it.
4. What study techniques work best for you? For the Postgraduate Diploma in Financial Planning qualification specifically, it helped to have detailed summaries on the key module objectives. I also found it helpful to draw diagrams and/or pictures on topics which involved complex detail and had this at hand in
Karin Muller University of Stellenbosch 1. One word that describes you, and why? Blessed; to live, work, study and be able to achieve. I am grateful for the opportunities I have had during my life and the ability to set goals and accomplish them. 2. Why did you choose to study financial planning? I am inquisitive and love learning. Secondly, the programme is most relevant to my work environment of fiduciary services. I had hoped that it would enhance my knowledge base in the different fields, hone technical skills and give me a more holistic overview of all the facets of planning, thus assisting me in providing a better service to our clients – which it did!
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the examination room. This helped to decrease the amount of time it would have taken to read through all the detail. 5. Being the top student, how did you celebrate your achievement? My husband supported me immensely during my studies and we celebrated with a nice dinner and (a couple of bottles of) champagne.
3. What is your current role and how did your company support you with your studies? I am a senior associate at Cliffe Dekker Hofmeyr Inc. As a law firm with its core focus on corporate and commercial law, there was initially some scepticism as to why the course would be beneficial to the firm. In my particular practice area– trusts and estates – it is a natural fit and with motivation on my and my director's part, they awarded me a partial bursary. As the course was in the evening on two workdays a week, I was allowed to leave earlier and was also granted study days before my exams. I am thankful for their support in this manner. I am most grateful to my director (Johann Jacobs) who held the fort when I was on study leave and who, together with our assistants (Jacky and Tania), shared the workload.
UFS Centre for Financial Planning Law programmes:
1. Postgraduate Diploma in Financial Planning Law 2. Advanced Postgraduate Diploma in Financial Planning Law 3. Programmes in Estate and Trust Administration
Dr. Liezel Alsemgeest CFP®
• Lecturer: UFS Centre for Financial Planning Law. • The Financial Planner magazine, one of seven outstanding CFP professionals under the age of 35 years old. • UFS B.Iuris : Financial Planning Law Programme director.
Adv.Sankie Morata CFP®
• National Head of Legal ,Risk and Compliance of Nedgroup Trust. • Chairperson of the Board of the Financial Planning Institute of Southern Africa. • Chairperson of the Financial Planning Standards Board.
Adv Wessel Oosthuizen
• General Manager FPI Centre for Professional Development.
Imagine where a UFS CFPL programme can get you... T: 27(0)51 401 2823 | F: 27(0)51 401 3733 | www.ufs.ac.za/cfpl
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Karin cont. 4. What is the secret behind a successful student? Hard work definitely – but that’s no secret! On a personal level, if you are motivated and are able to find aspects in your studies that interest you; that goes a long way on the road to success. On a practical level, being attentive in class, studying hard for the progress tests and practising the examples facilitates the preparation and writing of the exams. At Stellenbosch, we also had the benefit of having excellent lecturers whose knowledge of their respective subjects were extensive and remarkable. They were keen to interact and willing to assist beyond a classroom environment. I am also privileged to work for a director who is regarded as the foremost expert and attorney in succession and trust law, and who was keen to discuss (and challenge) me on the subject material we were taught. I must lastly remark that forming friendships with your classmates is
Haylee Renzulli University of Johannesburg 1. One word that describes you, and why? Dependable. I believe I have certain traits that make me a dependable employee, family member and friend. These traits include; integrity, being able to meet deadlines through prioritising, as well as remaining positive. 2. Why did you choose to study financial planning? I was at a crossroads towards the end of my
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also a key ingredient as the support network they provide is immeasurable. 5. What was your most challenging distraction while pursuing your studies and how did you overcome it? Working while studying was quite difficult, I found myself concerned about work matters, clients, fees and budgets while
third year of studying, between doing my Postgraduate in Financial Management or Financial Planning. My decision was made after a well-known financial planner, Warren Ingram, CFP®, shared his reasons for choosing this career path. He said if you are honest, enjoy people and want flexibility in life, then financial planning is for you. 3. Were you surprised to learn that you were the top student? Yes! My goal was to achieve to the best of my ability and not necessarily be the top student. The fact that I achieved this was a bonus. 4. What is the secret behind a successful student?
having to take time out for lectures and studying. Yet, you also wish to pursue the latter to the best of your abilities. The many hours spent over books further comes at a cost to your personal and family time. However – although it was a crash course in time management and priority organising – it is certainly not impossible to do and still find time to enjoy yourself.
• Stay on top of your work. • Don't file your work until you've read over it and understood it. • Rather study too much than too little, shortcuts equal to short-term gain. • Remain disciplined, prioritise and attend all lectures. 5. What is your favourite module and why? Retirement planning. I want to assist and prepare as many people as possible, so that they are able to retire comfortably at a reasonable age. This should be every person's goal, and I believe this module has given me the ability to help them achieve this.
THE FEELING OF FLYING WITHOUT THE FEAR OF FALLING. “Higher!” your child calls as you give her a push. The wind tousles her hair, and you don’t give a thought to the rigidity of the swing’s chains or the sturdiness of the frame. As her toes touch the sky and she squeals with delight, you realise that the things you trust most, never stop working to earn it.
NET#WORK BBDO 8012955/E/SW
To find out how Coronation can earn your trust, speak to your financial advisor or visit www.coronation.com
Coronation Asset Management (Pty) Ltd is an authorised financial services provider. Trust is Earned TM.
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TAX
Maximising the benefits of
tax free investments By Franscois van Gijsen, CFP®, FPSA® and MTP(SA)™ Director: Legal Services at Finlac Risk and Legal Management.
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As CERTIFIED FINANCIAL PLANNER® professionals we have recently been provided with a new savings tool to be considered when advising our clients. The new ‘tax free investments’ is the result of the exemption created in terms of section 12T of the Income Tax Act which became effective on 01 March 2015.
I
n keeping with our duty in terms of the FAIS Act to provide our clients with ‘advice’ that is appropriate to their individual needs, the industry would do well to consider the defining characteristics of this new savings tool to ensure that we use it to our clients' best advantage. If one considers the potential eroding effect that tax could have on investment returns, I would suggest that the best benefit would result from providing clients with the maximum tax advantage achievable. This will no doubt be helped by the fact that Finance Minister Nene has issued regulations with which an investment has to comply in order to qualify as a ‘tax free investment’, which regulations, among other things, limit the fees that may be charged in respect of making and withdrawing such an investment. Frequently, high investment fees are the reason why an investment fails to perform as expected and I believe that these limitations will especially benefit less sophisticated investors. The combination of the tax benefit and the restriction on costs should, together, provide clients with a significant benefit. However, as financial planners we should take care that our advice does not inadvertently negate some or all of this benefit for our clients. The first defining characteristic to be noted is that this exemption, does not provide clients with a tax deduction in respect of contributions made to their ‘tax free investments’ as is the case with retirement annuity contributions.
What it does do is to exempt the proceeds of these investments from income tax, dividends withholding tax and capital gains tax thereby delivering on the promised tax saving. As can be expected these investments come with some strings attached. The second important characteristic is that a ‘tax-free investment’ can in terms of sub-section 12T(1)(b) only be owned a) by natural persons or b) by the deceased estate or insolvent estate of a natural person. This I believe is also wide enough to allow a trust to invest capital to which a trust beneficiary has a vested right on behalf of such a beneficiary in a ‘tax-free investment‘ as the beneficiary in those instances would be the owner of the investment even though he or she may not at that stage be the person administering the investment. The third defining characteristic of these types of investments is that they restrict the extent of the contributions that can be made to them. Contributions to these investments must consist of an amount in cash. Investors are limited to contributions not exceeding R30 000 in aggregate during any year of assessment. Finally investors are limited to contributions not exceeding R500 000 in aggregate over the lifetime of the investor. This is not to say that the value of the investment may not exceed R500 000 but what amounts there are in excess of R500 000 will have to be the result of investment growth. Enforcement of these limitations of contributions is achieved in a very unusual manner. In terms of sub-section 7, if a taxpayer in any year of assessment contributes in excess of the allowable R30 000 in respect of tax-free investments, then his excess contribution will be taxed at 40 percent in respect of that year of assessment. (It is assumed, in view of the increased rates of tax for the 2015/2016 year, that this will be amended to 41 percent.) Considering that these investments are made with after-tax money, the taxpayer will effectively be taxed twice in respect of his excess contribution, whereafter the investment will continue to provide a tax free income.
It is the aforementioned limits on annual and lifetime contributions that provide us with our best insight into the reasons for these ‘tax-free investments’. As is obvious, these ‘tax-free investments’ are intended to encourage taxpayers to save. The existing interest exemption has failed to encourage the public to save on an ongoing basis, while nevertheless still costing the fiscus in respect of taxes not collected annually. It is hoped that the new tax-free investment will address this problem. To get any significant tax benefit investors in a ‘tax-free investment’ would have to remain invested for a very long period of time. It will take an individual at least 17 years of diligent investing to reach his R500 000 lifetime contribution limit. It should also be borne in mind by clients and their advisors alike, that withdrawals from the investment cannot at a later stage be replaced by means of an additional contribution. The benefit in terms of the withdrawn contribution is lost for good and the fiscus does not repeatedly lose tax revenue in respect of what amounts to the same savings. Bearing the above in mind, financial planner professionals should encourage their clients to think carefully about their reason for saving and the time period of their savings when considering whether or not to avail themselves of these investments. To obtain the most benefit from them, these ‘tax-free investments‘ should be approached with an ultra-long investment horizon. Investors should not place money that may have to access in case of an unforeseen emergency in a ‘tax-free investment‘. Although the funds in the ‘tax-free investment’ are available to withdraw, once withdrawn contributions cannot be reinvested. Placing funds in a ‘tax-free investment’, which need to be accessed in the short or medium term, would deprive the client of a potential lifelong tax benefit. It is worth remembering by clients and their advisors that the new ‘tax-free investment’ is not the only tax beneficial manner of investment. It is one of a number of incentives aimed at assisting taxpayers to provide for
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TAX
themselves. In order to obtain the most benefit therefrom, I would suggest the following as a general approach to the use of the ‘tax-free investments’ in our clients' portfolios. 1) For as long as the interest exemption – at present R23 800 – is still available to them, I would suggest that investors invest such money as they may need for contingencies in an interest bearing account. This will enable them to benefit from the interest exemption while still allowing them to avail themselves of the tax benefit that is offered by the ‘tax-free investments’. However, in order to earn interest of R23 800, assuming interest is earned at 6 percent per annum, one would have to invest R396 667 in an interest bearing investment. This is a large amount of money and the investor should consider whether such large provision is necessary to cover emergencies. The amount placed in interest bearing investments should be determined not by the extent of any tax benefit that may be achievable, but rather by the need to provide for emergencies and the individual investor’s risk profile. 2) After making provision for emergencies, investors should consider contributing as much as legislation allows them to a retirement annuity. Retirement annuities, similar to the new ‘tax-free investment‘, also exempt the investment proceeds in the retirement annuity from tax, but in addition retirement annuities also provide a tax deduction in respect of the contributions made. However, contributions to retirement annuities are made with money that is not taxed, while contributions to ‘tax-free investments’ and interest bearing accounts are made with money on which tax, at a rate between 18
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percent and 41 percent, has already been paid. This can be illustrated as follows:
received, but these too are to an extent exempted and/or taxed at beneficial rates. Meanwhile the investor has received tax-free growth on money that would otherwise have been paid in tax.
