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Financial Planner Supporting Excellence in Financial Planning

Investor Behaviour - Part One and Two Can SA really be globally competitive? Ready or not, you’re a seller!


Official Journal of the Financial I Institute of Southern Africa Planning Financial Planning Planner The Financial Institute of Southern Africa


Fpi Members Can Claim 2 CPD Points For This Issue August/September 2011 R30.002011 (incl. VAT) August / September 1



Foreword “Leaders need to be optimists.Their vision is beyond the present.” – Rudy Giuliani FAIS, FICA, POCA, RE, FSP… just some of the intimidating alphabet soup in our industry which can be overwhelming to some. Like it or not there is no way ahead but nose to the ground and forward march. Our industry is evolving and it is up to us as members of the FPI to lead, if not regulation and legislation, then certainly professionalism. It is surely wiser to embrace the changing legislation of our industry to be a step ahead and at the forefront of our profession. Public perception of our industry as being ethical and accountable to those we serve is crucial if we want to be coated with the same implied integrity accorded to those in the medical, legal, accounting and other established professions. The hallmark of a professional financial planner is the ability to inspire public trust in their services. It is up to us as professionals to be at the leading edge and to be amongst the best in international practice. It falls on us as individuals and collectively as an organisation to embrace these requirements. “If it is to be, it is up to me.” Let that be the mantra for us all. Leaders don’t create followers, they create more leaders. In this issue we have included articles from some of our convention speakers. We have also included an article commissioned by the FPI’s Investment Industry Sector Group (ISG), which is a summary of two chapters of Franco Busetti’s book, The Effective Investor. Thank you to our platinum sponsor at this year’s convention, Momentum who also sponsored the delegate bags and Pokens™, our Gala Dinner silver sponsor Old Mutual and our breakaway sponsors, acsis and Liberty. Thanks also to all our exhibitors and speakers for contributing their valuable time to participate at this convention.

Derek McGowan, CFP® Convention Committee Chairperson

To the FPI staff and all other volunteers involved in the organisation of the convention, a sincere thanks for the dedication and tireless effort in managing and assisting with the many months of planning leading up to the convention. For those who attended, we hope you enjoyed the convention and that this was a significant stepping stone to helping you achieving a leading edge.

The Financial Planner

August / September 2011



Magazine Feedback As a result of delivery problems experienced with the member magazine,The Financial Planner, this year, we decided to conduct a detailed review of the magazine with input from our members. A survey was run from 30 August to 9 September to gauge members’ views and suggestions regarding the magazine. 449 members participated in the survey which represented a sample of approximately 7% of the total membership. A summary of the main items surveyed is below: Question Is the magazine a valuable member benefit? Is the content valuable technical information? What is the preferred frequency of the magazine? What is the preferred method of delivery?

Results 89,5% - Yes 93.3% - Yes 42.5% every alternate month, quarterly 32.3% and monthly 25.2% 38.8% electronic only, 34.5% electronic and printed and 26.7% printed only 54.1% - Yes

If the magazine is electronic, would you like an option to subscribe to a printed version? What would you pay for a 81,2% - R25, 18.2% - R50 subscription-based printed and 0.6% - R75 version? Is a reduced/negotiated 86.2% - Yes subscription rate to other magazines a valuable benefit to you?

The overwhelming response was that the magazine is of value to our members and as your professional body, we remain committed to providing you with a high quality magazine as a valuable member benefit with technical content to keep you up to date with developments in the financial planning industry.

Production of the Magazine The current basis of distribution of the magazine is on a full risk, outsourced basis through an external publisher. The total production cost (editorial, printing and postage) is in the order of R150 000 per issue, which is just under R1 million p.a. for six issues. The full production costs are funded by the publisher and offset with advertising revenue. No production costs are funded from FPI membership revenue. Since the publisher has experienced reduced advertising support over the last two years for a number of reasons, it has become increasingly difficult to cover the full production costs. Future of the Magazine You would have recently received your June/July copy of the magazine. This August/September issue will be the third issue for 2011. We are currently planning the fourth and final 2011 issue which will be October/November issue to be sent to you by the end of November/early in December. As a temporary measure, during 2012, a printed version of the magazine will be made available to you FREE OF CHARGE but this will be based on a subscription basis. A digital copy will be sent to all members and all current and future issues made available on the FPI website. In addition, based on the feedback received from members, the magazine will continue to be produced on an alternate monthly basis. We will however be reviewing the content to provide you with specialised content in the various financial planning disciplines and other topics. We will also be investigating reduced subscriptions to a number of other magazines in 2012 and will communicate further in this regard. Survey Winners Thank you to everyone who participated in the survey and for providing us with your views and suggestions. The prize winners, who were randomly selected, were: • •