Assume an investor earns R25 000 per month and accordingly falls into a 31 percent tax bracket. Income tax on that amount is R5 354 per month, leaving the investor with R19 646 after tax. Our investor has monthly expenses of R16 000 per month leaving the investor with R3 646 after tax disposable income. Based on the aforesaid our investor is of the opinion that he can afford to save R2 000 per month with R1 646 for unforeseen monthly expenses. In this scenario our investor saves R24 000 per annum.
However, this article should not be taken as suggesting that clients should be discouraged from using the new ‘tax-free investment’. I am rather concerned that unconsidered use of these new investments will deprive clients of the potential benefit that these investments were designed to provide them. As shown, the ‘taxfree investment’ has to be left untouched for a number of years, if the investor is to obtain any substantial tax benefit.
However, our investor could choose to contribute to a retirement annuity. Because the contribution to the retirement annuity is taken out of the tax equation before tax is calculated on the remainder of his income he could save R2 420 per month in the retirement annuity and have more expendable income left after saving. The calculation now looks as follows: The investor earns R25 000 per month.
I would, therefore, propose that investors should only consider using the new tax-free investment once sufficient cash has been put away for contingencies, and the maximum use of the RA deduction has been made. In certain circumstances, clients should rather consider saving slightly less in these investments in order to safeguard them from having to withdraw from the investment and possibly losing the tax benefit that this investment provides them.
He pays R2 420 per month to his retirement annuity which means that R22 580 is taxable. Income tax on R22 580 is R4 658 leaving the investor with R17 922 with which to pay his monthly expenses of R16 000 and put R1 922 in his pocket for unforeseen monthly expenses.
The loss of tax benefit that results from a withdrawal from the new ‘tax-free investments’ is intended to encourage the public to save on a continual basis and to remain invested in return for which they receive a tax benefit. In so doing, it will hopefully assist SARS in encouraging South Africans to increase their household savings. Nevertheless, I would suggest that CERTIFIED FINANCIAL PLANNER® professionals who fail to advise their clients of the workings of these investments and the restrictions on contributions thereto could result in their clients suffering a loss of benefits that would in turn expose them to complaints at the Ombud for advice that was inappropriate.
By using the retirement annuity the investor manages to save an additional R420 per month and leaves him with an extra R272 in his pocket. True, the investor will later, upon retirement from the retirement annuity, have to pay income tax upon his withdrawals – both as lump sums and the annuity income
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fpi news
Why become an
FPI Approved ™ Professional Practice B
eing an FPI Approved Professional Practice™ makes you stand out amongst your peers and sends a clear message to your clients that your practice adheres to the highest levels of standards and ethics. It also validates that your practice is following the six-step financial process and that you place the needs and objectives of your clients at the heart of your business.
The professional statuses of our members are elevated on many levels; not only do they stand out in a group of financial advisors who do not carry the designation, but they can confidently deliver their services with the highest standards of knowledge, expertise and ethical conduct.
10 reasons to become an FPI Approved Professional Practice™
1
By displaying the FPI Approved Professional PracticeTM brand, your business will be recognised as a professional financial planning practice offering financial services of the highest standard.
2
You’ll get higher community recognition among your peers and consumers by actively promoting and using FPI Approved Professional PracticeTM branding in your business.
3
You will have increased exposure through advertising and article opportunities on various FPI platforms, many times at no cost to your practice.
4
Your practice will be listed on the FPI website as an FPI Approved Professional PracticeTM, giving you more than R50 000 worth of free advertising.
5
You will benefit from participating in FPI consumer awareness campaigns that will create a demand for your practice and the professionals employed by you.
6
You will become an employer of choice; your commitment to the highest standards will help you attract the industry’s top talent. You can advertise for potential employees through FPI on various platforms, at a reduced rate.
7
You and your staff can network in professional forums, creating the opportunity to showcase your practice to other like-minded professionals.
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8
By upholding the rigorous standards of this brand, you will play a pivotal role in transforming the standards of financial planning in South Africa.
9
Your practice will be an FPI Mentorship Centre by mentoring new financial planning employers and students. Your practice will receive free mentorship training to enable you to incorporate the FPI Mentorship programme into your supervision practices.
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By partnering with us through co-branding initiatives, we will promote your business to your clients, confirming your professional practice status and approval.
If you would like to apply to be an FPI Approved Professional Practice™, please contact: • Patrick De Nation on (011) 470 – 6101 or patrick@fpi.co.za • Justin Lippiatt on (011) 470 – 6076 or justin@fpi.co.za
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fpi news
Consumer initiatives:
As simple as
1…2…3
Consumer advocacy forms a crucial part of the overall strategic plan of FPI. We recognise the need to relate to consumers by helping them understand the basics of financial planning and helping them to overcome their inherent fears caused by the complexities and jargon of our industry.
By Tertia Ndlovu, FPI Consumer Affairs Co-ordinator
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n December 2013, we appointed Tertia Ndlovu as the consumer affairs co-ordinator to drive this strategy. The role requires the planning, implementing, supervising and evaluating of comprehensive consumer awareness programmes and initiatives to ensure that all consumers have access to professional financial planning cited in FPI’s vision “Professional Financial Planning for All”. As the custodian of the FPI MYMONEY123™ financial literacy educational programme, Tertia ensures that this programme is offered to schools, universities, corporates and consumer organisations who understand the importance of financially literate communities. We have signed Memorandum of Understandings (MoU) with various organisations to increase our consumer reach and our formal relationship with these organisations can only benefit South Africa as a whole.
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We have MoUs in place with: • Financial Services Board (FSB), geared towards creating awareness on the rights and responsibilities of consumers, personal financial management, as well as the overall distribution of financial education; and to give credence to the Financial Services Board Act, 1990. • Road Accident Fund (RAF), providing financial planning and literacy tools to RAF claimants. • South African Savings Institute (SASI) on their consumer initiatives such as July Savings Month. • Gauteng Economic Development on their consumer rights initiatives. We have also worked with Edward Nathan and Sonnenberg Attorneys (ENS) on financial planning education for their candidate attorneys and in the communities where they offer law clinics. South African National Defence Force (SANDF) offers our FPI MYMONEY123™ programme to their young entrants into the force and retirement planning education to their retiring members. The value that a corporate derives from working with FPI, is that we are an independent professional body and our financial planning programmes do not market any particular financial service provider (FSP) or any specific FSP’s financial products. The workshops are offered by CERTIFIED FINANCIAL PLANNER® professionals as pro bono, giving South African consumers
access to professional financial planning and making them aware of the benefits of using a CFP® professional who carry the global mark of true professionalism in the financial services industry. As millions struggle to find trustworthy information and resources, the role of CFP® professionals have become even more critical. We continue to close the gap in public financial education by facilitating these financial planning workshops. Most individuals need advice on how to plan and manage their finances wisely. We call out to other consumer organisations and corporates to partner with us in the drive to assist consumers faced with mounting debt, rising costs and who are in need of retirement and healthcare planning. For all consumer initiatives, please contact Tertia on (011)470-6000 or e-mail her on mymoney123@fpi.co.za. About Tertia Ndlovu Tertia Ndlovu has 20 years’ experience in the financial services industry having completed her Bachelor’s Degree in Education and a Postgraduate Diploma in Organisation and Management from the University of Cape Town. She has also completed her National Certificate in Wealth Management, FSB Regulatory Examinations 1 (Key Individuals) and 5 (Representatives) certificates and is currently busy with her Postgraduate Diploma in Financial Planning.
19
INTERNATIONAL news
Financial Planning Standards Board
named affiliate member of oecd –infe; endorsed national financial literacy guidelines for nonprofits.
F
inancial Planning Standards Board Ltd. (FPSB), owner of the international CERTIFIED FINANCIAL PLANNER® certification programme outside the United States, was recognised as an affiliate member of the OECD International Network on Financial Education (INFE) at FPSB’s April Global Member Meeting in Paris. At the same meeting, FPSB’s network of CFP® certification bodies endorsed OECD-INFE’s Guidelines for Private and Not-for-profit Stakeholders in Financial Education, which define a framework and criteria for a nonprofit body involved in national financial education strategies and programmes.
“In addition to establishing rigorous standards and CFP® certification requirements for the global financial planning profession, FPSB and its member bodies are committed to educating consumers so that they can take control of their financial futures," said Steve Helmich, FPSB Board Chairperson. "While many of
34
FPSB’s member organisations already conduct financial literary efforts, our membership in OECD-INFE will help connect those efforts to others promoting national financial literacy strategies. It will also allow the global financial planning community to shape the OECD’s development of financial literacy initiatives.” INFE Executive Secretary, Flore-Anne Messy, welcomed FPSB and the voice of the global financial planning community to the OECD-INFE network. After an engaged discussion with the FPSB Board and member organisations, she commented, "I am more than ever convinced that there are many possible avenues for future cooperation between OECD-INFE and FPSB, and I look forward to our next steps.” Additionally, during the FPSB meeting hosted by FPSB’s local affiliate Association Française des Conseils en Gestion de Patrimoine Certifies (CGPC), Verena Ross, executive director of the European Securities and
Markets Authorities (ESMA), addressed the FPSB Board and leaders of FPSB’s European member bodies on: Europe’s regulatory environment; the implications of MiFID II for the financial advice/planning community; and opportunities for participation by CFP® professionals and other financial advisors in ensuring appropriate levels of care and protection for those seeking financial advice in Europe. Since FPSB was formed over 10 years ago, the number of CFP® professionals has grown to almost 160 000 in over 26 countries and territories worldwide. At the Paris meeting, the FPSB Board and member organisations agreed on the need to grow the footprint of competent and ethical financial planners in existing and new FPSB territories to better address the global community's need for competent and ethical financial planners. The group set a provisional target of 250 000 CFP® professionals in 40 territories by the year 2025 and agreed to finalise the target by year-end after assessing territory-specific growth opportunities and challenges.
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At PPS, we know professionals – and we know what they need from their investments. After all, we’ve spent over 70 years skillfully growing our members’ wealth – as well as the assets in their PPS Profit-Share Accounts. That’s why so many of you have trusted PPS Investments to manage your fi nancial futures, and because your investment contributes to your PPS Profit-Share Account, every cent you invest with us is also earning you profits. To fi nd out more, visit ppsinvestments.co.za, email clientservices@ppsinvestments.co.za or give us a call on 0860 INV PPS (0860 468 777).
T H E K E Y TO S U CC E S S L I E S I N S H A R I N G I T.
Professional Provident Society Investments Proprietary Limited (“PPS Investments”) (39270), Professional Provident Society Multi-Managers Proprietary Limited (“PPS Multi-Managers”) (28733) and Professional Provident Society Insurance (“PPS Insurance”) (1044) are licensed Financial Services Providers.
27
fpi events
Continuous Profe ssional Development
Events Calendar 2015
Face-to-face events Month
Event
Region
Date
July
Client Engagement (3 day course/workshop)
Western Cape
21- 23 July
August
Client Engagement (3 day course/workshop)
Johannesburg
11 - 13 August
Johannesburg KwaZulu-Natal Western Cape
14 - 15 September 17 - 18 September 21 - 22 September
Annual Refresher Workshop
KwaZulu-Natal East London Port Elizabeth
28 October 29 October 30 October
Annual Refresher Workshop
Pretoria Johannesburg (west) Johannesburg (north) Polokwane Free State George Western Cape Western Cape
2 November 3 November 4 November 5 November 11 November 17 November 18 November 19 November
September
October
November
Retirement and Investment Planning (2 day workshop)
Webinars Month August
September October November
Online courses Date To be confirmed To be confirmed
Topic Retirement Planning Investment Planning Personal Risk and Insurance Health Benefits
22 October
Ethics (1)
19 November
Ethics (2)
Month
Date
Topic Risk Management:
** Dates are to change depending To subject be confirmed Insurance and September
on speaker and venue availability Business Assurance
* Dates are subject to change depending on speaker and venue availability.
To find out more about the 2015 events, contact the events team on (011)Â 470-6000 or email events@fpi.co.za.
36
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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 31 December 2014. Since inception 1994.
15
HEALTHCARE
By Roshan Bhana, CFPÂŽ, Head: Technical and Actuarial Consulting Solutions, Alexander Forbes Health
Investments in medical schemes
how are they structured?
Background Regulation 29 promulgated in terms of the Medical Schemes Act (131 of 1998) prescribes that medical schemes maintain a minimum solvency ratio of 25 percent. The solvency ratio is the level of reserves (accumulated funds) that a medical scheme needs to hold as a percentage of gross annualised contributions. Due to this requirement, medical schemes typically have to set aside these reserves in some type of investment vehicle.
Regulation 30 Annexure B of Regulation 30 promulgated in terms of the Medical Schemes Act (131 of 1998) provides guidelines to medical schemes as to how they can invest their reserves held
40
to meet the statutory solvency requirements. In particular, it specifies limits on the types of assets that a scheme is allowed to hold and can use to calculate their solvency ratio. The intention of these regulations is to reduce the level of risk that a medical scheme can take with their investment strategy and therefore protect members’ funds. The limits specified per asset class, institution or security is shown in the table below:
As can be seen from the above table, medical schemes can hold as much of their assets as they like in cash, money market instruments or bonds. There are, however, limits for maximum exposure to any single entity, for example a limit on how much can be deposited with each individual bank to ensure sufficient diversification of the assets held.
Asset Class
Overall Limit
Sub-limits per institution
Equities
40%
2.5% - 7.5%
Property
10%
2.5% per single investment
Bonds
100%
SA Government 100% Parastatals 20% Local authorities 10% Corporate 10%
Cash
100%
35% per bank
With respect to the other asset classes, they can invest up to 40 percent of their assets in equities and 10 percent in property investments. Once again, limits apply per security or institution.
percent whilst other asset classes including property made up 4.3 percent of assets. Whilst restricted medical schemes held a higher proportion of assets in cash, they did invest more aggressively using equity investments.
How medical schemes currently invest
Why do medical schemes invest so conservatively?
Currently, very few medical schemes make full use of the investment allowances as specified above. The typical investment philosophy followed by medical scheme trustees is one of risk minimisation as opposed to optimising the investment returns earned on their assets. At present, most medical schemes have adopted very conservative investment strategies. The graph below shows the asset allocation for 9 of the top 10 open medical schemes and the top ten restricted medical schemes (by membership size) for the year ended 31 December 2013 as obtained from the schemes’ annual reports.
Medical schemes’ preference for cash in particular appears to be driven by concerns about risks related directly to the investments (making negative returns and losing scheme assets). The high level of risk aversion when it comes to medical schemes investments probably results from a few main factors: • The risk that volatility of investments (i.e. the variability in asset values from day to day) poses to the solvency of the scheme: for a scheme with a high level of equity exposure, a fall in the stock market could mean that the scheme’s solvency falls below 25 percent. • The need for liquid assets in order to pay out claims from month to month.
For open medical schemes, 52.0 percent of assets were held in cash or cash equivalents and 28.3 percent were held in bonds and debentures. Only 19.7 percent of assets were held in riskier asset classes such as equity (14.6 percent) and property (5.1 percent). For restricted schemes 54.8 percent of assets were held in cash, and 17.9 percent were held in bonds and debentures. Equities made up 23.0
This may also be a direct function of the perceived short term nature of medical scheme liabilities, and the annual review of medical schemes’ performance by the Council for Medical Schemes.
Why medical schemes should consider investing more aggressively For the long-term sustainability of medical schemes, average returns below medical inflation may pose a huge risk. In particular, claims expenditure tends to grow faster than consumer price inflation (CPI). For a scheme to maintain solvency year on year, the reserves need to increase at least in line with the increase in contributions. For the recent past, these have consistently exceeded CPI. If investment returns cannot keep pace with the increase in claims inflation and accumulated funds increase at a rate less than contributions, then solvency levels will decrease over time, resulting in a need to either increase contributions further (which would exacerbate this issue) or reduce benefits. As a result, for schemes failing to meet the solvency requirement, low investment returns due to conservative asset allocations may in fact be increasing the risk for the scheme. For schemes meeting the solvency threshold, this can be eroded over time if returns are below claims – and contribution inflation, and they may be missing an opportunity to maintain affordable contribution increases in the future. Other reasons include the following:
Asset allocation as at 31 December 2013
100%
60%
90%
50%
80% 40%
60%
30%
50% 20%
40% 30%
Solvency
Asset allocation
70%
10%
20% 0%
10% 0%
Bonds
Property
Collective investment vehicles
Other
Profmed
Motohealth Care
Sasolmed
SAMWUMed
Platinum Health
LA-Health
Bankmed
Transmed
Polmed
GEMS
Sizwe
Equities
KeyHealth
Liberty
Fedhealth
Bestmed
Cash and money market
Medshield
Medihelp
Bonitas
Discovery
-10%
Solvency
• Liquidity requirements should be met from operational cashflow. If a scheme is unable to do this, it may point to the scheme’s contributions being set at inadequate levels. • Equity returns have consistently beaten cash and bond returns over the past twenty years, despite the volatility experienced in equity markets. • Trustees’ fixation on the statutory solvency level on an annual basis is preventing schemes from adopting a more aggressive investment strategy. Scheme reserves are typically set aside for catastrophic events, which by their nature are infrequent, unexpected and usually high cost. These should thus be considered as long-term liabilities. The asset strategy should correspondingly be set to mirror these liabilities.
41
HEALTHCARE
Is it not time to open up
by Lucas Greyling, CFP速, FPI Health Competency Committee Member
health financing in South Africa?
Part 1
42
Background Following the 1994 elections, the government committed itself to a number of specific goals in the area of social policy, including, among others, the provision of affordable, decent and effective healthcare
for all. Various documents on how this could be achieved have since been published. The guiding principles considered in the ANC Health Plan demonstrated a social solidarity-based approach to healthcare reform. The plan endorsed principles
way. The Health Plan also recognised that the health system at the time of the transition to democracy was wholly unsustainable, because vulnerable people had difficulty accessing health care services. In an attempt to reduce the inequities of the divide between the private and public health sectors the government, among other steps, enacted the Medical Schemes Act, 1998 (the Act), which was supposed to modify the behaviour of medical schemes toward their members and to enforce risk management requirements that would make schemes more efficient, affordable and equitable (Wayburne, 2014).
Definition of Medical Scheme in the Act The “business of a medical scheme” is defined as the business of undertaking that undertakes, in return for a premium or contribution, to provide for obtaining health services; or granting assistance in defraying health-related expenses; or rendering health services2. The Act also prohibits anyone from being able to “carry on the business of a medical scheme unless that person is registered as a medical scheme.” (S 20)
that aimed to provide better protection of individual interests when considered within a communal context, by recognising the necessity for redistribution and the sharing of health care resources in a more equitable
The Act therefore also actively prevents currently excluded communities from creating their own prepaid mechanisms for the transfer of the financial risk of illness and accidents. In this regard, it must be noted that more than 80 percent of the South African population continues to be excluded from membership of medical schemes in spite of the good intentions with which the Act was promulgated fifteen years ago.
Council for Medical Schemes The Act provides for the establishment of a new statutory regulatory authority and governing body, The Council for Medical Schemes (CMS), which is appointed by the Minister of Health and is tasked with protecting the interests of members of medical schemes. The LIMS3 national household survey estimated that 21.9 million individuals residing in non-rural households in South Africa had incomes below R6 000 per month. A high percentage of these individuals are willing to pay for medical pre-funding provided that contributions are affordable (i.e. <10 percent of income) (Broomberg, 2007). In spite of this the proportion of the population covered by medical schemes to date has continued to be relatively stagnant. Medical schemes have also attracted criticism for unaffordability of cover (Fish and Ramjee, 2007), a lack of innovation, passive purchasing of healthcare (McLeod and Ramjee, 2007) and a failure to address the escalating cost of healthcare (McIntyre, 2010). If the CMS only represent the interests of medical schemes, their members and service providers4, it begs the question, “Who represents the interest of the more than 80 percent of South Africa's population who are currently unable to obtain an affordable medical scheme option?”. Although the CMS have recently been holding various “indaba’s" with stakeholders interested in a low-cost alternative, the agenda and the proposed solutions continue to be informed
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43
HEALTHCARE
Progress towards realising the right of access to healthcare According to the latest available annual report of the CMS (Annual Report 2013/14) there were 87 registered medical schemes at the end of December 2013, of which 24 were open and 63 restricted. These schemes had a total of 8 776 279 beneficiaries, comprising 3 878 267 principal members and 4 898 012 dependants. South Africa had a population of 52 982 000 in 2013 (Stats SA, 2013). This means that in 2013 more than 83 percent of South Africa's population still did not participate in medical schemes – fifteen years after the publication of The Act and its Regulations. As a result, annual out-of-pocket payments for healthcare services by South Africans exceed R13 billion (World Bank Indicators) which has a significant poverty effect on low-income communities. This is clearly a failure to deliver on the provisions of Section 27 of the Constitution. It is also a failure to adhere to the international standards provided for in Article 12 of the International Covenant on Economic, Social and Cultural Rights, which details the right of everyone to enjoy the highest attainable standard of health5. by an exclusive approach that focuses on maintaining a more affordable version of the status quo.