Mr Albert Fritz from Centurion, winner of an Apple iPad (64GB) with Wi-Fi plus 3G valued at R7 600. Mr Heinstud Sharp from Verwoerdpark, winner of one year’s annual subscription to Financial Mail valued at approximately R1 000.

Subscribe free of charge to a printed copy of The Financial Planner Please complete and email to, fax to 086 633 7723 or complete the online subscription request (link on the home page of the FPI website YES, I WOULD LIKE TO CONTINUE RECEIVING A FREE PRINTED COPY OF THE MAGAZINE IN 2012 Full names: Member No: Postal address: Postal code:

Contact no:




Derek McGowan, CFP



Financial Planner

The Effective Investor - Part One and Two of Investor Behaviour

Publisher Financial Planning Institute of Southern Africa (FPI) Street Address Palms Office Court, Kudu Avenue, Allens Nek Johannesburg Postal Address PO Box 6493, Weltevredenpark, 1715

Franco Busetti


Ready or not – you’re a seller Ricardo Teixeira, CFP® | Head of Business Management, acsis 12 Can South Africa really be globally competitive? Dr Adrian Saville | CIO of Cannon Asset Managers 14

Contact Tsholofelo Dihutso (011) 470 6050

Tax and Financial Planning Errol Meyer, CFP® 16

Layout & Graphic Design Remata Communications and Printing

Economic Perspective

Editorial Board Mersey Booysen, Jenny Gordon, Jennifer Grefen, Harry Joffe, Leon Jordaan, Paul Kantor, Almo Lubowski, Johann Maree, Paul Rabenowitz, Jeffrey Wiseman.

Kevin Lings | Chief Economist, Stanlib Asset Management 18 Fund Governance and Compliance, where are we now? Kobus Hanekom | Executive Consultant,

The Editorial Board serves in a voluntary and independent advisory/technical capacity. Members do not in any way represent their employer companies. The views expressed in this magazine do not necessarily represent those of its owners, publishers or editorial staff. Editorial comments sent to THE FINANCIAL PLANNER are subject to editorial change to suit the style of the magazine. All manuscripts, photographs and other similar matter are accepted on the understanding that no loss or damage is borne by the publisher, the editor or their personnel. Subscription rate: R165 per annum for six copies (bi-monthly), in South Africa. Over border and overseas rates on application. © 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers. Any unathorised reproduction of this work will constitute a copyright infringement, rendering liability both under civil and criminal law. ISN 1013-1507

The Financial Planning Institute

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Tel: 086 1000 374

Simeka Consultants and Actuaries 21 Debt levels and growth, a look at developed vs developing markets Wayne McCurrie | Executive Director, RMB Asset Management 22 Baby Boomers - The End of the World? Craig Aitchison, CFP® | OMAC Actuaries & Consultants


Building capital value in a business Ian Middleton | Managing Director, Masthead 26 Building wealth is simple: Compounding investments returns at a low risk Kookie Kooyman | Head of SIMS Sanlam, Investment Management Global 28 How to Change to a Fee-based Practice Henry van Deventer, CFP® | Head of Coaching, acsis


FPI News


August / September 2011



The Effective Investor by Franco Busetti Summary commissioned by the FPI Investment ISG Chapter 21: Investor Behaviour PART ONE “History teaches us that investors behave wisely… once they have exhausted all other alternatives.” – Steve Leuthold, Leuthold GroupInvestments The Effective Investor by Franco Busetti When itcommissioned comes to determining price, ISG valuation Summary by the FPI Investment

models set a baseline, but secondary factors result in large deviations. Chapter 21: Investor Behaviour PART ONE way of looking at this is people trade for both Another cognitive and emotional reasons. Theonce following isallaother “History teaches us that investors behave wisely… they have graph exhausted alternatives.” – Steve Leuthold, Leuthold Group classic example of this. It compares the actual price of the S&P 1 When comes to determining price, valuation models 500 itwith the ex-post rational price . set a baseline, but secondary factors

result in large deviations. Another way of looking at this is people trade for both cognitive and emotional reasons. The following graph is a classic example of this. It compares the actual 1 price of the S&P 500 with the ex-post rational price .