Constitutional requirement for access to healthcare Section 27 of the Constitution obliges the state to develop legislation to progressively realise the right of access to healthcare. In the absence of free and effective public healthcare, this can be interpreted, at the minimum, to mean access to affordable mechanisms for the transfer of the financial risk of illness and accidents – i.e. insurance in its widest meaning. The World Health Report 2000 presented convincing evidence that prepayment is the best form of revenue collection for healthcare and that out-of-pocket payment tends to be regressive and often impedes access to care.
Health risks and poverty There is growing recognition that vulnerability to risk is one of the defining characteristics of poverty (World Bank 2000).
44
While having sufficient funding is important, it will be impossible to get close to universal coverage if people suffer financial hardship or are deterred from using services because they have to pay on the spot. When this happens, the sick bear all of the financial risks associated with paying for care. They must decide if they can afford to receive care, and often this means choosing between paying for health services and paying for other essentials, such as food or children’s education. Health shocks appear to have especially important effects (Gertler and Gruber, 2002) and studies of household welfare in villages in Kenya, Uganda, Peru and India over a four-year period and covering 25 000 households found overwhelming evidence that health shocks are the most frequent cause of long-term poverty (Krishna, 2007). Despite significant improvements made since 1994, inequitable access to health care services, reflected in the publicprivate sector divide, remains entrenched in South Africa.
In addition, it is a well-documented aspect of health economics that health insurance generates increased demand for health services and therefore contributes to the development of healthcare delivery infrastructure (Doherty and McLeod, 2003; Spaan et al, 2012) – something that is urgently needed in South Africa.
1. A National Health Plan for South Africa’ (May 1994) http://www.anc.org.za/show.php?id=257 Chapter 1 under headings ‘Priorities' and ‘National Health System' 2. http://www.acts.co.za/medical-schemes-act-1998/ 3. Low Income Medical Scheme 4. Although medical schemes have always been not-forprofit entities owned by their members and managed by boards of trustees, they are closely associated with a number of for-profit entities that provide a range of services such as administration, marketing, managed care, consulting and advisory services (McLeod and Ramjee, 2007) 5. International Covenant on Economic, Social and Cultural Rights GA Res 2200A (XXI) (1966); 21 UN GAOR Supp (No 16), 49; UN Doc A/6316 (1966); 993 UNTS 3. For an exposition of the right to health in international law see G MacNaughton ‘Untangling Equality and Non-Discrimination to Promote the Right to Health Care for All’ (2009) 11 Health and Human Rights 47.
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37
industry event
wellness and one way to do that is to empower their partners (financial advisors). The end goal is to have clients that benefit from engaging with an informed advisor who is equipped to recommend the necessary solutions to fulfil the client’s needs.
A Passion for life
This second annual Momentum Risk Summit was held at Sun City on 3 – 4 March 2015. The two-day event is South Africa’s only summit wholly dedicated to the life insurance industry.
T
o practice in any profession with confidence one needs to keep up with industry trends and issues. The host delivered insightful presentations of the insurance landscape to 350 delegates. The delegates benefited from learning not only the technical aspect to building competency but also gained personal development lessons which
46
ultimately helps to grow one’s value offering. Delegates also had the opportunity to connect with peers. FPI members who attended the summit earned a total 7.5 CPD points. Client centricity has become a buzz word in the industry. Momentum explained that they are geared to helping their clients to financial
To kick start the summit on a positive note, the first presentation was delivered by Mark van de Watt, who is the CEO of Momentum Retail. Mark articulated how financial advisors could unlock the opportunities that exist in the risk insurance industry. With the pending legislation, technological advances, Treating Customers Fairly (TCF) principles, they are optimistic about the opportunities that are offered by the financial services industry particular in the short-term space. This was validated by research that was conducted by True South who was commissioned by The Association for Savings and Investment South Africa (ASISA). The key finding of the research highlights that the South African market is underinsured by 60 percent which is quite a bold statement. The research does reveal a more defined picture of the mentioned 60 percent, as to what portion of them feel they can afford or are willing to consider risk planning in their financial needs analysis. Furthermore, the research does not provide key insights such as demographics and financial position for one to fully plan how they can exploit the mentioned opportunity. The theme of the event was A Passion for Life, essentially advocating that the organisation has a passion for life insurance and wants its key stakeholders to share in that vision. FPI caught up with Mark to find out more about their initiatives. As a life insurance company, they are proactively reaching out to the public to educate consumers to make better financial decisions and invest in research to not only understand financial illiteracy but also do their bit to alleviate it. This is done by the offering of online financial tools that assist clients to have a constructive view of their finances and be
encouraged to adopt good financial habits such as budgeting, saving and including risk as part of one’s financial plan. Mark stated that they benefit from the financial tools platforms as they extract useful data to better understand the needs of consumers in order to design the appropriate products that strengthen the client’s value proposition. More so they have embraced the principles of TCF by gradually reviewing their documents to implement plain language. He adds that, “Clients don’t often understand what they can expect from entering into an agreement with the service provider which could be limited by simplification, education and transparency.” He believes that as an industry we are not readily trusted by customers, therefore, we have to be prepared to earn their trust and that will take time. Mark also feels that trust can be won by doing the right things. The broader financial services industry is about trust and people. In agreement with this view is one of the international keynote speakers, Derik Mills. Derik shared his experiences as a financial advisor on how he and others in the United Kingdom ‘survived’ the Retail Distribution Review (RDR) legislation.
The introduction of RDR has created positive and negative sentiments among financial planners. The pending legislation is exploring ways to ensure that financial advice is provided by qualified financial advisors, free from bias and the costs of advice is understood by consumers. Central to the pending legislation is the remuneration model of financial advisors and a categorisation of what an advisor can refer to himself as. The aim of all changes is to improve the quality of advice and the effectiveness of the legislation will be determined by transparency and consumers being able to compare services and also have holistic understanding of what they are paying for.
As a keynote speaker, Derik was also invited to share his wisdom as an author of The 10 Second Philosophy®. In his book he shares his journey to success started with a simple question from a security guard. That question was a turning point for him, an epiphany for a late night working, poor income and unfulfilled financial advisor who was constantly on the road chasing leads and going nowhere slowly.
Derik provided positive advice to the audience by sharing how he embraced the changes and unlocked opportunities. He also believes that he was compelled to professionalise his services and define his worth as a financial advisor. A number of South African financial advisors feel anxious about having to articulate the value of their services as consumers may expect initial consultations as a ‘free service’. The expectation often does not recognise the expertise employed in conducting a proper financial needs analysis even ahead of recommended solutions. The other obvious part of the anxiety is the feeling that their income potential is under threat.
The other highlighted key topics of the summit were the technological breakthroughs that will also assist life insurance and medical companies to have a better understanding of their clients so to encourage healthier behaviour. There has been no better time for consumers to practice healthy life habits than the present. Overall the summit was a well-organised event and we look forward to what next year's event has to offer!
The required standard of professionalism A professional is known by four hallmarks: Education, Examination, Experience and Ethical Behaviour. Since 2011, FISA has offered an annual examination that allows the successful candidate to apply for the Fiduciary Practitioner of SA (FPSA®) designation. Furthermore, our education partner, the Unversity of the Free State, is introducing a programme in fiduciary practice from 2015. FISA has a strong Code of Ethics, as well as a Continuing Professional Development programme. Our strong reputation has led to: • Increased awarenes of fiduciary matters in the media • Clients demanding to deal only with FISA members • The authorities consulting us on industry issues • Members experiencing a promotion of their interests
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47
INVESTMENT
What, me
irrational? I
t was John Maynard Keynes who said, “The market can remain irrational longer than you can remain solvent.” He reportedly made this comment after making several highly leveraged trades that clearly left him in a reflective mood. Market commentators constantly warn us against being irrational and letting our emotions get in the way of our investment goals, but what does this really
mean for you and I, the prospective investor? To understand “irrationality”, we need to delve into classical economic theory to uncover what it means to be “rational” and make so-called appropriate or wealth-maximising decisions based on utlity theory. If we assume that we do operate rationally and to maximise our wealth, we should at the very least receive returns in line with markets, right?
S&P 500
Inflation
Equity Funds
Fixed Income Funds
By Paul Nixon, CFP®, Technical Marketing, Barclays Global Investments and Solutions
48
0,00%
3,00% 10 Year
20 Year
6,00% Since 1984
9,00%
12,00%
US-based research and evaluation firm, Dalbar, have been running what they term QAIB or a quantitative analysis of investor behaviour since 1984 (about 30 years). This model basically compares US market returns to those delivered by mutual funds or unit trusts. The results shown above are rather sobering. Since 1984, the S&P500 has delivered rock solid growth of over 11 percent, considering that inflation was under 3 percent over the same period. Investors in equity funds, however, received a miserly 3.69 percent or 1/3rd of the market return. Even more concerning, but shedding some light on the results is that the average investor only remained within the equity fund for 3.33 years. So, either we are deliberately using risky assets to achieve medium-term objectives or something is leading us into the temptation of trying to time the market. This brings us neatly back to the beginning of our discussion. Utility theory, (von Neumann and Morgenstern, 1947) provides a normative model offering the basis for decision-making under risk. From a technical perspective it is important to note that “risk” here refers to scenarios where the probability distribution is known. In other words, we know what the chances of rain on a Monday are from how much it has rained on previous Mondays. The economic utility function provides each possible monetary outcome of a risky decision and the rational investor simply chooses the investment alternative that produces the highest expected benefit. So if there is a 50 percent chance of gaining R10, we have an expected value of R5 (50 percent x 10). If we compare this to a 1 percent chance of gaining R100, which provides an expected value of R1 (1 percent x 100), the rational investor chooses the former and ignores the latter. At this point, the difference between homo economicus or economic man and homo sapiens becomes more apparent. Firstly, as investors, most of the time we make decisions under uncertainty and not risk. In other words, we don't always know what the probability distribution of outcomes will be. Buying a lotto ticket comes with a known probability distribution depending on how many tickets you have
bought and how many are issued. Buying a stock does not. Secondly, utility theory looks at gains and losses of wealth in absolute terms and assumes a stable utility function over time. In reality, investor utility functions can change dramatically over time simply because at different points and with different life decisions we have a different perception of and attitude towards risk. We don’t look at our wealth in absolute terms, we have an education fund, a retirement plan and a holiday fund – a set of mental accounts with unique risk attitudes. Finally, our ability to adequately weight the probability of expected returns and calculate expected values correctly is far from perfect. For a stock trader, this calculation may take no more than seconds, but more time does not necessarily guarantee results. Playing the US lotto with one ticket provides a 1 in 175 000 000 chance of winning with an expected value of $0.000000011. Needless to be said, there are a multitude of investments out there which offer superior expected values; clearly we are hopelessly overestimating the probability of success. In fact, lotto players have a greater chance of perishing on the way to the lotto counter than winning the lotto itself.