Great Investment Pictures: Irrational volatility – real, detrended

Great Pictures: volatility S&P Investment 500 price versusIrrational ex-post rational price S&P 500 price versus ex-post rational price – real, detrended 2 000 1 500

There are 15 classical behavioural aberrations to watch out for. Learning to identify and understand them will help you avoid the pitfalls; remember to keep a constant eye out for them as they are always lurking close by. 1. Overconfidence People have too much faith in the accuracy of their estimates, which can result in nasty surprises. To counteract this, systematically monitor your judgements and forecasts against the eventual outcomes. Keep a record of this so that you can reflect back over it. 2. Over-optimism Optimists have an unrealistically high opinion of their talents and underestimate the likelihood of bad outcomes over which they have no control. They are also prone to the illusion of control. When it comes to forecasting, we can be over-optimistic in two ways: in our actual forecasts and in the accuracy of these forecasts! If this sounds familiar, try to measure the over-optimism in your forecasts to keep this problem at bay.

1 200

Actual price 900 700


Rational price

400 300

1870 1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010


Source: Robert Shiller, Yale

Source: Robert Shiller, Yale

The graph shows that actual prices are dramatically more volatile than the rational price. These movements in price are too large to be justified by actual subsequent events or to be in accord with efficient markets. this we can see thatdramatically the market overreacts to both actual The graph shows thatFrom actual prices are more and anticipated events.

volatile than the rational price. These movements in price are

The graph also implies that factors other than dividends must be playing a major role in price too large to be justified by actual subsequent events or to be determination. Behavioural finance, which incorporates psychology and emotions, can explain some of the deviations the baseline and this we need use techniques in accord with efficientfrom markets. From wetocan see that that the measure or counteract behavioural aberrations.

market overreacts to both actual and anticipated events.

Finally, it implies that perfect foresight would not help us. In other words we cannot be exclusively rational investors and must acknowledge market sentiment, even over long The graph also implies that factors other than dividends must be periods.

playing a major role in price determination. Behavioural finance,

There are 15 classical behavioural aberrations to watch out for. Learning to identify and which incorporates and remember emotions,to can understand them will help psychology you avoid the pitfalls; keep explain a constant some eye outof for them as they are always lurking close by.

the deviations from the baseline and we need to use techniques that measure or counteract behavioural aberrations.

1 Ex-post means the price is calculated afterwards so that actual future dividends are known. Rational means the price was calculated as the discounted value of these actual future dividends.

Finally, it implies that perfect foresight would not help us. In other words we cannot be exclusively rational investors and must acknowledge market sentiment, even over long periods.

3. Imitation and herding Observing and imitating others can produce herding behaviour in markets. This can be reflected in significant deviations of financial prices from their fundamental values, leading to excessive volatility and bubble situations. Avoid following the pack without really understanding what you are doing and why; take the time to make informed decisions. When there is universal consensus on an investment theme it is usually about to reverse. 4. Hindsight is easier than foresight In the words of Legg Mason investment strategist Michael Mauboussin: “Investors who insist on understanding the causes for the market’s moves risk focusing on faulty causality or inappropriately anchoring on false explanations. Many of the big moves in the market are not easy to explain.” Hindsight is a large and unnecessary element of investor regret. Do not use it to beat yourself up and increase your regrets. 5. Overreaction to chance events Our brains tend to search for patterns and causes, even in random events. An analysis by Terence Odean of hundreds of thousands of individual investors showed that they were prone to overtrading, which resulted in underperformance, and this

Ex-post means the price is calculated afterwards so that actual future dividends are known. Rational means the price was calculated as the discounted value of these actual future dividends.