Prospect theory (Kahneman and Tversky, 1979), a descriptive behavioural model, proposes to modify the economic utility function with a value function that explains the deviations of real human behaviour from the normative model. This value function is based on three relative properties (Wright, Smithers et al, 2004). Firstly, we evaluate our investment results relative to a set reference point. If we buy a stock at R10, this entry price is the reference point and all subsequent price movements are evaluated against this. This sounds intuitive, but the consequences are far reaching and will become clear as we discuss the second property, that of shrinking sensitivity. Investors become less sensitive, the farther away asset prices are from the reference point. Simply put, investors are much happier about the first rand profit than the second and so on. The same results are seen in the domain of losses, we will feel the first rand loss much more than the second and so on. The resulting behaviour is that we hold onto losers and sell winners. Research shows that traders have around 80 percent more gains than losses, often used to reinforce superior skill. Closer inspection, however, reveals that stocks are simply overtraded when prices rise and not sold at all when prices fall. This leads us to the final property, loss aversion. The fact is, our value function is convex, most of us will feel a loss of R10 000 2 to 2.5 times as intensely as a gain of R10 000. Naturally this will depend on the proportion of our wealth in question. In conclusion, as investors we clearly don’t make decisions with the express intent of destroying utility. What is clear and reinforced by the research presented earlier, is that human beings are notoriously bad at predicting the consequences of their actions. The fact is the market as a whole behaves in much the same manner, paradoxically almost in that so-called noise traders or irrational investors seek reward for the additional risk they themselves create. Rest assured however that even the most analytical thinkers are predictably irrational, we are all human and profiting from irrational behaviour, as Keynes discovered years ago, is trickier than a box of monkeys.
49
INVESTMENT
Alternative investments and
hedge
funds We believe that by subjecting hedge funds to ongoing regulation, investors would gain a far greater sense of confidence about using hedge funds as an investment product, resulting in great potential upswing for growth in the hedge fund industry.
their effective oversight, a challenge we are embracing. As a consequence, a new department has been created for hedge funds and a head of department hired, who is currently in the process of employing six staff members.
What does this mean for existing hedge funds?
What impact do you think this regulation will have on the SA hedge fund industry?
Finance Minister Nhlanhla Nene has given the hedge fund industry six months from 1 April 2015 to apply for registration as a hedge fund in accordance with the Collective Investment Schemes Act. Interview with Jurgen Boyd, Deputy Executive Officer: Collective Investment Schemes at the Financial Services Board (FSB) What does the classification of hedge funds as a collective investment scheme mean? The declaration by the Minister of Finance on 25 February 2015 that hedge funds will now be classified as a collective investment scheme places the oversight and supervision of these financial services products under the jurisdiction of the Financial Services Board (FSB). This is a very positive move, for both investors and for the local hedge fund industry, as it now means that South Africa will have one of the most extensive regulations of a hedge fund industry, in the world. Do you think this will change the perception of hedge funds for investors?
50
According to the declaration, to be registered each hedge fund must now follow a prescribed set of regulations including providing a deed which sets out, inter alia, its investment policy, how its assets are valued and the frequency on which they will be valued. The assets must also be valued independently, and if not, then the valuation must be independently verified.
What will happen to a hedge fund if it does not register in accordance with the Act in the next six months? Should any hedge fund fail to register by 30 September 2015, they will be operating illegally, and will as a consequence be subject to regulatory and enforcement action by the FSB. What does this mean for the FSB in terms of how it will regulate these funds? Given the complex nature of hedge funds, we will require a new skill set to ensure
The South African hedge fund industry is currently estimated to be worth more than R40 billion, which is relatively small compared to the global hedge fund industry, which has an estimated $2.7 trillion in assets under management. However, we believe that the increased regulation of this asset class is likely to give it more credibility to retail and institutional investors and we would, therefore, expect the local industry to grow further from its current base. It is interesting to note that private pension funds were granted an opportunity to increase the level of their investments into hedge funds to 10 percent from 2.5 percent in 2011. However, this didnâ&#x20AC;&#x2122;t result in a huge take-up, as the market still perceived hedge funds to be too risky as a result of the lack of supervision and regulation. Greater diversity will thus be introduced to pension fund investments should the low uptake be reversed as a result of this regulatory initiative. We are confident that the inclusion of hedge funds under the Act and the supervision of the FSB will increase confidence in the hedge fund industry and lead to further growth.
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29
INVESTMENT
Implementation
poses challenges Hedge fund regulations may have been passed â&#x20AC;&#x201C; but implementing the regulations take time By Mark Preston, Chief Operating Officer, Laurium Capital
52
S
outh African hedge fund regulations pave the way for more transparency, better investor protection and potentially more inflows into what is currently a very small hedge fund industry. Hedge funds will now officially be regulated under CISCA â&#x20AC;&#x201C; the Collective Investments Schemes Control Act, where they will have to be formally registered as collective investment schemes. Practically how will the regulations take effect? The new regulations are fairly onerous with specific requirements but how will hedge funds meet these, set up the required structures and lodge applications to comply with CISCA?
Mark Preston, COO of Laurium Capital, a local hedge fund manager, says that in this exciting and interesting time for the industry - there are some challenges ahead. “While we know what the regulations state, as an industry we need to work out how best to transition and comply.” The regulations allow for two types of hedge funds – retail investor hedge funds (RIHF) and qualified investor hedge funds (QIHF), although Preston believes that managers will also have the freedom to manage segregated mandates for single clients outside of the regulations, using their Category II and IIA FAIS licenses – as is the case in the collective investment scheme space as we know it today. Will new structures need to be formed? If a hedge fund has been set up as an en commandite partnership, as many of them are, while these structures are recognised and permitted by CISCA, investors may well need to be transitioned across into more traditional trust structures. This is because hedge funds will need to establish, or co-name with, a Manco as a regulatory requirement. In an en commandite partnership, the regulations are clear that the Manco will need to serve as the en commandite partnership’s general partner – and it is the general partner that is responsible for the actions of the en commandite partnership and personally liable for all of the en commandite partnership’s debts and obligations. This means that the Manco would be placing it’s balance sheet at risk Manco’s may therefore choose to only consider trust structures.
could co-name with an existing Manco who would handle this for them. We have seen most hedge fund managers moving in this direction. So when choosing a Manco, managers must consider whether the Manco will support en commandite partnerships or not, and if not, how best to transition investors into a trust structure.” There is currently no guarantee that transitioning investors will not trigger tax consequences for investors. Timing is another question many have raised – initially six and twelve month deadlines were set – but these may need to be extended. “We are setting a precedent,” says Preston. This is a time everyone wants to act with caution and fully understand what is required, how it will happen and what the effects and consequences will be. “We need to be careful when we follow this process, how we interpret the regulations and how we complete the applications. This is a very positive time for the industry – but it is new - and with that comes some uncertainty.” Preston says the regulations will promote the integrity of the industry.
Preston says hedge fund managers may elect to set up a Manco themselves or team up with an existing one.
“CISCA offers more transparency, better investor protection and will show the investing public that the vast majority of hedge funds in South Africa are actually conservatively managed and well diversified, use moderate leverage and serve to reduce investment risk. We want investors to see this. Hedge funds have been widely misunderstood and there is an education gap that needs to be filled. I suspect this may take some time though and that the big inflows into the industry may only happen over the medium to longer term.
“Hedge fund managers tend to operate in the boutique space,” he comments, “where they are focused on staying nimble by managing funds and outsourcing most, if not all, non-core functions. They may not wish to enter the Manco space by registering their own Manco and dealing with all the administrative complexity. Instead they
My view is further cemented by the fact that CISCA currently does not recognise or permit allocations to hedge funds by existing CISs. This means that until CISCA is changed, which will no doubt take some time, a CIS in securities fund of fund, as an example, cannot invest a hedge fund, whether it’s a retail or qualified hedge fund. ”
53
PRACTICE MANAGEMENT
Two key ingredients for long-term company survival
Adrian Saville, CIO of Cannon Asset Managers, looks at how companies can overcome a poor business environment. earnings consistently ahead of nominal GDP, regardless of the economic cycle. By Adrian Saville, CIO of Cannon Asset Managers
How many JSE companies do you think beat the last downturn? Of the more than 1 000 companies surveyed in our research, just a handful of JSE-listed companies managed to sustain and grow earnings between 1997 and 2013. At Cannon Asset Managers, we call them the ‘exceptional exceptions’ and they are quite an eclectic mix of shares – from Mr Price to Wilson Bayly Holmes-Ovcon; from EOH to Famous Brands – these counters have managed to grow
54
We surveyed stock markets across 25 countries, and our findings revealed that the most significant factor to impact on the growth in company earnings is GDP growth. This came as something of a surprise to us. More than any strategy adopted by businesses, including diversification or globalisation, beyond any industry variables or geography, our evidence shows that GDP growth has the greatest impact on company performance. (It should be noted that we looked at the economy relative to corporate profitability over time, not at stock market performance.) For companies to perform well, then, it helps to have a supportive business environment in
which to operate. However, this is not always the case and in South Africa it's no secret that the economy is growing at rates well below its potential. But bad times do not last forever, and we can expect a recovery to come from several quarters. Notwithstanding the current local malaise, South Africa’s growth rate for the last 20 years has taken its lead from world economic growth: global growth is the best indicator of what our structural growth rates are likely to be into the future. We believe that for the next 10 years we will see an average annual global growth rate in the region of 3.5 percent, giving South Africa a baseline growth rate of 2.5 - 3.0 percent. There are two additional factors which could double this potential growth rate. First, a further 1.5 percent growth is possible if
South Africa boosts intra-regional trade and intra-regional flows of people, information and capital. This freer movement of factors would enable the country to tap into the outstanding growth rates of plus-6 percent being experienced in the rest of subSaharan Africa. Second, if the R1 trillion infrastructure expenditure programme is undertaken in a meaningful way, another 1.5 percent could be added to South
Africa's growth rate, to yield in the order of 6 percent annual economic growth. Infrastructure development has one of the greatest multiplier effects in terms of job creation, especially with regard to the promotion of low-skilled jobs. Significantly, both of these kickers are structural in nature: they would result in a permanent lift in the country’s output potential.