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August / September 2011



8. Anchoring Anchoring is one of your biggest enemies in the market. An initial or proposed starting value influences us unduly and we do not adjust sufficiently away from this value. Try to ignore whatever the current situation is. For example Investor A and B own the same stock. Investor A paid R100 per share and Investor B paid R200 per share. The value of the stock drops from R160 to R150. Investor A sees this as a reduction in gain and Investor B sees it as an increased loss. But a stock does not know where it has come from. Its price history is irrelevant and should be ignored. 9. The disposition effect This is the reluctance of investors to realise losses and is a direct result of anchoring. In the wise words of Sir Nathan Meyer, First Baron Rothschild: “How to make money from the market? Always sell too early.” It is important to have exit rules and stick to them. Investor David Dreman advises people to avoid ‘overstaying’ in a stock and sell when: • The PE ratio rises above that of the market. • Fundamentals unexpectedly change. First losses tend to be the smallest. • 24 – 36 months pass without significant price improvement.

Franco Busetti was attributed to the perception of non-existent patterns (as well as overconfidence). Do not underestimate random chance, be sceptical of fund managers with short track records and remember that supposedly “rare” events occur with unnerving regularity. 6. The overweighting of long shots People like long shots more than other gambles of equal expected value because low probabilities of winning are overweighted. For example they will find a 1% chance of winning R1 000 (with an expected value of R10) more attractive than a R10 gift. Try to remember that long shots are exactly that; do not get excited about them. 7. Prospect theory and risk aversion We hate losses more than we love gains. How large is your asymmetry of loss aversion? Ask yourself the following question: I am offered a bet on the toss of a coin. If I lose, I must pay R100. What is the minimum amount I should be eligible to win to make this bet attractive? If your answer is, for example, R200, this means you feel losses twice as keenly as you enjoy gains. Investors generally weigh possible losses approximately 2.5 times more heavily than possible gains. As a result we tend to sell winning investments and hang on to losers, which is precisely the wrong thing to do.

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10. Narrow framing Investors often consider decision-making problems one at a time instead of adopting a broader frame. For example a family may save for their children’s education while borrowing to buy a car. Remember to always keep sight of the broader picture and take a step back to get perspective of the overall situation. 11. The disjunction effect This is the tendency of people to want to wait for new information before making a decision, even if this information is not important for the decision and even if they would make the same decision regardless. Is the desired additional information both likely to materialise and be significant? If not, stop procrastinating. 12. Magical thinking Decisions that happen to precede increases in sales or earnings may be seen as the cause of these increases, even if they are unrelated. Watch out for this and always look at other influential factors that may have played a role. Establish causality beyond doubt – plausibility is not enough. 13. Availability People are influenced by how easily something can be visualised. This leads to a tendency to work with a universe of stocks that is determined by news flow and brokers’ research

August / September 2011



coverage. But high press coverage of a stock is frequently accompanied by subsequent underperformance. Do not let availability determine your universe – think outside the box. 14. Representativeness As the amount of detail in a scenario increases, its representativeness and apparent likelihood appears to increase, but its probability is actually decreasing.

are often made using an automatic process, which is influenced by emotions and is subject to biases caused by mental shortcuts. Understanding this better will provide new insights into our behaviour.

An example is the belief that the shares of high-profile companies will be good investments. However, these companies tend to be past their prime, with poor subsequent return prospects. More detail does not confer more certainty.

The value of emotion Although we sometimes wish we could separate our emotions from our ‘investment mind’, we actually can’t make decisions without our emotions. In facing complex, multifactor evaluations, the brain becomes deadlocked between the huge number of alternative and frequently opposing permutations, and it is emotions that provide the casting vote to break this deadlock.

15. Cognitive dissonance This is the mental conflict experienced when we are presented with evidence that our beliefs are wrong. We try to reduce this, for example by avoiding new information. Try to counteract this by always forcing yourself towards discomfort.

Right and left brain investors A simplistic way to differentiate the two halves of the brain is to think of the left hemisphere as the logical, rational half that processes information in a linear way and the right hemisphere as the intuitive side.

PART TWO In part one of this article we discussed behavioural finance and the fact that we cannot be exclusively rational investors; we also need to acknowledge market sentiment and manage our behavioural aberrations.

Skills needed in the finance industry usually draw on the left brain’s rational analytical processes, and pay little attention to the right brain or models of brain-hemispheric cooperation. However a strategy in which the right and left brain halves work together to support each other should lead to improved forecasting and therefore better decisions.

In the words of psychologist Meir Statman, “… people trade for both cognitive and emotional reasons. They trade because they think they have information when they have nothing but noise, and they trade because trading can bring the joy of pride. Trading brings pride when decisions turn out well, but it brings regret when decisions do not turn out well. Investors try to avoid the pain of regret by avoiding the realization of losses, employing investment advisors as scapegoats and avoiding stocks of companies with low reputations.” In this article we discuss the way our emotions and two separate brain hemispheres influence our decisions. We also leave you with a checklist to keep in mind when making investment decisions. Stocks prone to sentiment Stocks with low market capitalisation, younger companies, unprofitable companies, high-volatility stocks, non-dividend paying stocks, growth companies and stocks of firms in financial distress are likely to be disproportionately sensitive to investor sentiment. Neuroeconomics Behavioural finance describes the various psychological aberrations but does not reveal their causes. Rapid advances in understanding the chemical and biological bases for much human behaviour could soon change this. Traditional economics assumes that humans make decisions using a controlled cognitive process; in practice decisions

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August / September 2011



Complete the following test to determine the degree of asymmetry in your brain:

Your HCP Profile score is plotted on the distribution below:

HCP Normal Distribution HCP PROFILE ©David Loye This is an experimental test of thinking styles. It will take about three minutes of your time. Please circle the ONE number for the answer that best fits you. 1. In grade and high school, were you best in: math, 1. or art, 2.

10 9 8 7 6 5 4 3 2 1 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 Source: Loye, D., The Sphinx and the Rainbow, toExcel: New York, 1998.

2. In grade and high school, were you best in: languages, 1. or crafts, 2. 3. Do you tend to get at solutions to problems by: analyzing them step by step, 1. or by getting a “feel” for the solution all of a sudden, as a whole, 2. 4. In regard to your work or personal life, do you follow hunches only if they are supported by logic? Yes, 1. No, 2. 5. In regard to your work or personal life, do you follow hunches if they may not seem logical but have the right “feel”? No, 1. Yes, 2.

To score the HCP Profile, add up the response numbers and divide the sum by 10. •

A score in the range 1.0 to 1.4 suggests a person is highly likely to be left-brain dominant.

Scores between 1.6 and 2.0 indicate a strong likelihood of right-brain dominance.

A score of 1.5 depicts someone who is probably fairly evenly balanced in terms of brain hemispheric use.

Investor checklist •

Adopt a broad view of your wealth, prospects and objectives.

Make long-term commitment to policies.

Avoid monitoring results too frequently.

Understand the uncertainty involved in investment decisions.

7. In drawing pictures, plans or maps, how would you rate your sense of distances, directions, and how things relate to one another? Pretty good, 2. Not so good, 1.

When you look at historical data, don’t only focus on the upside.

Before making an active decision, consider the possibility that the trade is based on random factors. List the reasons why it is not, before making the trade.

8. When you work on projects, do you most want them to be: well planned, 1. or designed to contribute something new, 2.

Adopt and follow a sensible risk policy. Determine the reference point from which a gain or loss will be calculated.

Follow a top-down process that accounts for all objectives simultaneously.

Understand the role of statistical aggregation as a remedy to unreasonable loss aversion – you win a few and lose a few, but in the long run you will come out ahead.

6. Have you ever known before being told if some member of your immediate family or a close friend is in serious trouble or ill? No, 1. Yes, 2.

9. In dealing with problems, which gives you the most satisfaction: solving it by thinking it through, 1. or tying fascinating ideas together, 2. 10. Do you experience hunches about future events that prove to be correct? Yes, 2. No, 1.

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Look out for our next article, which describes the warning signs of bubbles and their subsequent crashes, and discusses the fact that these events are becoming more frequent.