But, while waiting for the environment to recover, what can companies do? Harvard Business Review (2012) published a study by Rita McGrath of Columbia University which shows that of 4 793 companies, each with a market value in excess of $1 billion, only 8 percent were able to grow real earnings faster than world GDP without interruption between 2005 and 2009. Admittedly this was during a period of economic stress, but even between 2000 and 2005, when times were easier, that number is only 15 percent. Considering the full ten-year period 2000 to 2009, McGrath's evidence is even more striking: just ten firms in her five thousand firm sample achieved uninterrupted real earnings growth ahead of world GDP. Arguably, an even more intriguing result is the firms which make up this exclusive set of ten which includes search firm, Yahoo (Japan), Spanish construction operation, ACS, Chinese brewer Tsingtao and Atmos Energy, a US-based gas business. We extended McGrath's research to include South Africa over seven ten-year periods to end-2013 to assess the application of her findings to our market. Notably, we too have a low success rate; of the more than 1 000 firms we surveyed, just a handful generated real earnings growth that is also ahead of South Africa's GDP growth over this time. And our small set of thrivers is as eclectic as McGrath’s, including Clientele Life, Truworths, Mr Price, WBHO, EOH and Famous Brands. We sought to establish if there was a common element which the businesses that thrive displayed and others didn’t and we found two key factors common to these stocks: agility and absorption.
1. Agility means their nimbleness with regard to operations, portfolios and strategy. • Operational agility is the ability to take advantage of opportunities to improve operations; • Portfolio agility is reflected in companies which are able to adapt their underlying holdings in line with a changing environment. Good local examples of this would be Imperial, Bidvest and Barloworld; • Strategic agility occurs where leaders have vision and courage to follow new paths and where mistakes are corrected swiftly, before they become entrenched. 2. Absorption means that a company can withstand the vagaries of a challenging environment – that it has “shock absorbers” in place to cushion it during turbulent or trying times. A sound balance sheet with modest debt levels, a diversified (and strong) cash flow and loyal customers are examples of traits which an absorptive company displays. Other examples would be constant innovation, taking many small bets and listening to what clients want. Two companies which exemplify the need for these attributes are Kodak and Fujifilm: the former is a shell of its former self while the latter has grown inexorably. The trends are evident in the employee numbers: in 1995, Kodak employed some 150 000 staff but by 2014, that number had shrunk to 8 800; by contrast, Fujifilm has seen its employee numbers rise from 15 000 in 1990 to 50 000 today. Recognising that the traditional photographic industry was in the death zone, Fujifilm used its agility to reinvent itself. Using its background in materials chemistry, imaging, optics and analysis, the group has developed a diverse range of products from digital X-rays to cosmetics. In recognition of its achievements as one of the world's most innovative companies, Fujifilm was named a Thomson Reuters 2014 Top 100 Global Innovator for the third year in a row. Kodak filed for bankruptcy in 2013 and is currently attempting a comeback. Companies which are able to balance both the qualities of agility and absorption are able to command premium valuations and experience better profitability and return on equity. Those companies wishing to see off the challenges of a subdued business environment should look closely at these two factors – agility and absorption – and find ways to enhance both.
55
PRACTICE MANAGEMENT
How financial advisors are using
LinkedIn to grow their business
With more than 350 million members, LinkedIn has become the world’s largest online business networking site. No longer just a tool for job searchers, today LinkedIn is the premier social media site for lead generation and reputation management.
O
• • • • •
ther than Facebook and Twitter, LinkedIn is strictly business – and has become a secret weapon for marketing activities such as: Replacing Cold Calling Generating New Leads Finding the Decision Maker Accelerating the Sales Cycle Connecting with C-level Executives
The state of the LinkedIn Nation • LinkedIn has more than doubled in size in the past year with two users added every second; • Executives from all Fortune 500 Companies are registered on LinkedIn;
• 45 percent of LinkedIn’s members are considered the major decision makers for their companies; • LinkedIn holds the record for the Highest Average Household Income over all other social networking sites at over $109 000 per member; • There are no distractions – on LinkedIn, you will only find individuals with a business mindset, focused on networking for results.
with peers and industry leaders. And over 60 percent of LinkedIn Frequent Users indicate they have successfully generated revenue based upon their LinkedIn efforts.
277 percent more effective than Facebook and Twitter
Early adopters that have piloted the new LinkedIn Sales capabilities, have reported a significant increase in lead generation, including: • IBM doubled the traffic to their seller profiles in one month • 40 percent of Morgan Stanley’s financial advisors got business inside of two months • Leading US Technology firm Marketo increased their outbound sales rates by four times
In a recent study of over 5 000 businesses, HubSpot found that traffic from LinkedIn generated the highest visitor-to-lead conversion rate at 2.74 percent, almost three times higher (277 percent) than both Twitter (.69 percent) and Facebook (.77 percent). LinkedIn’s conversion rate also outranked social media as a channel overall. In other words, of all the traffic that came to these business’ websites via social media, .98 percent of that traffic converted into leads, compared to LinkedIn’s 2.74 percent. So why might LinkedIn be the most efficient social channel for lead generation, and how can you use that to your advantage?
By Dr Nikolaus Eberl, PhD (Dr Nik)
56
The newly upgraded sales and marketing functionality on LinkedIn now enables professionals to establish a marketing funnel and product path online and attract new clients on an ongoing basis.
Success stories abound
This has significant implications for financial advisors who are serious about growing their business through the new discipline of social selling. Social selling has been pioneered by financial professionals in the United States where the average successful financial advisor has been in business for 10 to 13 years, and is in his or her late 40s to 50s, and may not be particularly adept at social media.
According to Harvard Business Review, 87 percent of company executives believe LinkedIn is the place to connect and interact
As an advisor to IBM and FNB, I have found the following five ways most effective for service professionals to grow their business on LinkedIn.
1
Building your personal brand
2
Synching your email contacts
3
Getting new clients from linkedin recommendations
Once you have a complete LinkedIn profile (and achieved LinkedIn ‘All Star Status’), your profile will rise to the top of Google results whenever some-body searches for your name. Google loves LinkedIn and both your personal profile and company page will boost your personal brand’s GoogleAbility.
Darrel Rhea, MD of consulting firm Cheskin, wasn’t sure how to leverage his professional network on LinkedIn effectively. A quick 10 minutes that he spent importing his Outlook contacts to LinkedIn yielded a chance encounter with a former client. One thing led to the other, and before he knew it he had signed off on a $1M project with his client.
Sasha Strauss, founder of the Public Relations agency Innovation Protocol, used LinkedIn to grow his new company’s profits exponentially without placing a single advertisement. He describes LinkedIn as “an authenticity protocol”, by which professional contacts come to him pre-qualified by the network and accomplishments they represent on LinkedIn. Conversely, his business has profited from his robust network and profile that features 53 glowing recommendations, one of which informs us, “Sasha is a talent so rare, that if he were an animal, National Geographic specials would be made about him.” His clients include Adobe, IBM, Johnson and Johnson, Korn/Ferry International, Microsoft, Pepsi, TiVo and Yahoo!
4
Activating your content marketing machine
5
Mining Your Referral Network
This makes LinkedIn the perfect platform for your content marketing, in other words sharing information of value and creating your own thought leadership content.
Called the “Three Degrees of Success”, LinkedIn enables you to data mine the networks of your connections – and to leverage your own network to obtain introductions to their LinkedIn connections. According to the latest research, up to 80 percent of new business comes from referral networking and, if used properly, LinkedIn allows you to build a massive referral network
To learn more about how you can use LinkedIn to generate new business, please join Dr Nik at the upcoming FPI Professionals Convention, on 25 June at 14:00-16:00. About Dr Nik Dr Nik (Dr Nikolaus Eberl, PhD) is one of the world's leading experts on the subject of social selling and how to use LinkedIn to grow your business. He is currently working for a number of international clients, from SMEs to multinationals (such as IBM, FNB and Altech), and he has helped his clients attract new clients online and grow their revenue and reputation through the Social Selling Success System™. To view the social selling success stories and assess your social selling skills, please go to www.themeerkatmethod.com
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ADVERTORIAL
The importance of
information By Nicky Nairn, head of compliance at Masthead
W
e live in an age where information is available at the press of a button or the swipe of a screen. But data and information alone will not fly the plane. It takes a qualified pilot, a carefully plotted course and regular information from the instruments and air traffic control to ensure a safe arrival at the destination of choice. In much the same way as pilots must comply with certain rules, regulations and protocols to ensure safe flying, so financial services providers (FSPs) and their approved key individuals have regulatory obligations and responsibilities to act with due care, skill and diligence to ensure fair outcomes for their customers.
To efficiently manage, oversee and monitor the business of an FSP, comply with legislation, ensure that customers receive fair treatment and achieve the unique goals and objectives of the business, the right management information is key. While there are certain prescribed record keeping requirements, advisors must establish what information is needed to drive their business in the right direction. Albert Einstein once said, “If I had 60 minutes to solve a problem and my life depended on it, I’d spend 55 minutes determining the right question to ask. Once I got the right question, I could easily answer it in five minutes.” It’s only when expertise and professional experience is applied to appropriate information that it becomes useful in the context of the business and its goals. The FAIS Act requires FSPs to maintain certain records and information, and the length of time and manner in which such records must be kept is prescribed by law. Every business day, records are created that could become background data for future management decisions and planning. These records should be efficiently controlled and maintained, not only to comply with legislation, but because it is professional and makes good business sense. The General Code of Conduct further requires an FSP to have and effectively
employ resources, procedures and systems to reduce or eliminate risks. It is also required to structure the internal control procedures to provide reasonable assurance that the business can carry on efficiently, that information used is reliable and that it complies with applicable laws. This cannot be done without adequate management information that provides an in-depth knowledge of the business, its activities, staff and processes. In terms of the Treating Customers Fairly (TCF) framework, key management information must be maintained and analysed to ensure a culture of fairness is continuously cultivated within an FSP business. Maintaining information is also relevant in light of the proposals set out in the Retail Distribution Review discussion document. The document proposes that remuneration must be attributable to the activities performed and paid for by the person who benefits from those activities. To be able to charge appropriately, FSPs would need to record and make accessible information about their activities. While too much information can have the same effect as not having enough information, relevant information is an essential tool for managers in planning and decision-making, particularly in a changing environment. Good information provides a framework from which to evaluate and measure progress so that resources can be optimally utilised, productivity can be improved, and any shortcomings can be timeously addressed. The only way an FSP can be reasonably sure it is complying with laws and regulations, and so avoid fines, penalties or other legal consequences, is through good management information that ensures early detection of non-compliance or irregularities. Information may differ slightly from one type of business to another, but the principle of ensuring that the right tools are available in the decision-making and management process applies across all types of entities. Information, however, must be used to be useful.
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Department of Finance and Investment Management FACULTY OF ECONOMIC AND FINANCIAL SCIENCES
BCOM HONOURS (FINANCIAL PLANNING) • Approved and accredited by the FPI • Facilitated evening classes twice a week for one year OR • Facilitated evening classes once a week for two years • Continuous interaction with lecturers • 8 detailed modules • Positive feedback from employers who have employed graduates • The qualification is at the NQF level required for admission into a Masters degree • Upon successful completion graduates are eligible to write the CFP® professional competency examination (PCE).
POST GRADUATE DIPLOMA (ESTATE PLANNING) • New course commencing January 2016 • Great opportunity for those who already have their CFP® certification and want to specialise • Focused specifically on Estate Planning and Trusts • Consists of 4 detailed modules: – Estate Planning – Law of Trusts – Administration of Estates – Application of Trusts • Facilitated evening classes once a week • Continuous interaction with lecturers
CONTACT DETAILS Department of Finance and Investment Management dfiminfo@uj.ac.za facebook.com/UJFinanceInvest Web: uj.ac.za/EN/Faculties/ecofin/fininvestman
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risk
Critical illness
cover
An increasingly important aspect of proper financial planning As CFP® professionals our role is to bring much needed perspective to our clients, sooner rather than later, in terms of how a serious health setback can ultimately have a disastrous impact on financial health, financial planning, lifestyle and quality of life. Critical illness cover has perhaps not always received as much of our attention as it deserves when we as financial planners have set up our clients’ financial plans, but this trend is changing and certainly will need to change even further.
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K
obus Kleyn, CFP®, Chairperson of the FPI Risk Competency Committee recalls someone once stating “critical illness cover is for the living, life cover is for the survivors”. These words powerfully reinforce the importance of critical illness cover and Kleyn now believes that it is the most needed cover for all of us going forward for many reasons. He states that: “The big five assurance companies have paid out over R18 billion in claims in 2014 and most probably 70 – 80 percent of these were for the big four critical illnesses.” Certainly such statistics would support the need for financial planners to take a fresh look at the issues around critical illness cover.
Some of the hurdles financial planners have experienced in the past when considering whether or not clients need critical illness cover are: Financial planners may have questioned whether it is a genuine need or just a niceto-have. If the client has medical aid, medical gap cover and temporary disability cover – does he or she really need critical illness cover? Isn’t it just a “soft” or “psychological” need? Medical aid should take care of medical expenses and temporary disability cover should provide a replacement income during disability. Critical illness cover, on the other hand, offers a lump sum payout which may enable the client to meet any lifestyle changes or adaptations related to the illness. In other words, it's like a ‘lump sum temporary disability’ payout. It is only when we hear accounts of those who have experienced a critical illness that we begin to realise the “hidden costs” of critical illness and the financial risks our clients might face. The risks are obviously much higher
when there is a family history of the illness or where the client has an ‘unhealthy’ lifestyle. As thorough as the financial planning may be, it could all come to nought if he or she experiences a critical illness and is suddenly faced with the prospect of using up savings set aside for other purposes. An unhealthy lifestyle, including stress, bad dietary habits, lack of exercise etc, is known to be one of the biggest contributors to critical illness, and yet the negative trends in modern day lifestyle show little signs of improving in the future.
Financial planners have found it difficult to quantify this need. Many financial planners have found it dificult to quantify the critical illness need in the ‘needs analysis’ and, therefore, this aspect has often been glossed over or guessed at. It actually isn't that difficult – financial planners should be going through the same series of exploratory questions with the client, just as they do with life and disability cover. For example: • “Does the client want to make provision for expenses not covered by a medical aid; move to a more expensive medical aid option; or have access to the latest medical
There’s only one Investment Solution In an industry riddled with jargon and complexity, we offer our clients investments they can count on, delivered with simplicity and transparency -- and we’ve been doing it for 18 years. So, when you need an investment solution, cut to the chase and go straight to www.investmentsolutions.co.za or call 011 505 6000. Follow us on twitter @InvestmentSolZA.
Investment Solutions. 18 years. With confidence Investment Solutions Limited is a licensed Financial Services Provider. FAIS licence number 711. Registration number 1997/000595/06.
A Member of the Alexander Forbes Group
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risk
make sure that they were recommending the most appropriate options to clients. But this has not been the case and as a result many financial planners have not taken the time and effort to battle through the technical specifications to get clarity. Consequently they have not always known exactly what is covered across the spectrum, when it is covered, how it is diagnosed, when it will be paid, at what percentage etc. and so have skirted the issues with their clients.
The terminology has been confusing and intimidating. By the very nature of critical illness cover it involves concepts, terms and definitions which would confuse and intimidate ordinary persons who do not have a medical background or qualifications. The movement in the industry towards plain language and applying the outcomes-based Treating Customers Fairly (TCF) principles has brought to the fore the general need for proper understanding on issues all round, for removing smoke and mirrors wherever possible and for making complex matters simpler to understand. These movements are still in their infancy and will take many more years to fully achieve, but the sooner financial planners embrace the principles and start applying them, the better off they and their clients will be at the end of the day. Andre Froneman, product specialist at Hollard Life, states “Policies are often terminated because the client does not fully understand the cover that they have. This is why simplicity is so critical on the part of the product providers. Key to making it easier for all to understand the provisions of policies is simple language and absolute transparency, and in turn, helping financial planners to better manage client expectations.” technology in the event of a critical illness? • Perhaps the client wants to make provision for child care, the services of a driver or domestic servant, or unpaid leave for a spouse while recuperating from a critical illness? • Maybe the objective is to ensure the client will be able to work fewer hours, change to a less stressful job, or retire earlier following a critical illness?” All of these expenses can be capitalised for the relevant time period in the needs analysis. As with all the other needs, these critical illness needs should be reviewed at least annually, particularly since medical science is an area where developments
62
are rapid and frequent and costs can be affected accordingly.
The products have been many, varied and complex. The variety of critical illness conditions covered has grown enormously over time and clarifying them has always been a mammoth task. From a product provider perspective it would have been great if the different variables (medical definitions, severity-based, limited, comprehensive, on diagnosis, on prognosis, accelerated, re-instating etc.) were always clearly spelled out so that financial planners were better able to understand the products, and in turn were better able to
No basis to compare the benefits offered by different life companies. In 2008 already the (then) LOA acknowledged that the absence of standard industry disclosures and definitions increased the complexity and uncertainty around critical illness cover and increased the widespread confusion in analysing and comparing the products between life companies. In response, the LOA set up the Standardised Critical Illness Definitions Project (SCIDEP) Committee to formulate
a set of standard industry disclosures that would be underpinned by standard medical definitions. Today, the SCIDEP definitions apply to any product that uses any of the ‘Big 4’ (heart attack, heart bypass, cancer and stroke) but not functional impairment products, disability products and products that only cover part of a disease. The standardised definitions are by no means simpler definitions. In fact, many are more detailed, but now there is only a need to understand one set of definitions, in relation to the ‘Big 4’, across the life companies. This ensures consistency in claims assessment and decisions. Financial planners are also better positioned to make meaningful comparisons between the various products on offer and to select those which are appropriate to the needs of their clients. Asisa (Association for Savings and Investment South Africa), the successor to the LOA, has incorporated all the developments above in the ASISA STANDARD ON DISCLOSURES FOR CRITICAL ILLNESS PRODUCTS. This
document offers key guidance to financial planners who realise the extent to which critical illness cover has become an important aspect of proper financial planning and who wish to understand the core medical conditions, standard definitions, severity levels etc. It even attempts to describe or translate the issues in “layman’s terms” and thus every financial planner would benefit from a thorough reading of this document.
Looking forward Stephen van Niekerk, head of Momentum Myriad states that “According to the 2014 claim statistics, critical illness was again the second largest claim category, after death claims, and increased in relative terms from 2013. With the expected improvements in longevity and the associated higher prevalence of critical illness events in older ages, we expect this trend to continue. This persisting trend once again highlights the importance of critical illness cover
and longevity protection as part of your financial planning solution.” Any persisting trend in risk claims experience deserves the full attention of financial planners and, in particular, of CFP® professionals. The ancient Roman poet, Virgil, said: “The greatest wealth is health”. He was probably speaking figuratively, but if we accept his words then as CFP® professionals we owe it to clients to also interpret his words literally and ensure that our recommended plans do sufficiently mitigate against loss of health so as not to threaten actual financial wealth.
Special thanks to our contributors: Frances Bailey Ashley Lakey, CFP® FPI Risk Competency Committee
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REGULATION
New acronyms creating a Scrabble
Rowan Burger, Executive: Large Corporate Segment (Momentum)
R
DR looks to move the individual investment and risk market away from the existing commissionbased system to one focused on charges aligned with activity â&#x20AC;&#x201C; disclosed and agreed to by clients. This effort to level the playing field between product providers and ensure appropriate advice and intermediation should make the high net worth individual market hotly contested. The middle-income market will, in turn, be dominated by those advisors best able to quickly determine financial needs for clients and fulfill these at the lowest cost. There is recognition that advice on the new proposed charging basis may be prohibitive in the lower income market, and, therefore, a different remuneration model is also under discussion.
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The investment industry is set to change significantly as a result of the proposals set out in the Retail Distribution Review (RDR) paper and the Treating Customers Fairly (TCF) framework. Many of the improvements to the savings landscape highlighted by the National Treasury in a number of discussion documents over recent years have been ascribed to financial incentives not aligned with customer outcomes. The principles are generally accepted by most players and will change investment product distribution significantly in the retail market. The proposals cross over to the institutional market too, requiring many players to rethink how they position their advice offerings.
The implementation of this legislation in the United Kingdom led to nearly a halving of advisors, as well as the exit of a number of large providers who adopted a compliance approach instead of looking to align their business practices to the principles set out in the legislation. Having learnt from this experience, it seems large South African players are trying to align their businesses accordingly. The RDR implementation timetable is tighter in South Africa, which may be as a result of being able to apply learnings from other jurisdictions. However, given the large number of regulatory changes at present, one might forgive companies that are running behind. It is likely that the distinction between retail and institutional solutions will become less
clear, particularly given individual default annuity and preservation options the regulator would like to see trustees apply to their fund members. Trustees will then fill part of the advice gap created by RDR where individuals are unwilling to pay for advice but need some form of guidance. The TCF framework goes further in ensuring conduct standards of advisors and product providers are appropriate, extending these requirements to trustees. Both the TCF and RDR reforms look to make advisors and product providers to funds responsible for member outcomes effectively looking through the pension fund wrapper. Trustees will, therefore, need to demonstrate how they understand their members and deliver their intended outcomes,
or should they seek external assistance, allow product providers wanting more information to better tailor solutions to a heterogeneous group of fund members. Given that fees need to be transparent and activity based, the difference in the cost of retail and institutional savings solution should be based on the level of advice and intermediary services rendered only and not necessarily at an asset management level as is the practice at present. The vacuum of advice should be filled by employers and trustees considering a broad range of financial solutions to this soon-tobe under-serviced middle market, as they have both the buying power and knowledge to ensure appropriate and cost-effective solutions are available.