August / September 2011


Practice Management

Ready or not – you’re a seller eyes of a buyer and you will be able to get your business sale ready. So what do buyers look for? Bargains People tend to look for bargains when they make big purchases - the lowest price at the right quality that matches their needs always wins. This is typical consumer behaviour and is exactly what a buyer of a financial planning business would look for. Buyers have time and financial resources on their side. They can therefore afford to be selective and cherry pick the best deals available. A buyer is able to benchmark your business against every other business that is available and for sale at the time. So it can be expected that the buyer will select the client book that best fits his client profile and that offers the best value for money. Client retention Generally, buyers want to buy your ideal clients only. They want to cherry pick those clients that best fit their client and service profile. They also want to maximise the retention of clients after the purchase, so targeting the clients that fit their profile best is one way of ensuring that they successfully transfer the client relationship and then retain the clients once you’ve left.

Ricardo Teixeira, CFP® | Head of Business Management, acsis

Death and taxes.Try as you may, these are the two certainties in life that can’t be avoided. Instead, we can plan to work around them through optimal estate and tax planning. The point is that we plan for these certainties in one way or another. Planning for life’s certainties is a key lesson for owners of financial planning businesses. At some point in time, an event will trigger the sale of your business - you could decide to emigrate, be tired of working, your wife could tell you to stop working, you could become disabled, etc. While you may be able to choose some events, others may occur unexpectedly. So ready or not, the reality is that every business owner will become a seller at some point in the future. The key lies in being fully prepared for this eventuality. In this way, you will be able to control and influence the outcome. The first step is to ensure that your business is ‘sale ready’. To do this effectively, you need to understand what buyers look for when purchasing a financial planning business. In my experience, the overriding principle is that value is in the eye of the beholder. So be sure to see you business through the

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Retention is best achieved when buyers can replicate how you’ve previously engaged with your clients. A welldocumented annual review and initial financial planning processes will make it easier for the buyer to do what you’ve done. The more seamless the client experience, the greater the probability of the buyer retaining the client. Annuity income Buyers are willing to pay for a steady, ongoing cash flow stream. The greater the certainty of the cash flow recurring, the higher the price they will pay. Simplicity and easy transfer of clients Buyers look for simplicity in administration. For an investment client book sale, the fewer the number of investment platforms, the greater the buyer’s interest as it’s more cost effective. Buyers like to incentivise sellers in order to facilitate the transfer of clients. They would typically do this by way of a deferred payment structure linking the client transfer to the payment of the purchase price. Further, in my experience, buyers are willing to pay a premium for the effective and timeous transfer of clients. Often this is achieved through the employment of key members of staff that have good working relationships with your clients. Ultimately, the value placed on your client book by a buyer will be driven by a few factors. The wish list above can be summarised into the following core business areas that the drive capital value of your business:

August / September 2011


Practice Management

Client relationships: assessing the transferability of the relationships and the probability of retaining the clients post the sale.

front. The result is often a scenario where the valuation is difficult to determine due to the administration complexities in gathering the required data.

Client quality: how the clients match the buyer’s view of an ideal client in terms of demographic profile and recurring cash flow to the business.

Be sure that you can calculate the value of the deal and administer the terms of the valuation calculation.

Planning processes: the ability of the buyer to step into the shows of the seller and replicate the planning processes the client has experienced to date with the seller.

Client management processes: the quality of the work flow processes in place to ensure a smooth transition of clients.

Business management information: the quality of financial and non-financial information available to the buyer in order to make an informed assessment of the quality of the clients and the recurring cash flows.

Although it is true that value is in the eye of the beholder, as the seller, you are able to influence the view taken by the buyer simply by making changes that enhance the buyer’s view of the factors outlined above. Getting it right the first time – a ready seller’s checklist Buyers of financial planning businesses often fall into the category of ‘serial buyers’. Once they’ve made one successful acquisition, they are ready for the next opportunity. Consequently, they get to practice with each new deal and learn from their mistakes, thereby refining their approach to making further acquisitions. As the seller though, you seldom get a second chance to sell your client book. It’s generally a once-in-a-lifetime deal, so you need to ensure that you get the best possible outcome.