Another consequence of RDR is the categorisation of advice. There are many convoluted business arrangements, support and ownership structures in our industry that will make qualifying as an independent advisor near impossible to achieve and still having the resources to provide adequate advice in reality. There are advisors who provide certain services to the asset managers they recommend to institutional clients, and those who recommend mandates on historic preferential fee
arrangements with selected managers to justify their fees. This will, in future, bring their claim of independence into question. RDR will allow trustees to have a better understanding of their advisorsâ&#x20AC;&#x2122; business models and, therefore, be in a better position to assess the appropriateness of the guidance given.
65
Technology
By Luka Vracar
Protecting your business from
cyber criminals
66
C
ybercrime is any criminal activity involving computers and networks: theft, disruption, fraud and forgery of secured or unsecured data. This often results in direct theft of funds through fraud or extortion. And cybercrime is quickly becoming one of the greatest threats to business. According to Symantec’s report, last year cybercrime was valued at $388 billion, bigger than the black market in marijuana, cocaine and heroin combined. To put that into perspective, if cybercrime was a nation, it would have the 27th biggest GDP in the world. In South Africa alone, cybercrime took in R5.7 billion in 2014, and financial services are becoming targets. Roxanne Moodley, professional liability and cyber lead Africa at AIG, says that the financial industry over the last five years has risen considerably as financially motivated hackers look for new ways to illegally access funds. The adoption of Internetbased commerce systems, while easy to use, convenient-for-customers suppliers could provide criminals with an opportunity to access both money and information.
According to Symantec’s Internet security report for 2014, 84 percent of South African adults were victims of some form of cybercrime last year, rating it third in the world for malware. With the move to Internet applications, are financial services targeted? And with such increasing cyber risks, how can businesses protect themselves?
Moodley explains that there are three main incidence patterns responsible for security breaches in financial services. • Web app attacks – where an attacker uses stolen details or accesses information through e-commerce platforms. • Denial of service (DoS) – these attacks flood the company’s systems with malicious traffic resulting in lost production and a halt to business as usual. • Card skimming – this is not limited to capturing information from a customer’s credit or debit card at a point of sale, but can include sophisticated attacks at ATM’s with user’s details being transmitted wirelessly. However, cybercrime is largely opportunistic. Symantec’s security report indicated that 80 percent of adults in emerging markets have been victims of cybercrime across all industries. In South Africa, both Cell C and Vodacom have had their client’s data exposed; everything from banking details to call registers, PIN and PUK numbers. The City of Johannesburg’s online e-statements site was hacked, and residents and businesses had their personal details publicised. Cybercriminals managed to
67
Technology
withdraw over R30 million from some 5 437 ATMs, in just three days. Other victims included Timbavati Nature Reserve, the ANC government, and the Gautrain. Candice Sutherland, business development consultant at Stalker Hutchison Admiral (SHA), notes that very seldom would cybercriminals actively try and steal your intellectual property. The point of somebody hacking you is essentially twofold: for direct financial gain, or to impersonate you.
Sutherland says risks for SME's could be greater than it is for large corporations. This is because massive corporations in South Africa have sophisticated IT infrastructures, whereas the SMEs might practice riskier behaviour, such as putting entire client lists on Dropbox. It is, therefore, much easier to access these organisations than it is to access larger organisations such as Investec, or ABSA, or Standard Bank.
Regulation The Protection of Personal Information (POPI) Act gives effect to the constitutional right of privacy and protects all personal information. Businesses will have even more incentive to protect their (and their clientsâ&#x20AC;&#x2122;) information, as the Act will enforce strict repercussions for custodians of breached information. Under POPI, custodians can face a R10 million fine, or 10 years in prison. However, even in regulation, there are issues. The problem in South Africa is that, since there is no information regulator, POPI theoretically does not yet exist. However, the Electronic Communication and Transaction Act states that if you are found guilty of a cybercrime offence you may face no longer than five years in prison. A company owner would face a far worse sentence under POPI than the individual who stole the data in the first place. Sutherland says that there is inadequate legislation for cybercrime in South Africa. Additionally, while the South African Police Service have indicated that there is something in the works, there is currently no task-team actively working to prevent or diminish cybercrime. This means that, should an incident occur, very little will be done about it. And that is the fundamental issue.
Cyber insurance Businesses are able to take out cyber insurance. And they should, as even without fines a data breach can, and probably would, be
68
very costly. Increasingly, underwriters are offering first party and third party cover. “First party expenses are things like restoring your data and recollecting your data. It would also include any sort of loss adjustor or forensic auditor – essentially any cost that affects you as a first party,” says Sutherland. The cover also covers notification expenses, which incurred to comply with privacy legislation such as legal expenses and communication expenses through mail, call centres, and websites. Additionally, one of the biggest impacts an organisation facing a cyberattack will incur is reputational damage. Insurance covers crisis management expenses, which includes public relations and advertising expenses. For example, if a company has 10 000 clients and there is a breach, for whatever reason, perhaps a managing directors’ laptop is stolen from their car, or an employee loses their smartphone on the Gautrain, it would be classified according to POPI as a breach of the clients’ personal information. The company will have to notify every client, every staff member, and every person that the company has done business with and inform them that potentially their information has been breached. She also highlighted that credit monitoring for each person needs to be set up, and for that it is an average of approximately R200 per person. Multiply that by 10 000 clients and you are looking at R2 million just in notifying people what has happened and what is being done about it. Insurance would also cover any fines or penalties to the extent insurable by law. According to POPI, if you are the custodian of somebody’s information, you are directly responsible if that information is leaked through whatever fault. As POPI is not yet in effect, and without the appointment an information regulator, insurers cannot confirm what portion of a fine they will be able to cover.
Security evaluation To minimise the risk of cybercrime, businesses should be advised to consider having a security evaluation prior to taking out cyber liability cover. Usually, a
broker will require the business owner to answer a technical form with questions such as: How often do you update your passwords? Is your antivirus up to date? Have there been any attacks? Do you do cloud storage?
However, cloud storage poses risks, as illustrated in 2014 when Hollywood celebrities had their Apple iCloud accounts hacked, and personal photographs released on public forums. And hacking is still only part of the cloud problem.
Sutherland says that the insurer will usually evaluate the answers and indicate what they are not happy with and give additional advice, before offering a quote. Once the client accepts the cover, the insurer will set up an incident response team.
“People are essentially seeing information or getting information that they are not entitled to is obviously one of the biggest problems, probably the biggest one. But there are also problems of what guarantees you have that it is still going to be there tomorrow? That is another security problem. Additionally, there are corruption issues,” says IT veteran and CEO of NuoDB, Barry Morris.
“So the most critical point is in the event of a breach, which would invariably happen between a Friday 18h00 to a Saturday morning 10h00, when people are generally not in the office, what do you do? We will delay that whole team of forensic auditors, legal specialists, PR people — the whole operation,” says Sutherland. Businesses can even try and hack themselves. With a security penetration test, an IT professional can be contracted by the insurer to exploit a business’s weaknesses. However, this too can be costly as the final report is comprehensive and analyses all aspects of a company’s IT.
Beware the cloud Storing information on a data cloud has become common practice, whether it be personal photos on an Apple account, databases on Dropbox, or even banking details on Google Drive.
Cloud storage is just a fancy way of remote computer storage. Morris points out that there needs to be a person there looking after those machines – a systems administrator. He asks the pertinent questions: Who is that person? What is their background? Do they have a criminal record? Data, essentially, needs to be safe even in a potentially hostile environment. There are also issues of access by third parties that, while legal, is still undesired. An example of this is covert government surveillance, like the US National Security Agency and other government intelligence. Currently, financial services institutions will not go anywhere near the public cloud. There is simply no security guarantee, and
69
Technology
financial services institutions would rather build a cloud of their own, behind their own firewalls. However, Morris is certain that this is likely to change as more and more services become cloud-based.
you can quickly delete it so that they cannot continue to get value out of it, which requires you to have other copies encrypted in other ways in other places. Human error
need a firewall, a web filter and an intrusion prevention system (IPS), but they do not really know why they need it, they are just doing what their peers are doing. That is the kind of the attitude,” says Thulin.
“Financial services will have to change their positions, even though there will always be certain information they keep internally. Trust is going to build, and it’s going to build because, economically, it has to. You’re going to get security that is going to get better, and operations will get safer and easier.”
Human error is a significant driver of cyber risk. Over the last year, over 7 000 mobile devices were left at just airports, and since 38 percent of users do not have an auto lock on their devices their data, be it personal or business, is available to anyone who bothers to look. Cybercriminals can easily exploit this, and it will lead to a data breach. As most employees use their mobile devices for personal and business reasons, this is a cause for concern.
Another threat especially common to Africa is phishing, where victims are tricked into sending personal information to a seemingly sincere e-mail. This should be easily avoided by education through security policies. Employees should be made aware that they probably did not win the UK lottery, and to click on an e-mail that says they did is to invite viruses into the system.
The key to cloud security is encryption. Even with this, Morris points out that there is one major problem. Encryption can only work as long as the information owner is the only one with the password or key. Again, this becomes a trust problem because there are still administrators in play. The cloud will be safe only with layered encryption, comprehensive policies as well as strong firewalls — a layered approach to security.
Jonas Thulin, security consultant at Fortinet, advises that companies establish standard IT policies, and train their employees to follow these policies. It is important for corporates to understand the policies themselves, a fundamental that, for Thulin, has been lacking.
Morris adds that you want to have mechanisms where, if somebody does compromise the data on the cloud, that
“You have to have an information security strategy and your policies. I go to companies who indicated that they
70
Thulin concluded by saying that the easiest way for anyone to get your password is by asking you for it. Social engineering, used 9 out of 10 times is the number one tool a hacker would go to, which is why people are your biggest risk.
Cybercrime and advice on how to mitigate its risk will also be discussed at the upcoming FPI Professionals Convention, breakaway two at 9.30 -10.30 on 25 June, where Danny Myburgh from Cyanre, the Computer Forensic Lab, will cover Cyber Threats: How safe are your clients files and data.
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How much is
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Wealth is about more than just money. But how can we come to grips with our financial situation at a time when no one seems to have enough?
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INDUSTRY NEWS
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George Whitehead, CFP速
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Appointed as Compliance Consultant at Masthead (Eastern Cape)
Appointed as Financial Planner at BDO (Durban)
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