Sign the contract before implementing The euphoria of concluding the deal often overshadows the need to document the terms of the transaction in writing. As the seller, it is in your best interest to ensure that you have a contract with the buyer so that there is no misunderstanding as to the terms of the transaction. Remember, as the seller you are unlikely to repeat this exercise, so there is no room for errors or oversights, which can be costly. Obtain payment guarantees Most transactions are paid for over a period of time or may even incorporate an earn out for the seller. The longer the payment terms, the greater the need for payment guarantees from the buyer. A payment guarantee would mitigate any risk of default by the buyer during the payment term. In conclusion, knowing what a buyer will attach value to is the key starting point in getting your business sale ready. The actions you can take today to prepare your business for an eventual sale are directly in your control. Therefore, having a plan that outlines how you will get your business sale ready is key. Ready or not, you too will be a seller in the future.

Get advice Finding the right buyer and putting the deal together is not a DIY job. Ask any of your clients that have sold a business who they consulted with prior to and during the sale and the list of professionals will include anything from private equity partner, tax advisers, accountants, business brokers and bankers. Selling a financial planning business is no different. Seek counsel from experienced business advisers and facilitators who can walk the path with you to conclude the sale of your business. An experienced business adviser will assist you in finding the right buyer, valuing your business and structuring the terms of the deal. This will allow you to stay focused on running your business during the negotiation process – a key aspect that many sellers seem to overlook. Set the value up front While this sounds obvious, many transactions occur where the purchase price is a function of a complex calculation of several variables that cannot be accurately quantified up

The Financial Planner

August / September 2011



Can South Africa really be globally competitive? Adrian Saville unpacks the paths to success in an increasingly competitive global environment The global financial crisis brought with it the sharpest economic slowdown since World War II with widespread business failures and operational and balance sheet stresses that stretched well beyond the financial sector. The economic recovery, however, has been sharp, with emerging economies leading the way; growth in Brazil, India and China, for instance, measured 7.5%, 8.3% and 10.3%, respectively in 2010. But the recovery has not been without complication. Developed countries are running large fiscal deficits, printing money and weakening their currencies in an effort to spur recovery. These policies are unlikely to have the desired or intended effect. Instead, it remains the case that the risk of sovereign defaults in these economies is high, aggravated by factors ranging from high levels of sub-sovereign debt, aging populations and stubborn unemployment. At the same time, in the broad cluster of countries that make up emerging or dynamic markets, there are some exceptional forces at play. By way of example, China is now the world’s

largest tourist nation with 47.7 million Chinese tourists expected in 2011, more than France, Canada and Japan combined, and Chinese outbound tourism is up 54% over five years. China’s foreign direct investment has increased fivefold since 2005 and the country accounts for 10% of the world’s trade – many times more than the figures of ten years ago. In this way, the advance of China and other dynamic markets has seen the centre of economic gravity of the globe moving steadily eastward and southward – a trajectory that is set to continue. South Africa has not been immune to the global disruption and shifting economic sands. In 2009, we experienced our first recession since the early 1990s. Although, it was short and shallow, the ensuing recovery has been shallow too, and household debt remains elevated; lost jobs have not been recovered and inequality has become an entrenched socioeconomic feature. In 1996, 1.2 million South Africans (3% of the population) lived on less than $1 per day. By 2008, this had risen to 4.2 million (8.6% of the population). In delving into the South African economy’s muted response, it is evident that the manufacturing sector has borne much of the job losses and that much blame for this has been assigned to the stronger rand which is argued to have substantially

Figure 1: The Prosperity Pyramid

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With high unemployment (25.7% based on the conservative definition), a low labour absorption rate (scarcely 40% compared to global averages of 60%) and short working hours, we are not maximising the use of our labour force. August / September 2011 14 At the same time, our productivity improvements have been poor. If we compare the progression of


compromised South African manufacturers’ competitiveness.

At the same time, our productivity improvements have been poor. If we compare the progression of labour productivity of South Africa to that of China over the 40 years from 1970 (when China began its transformation) to 2010, South African labour productivity has doubled whilst Chinese productivity has grown 12-fold. In many ways, this outcome is unsurprising because by measures like TIMMS and PERLS, South African learners score in the bottom quartile globally in terms of important skills such as science, maths and reading. It is clear what needs to be done: improve the quality and skills of the labour force; improve the utilisation of labour and together these will lead to rising incomes and greater prosperity. We cannot be world-class producers without a world-class labour force. While this may seem a daunting task, the world has many examples of countries which have been transformed from lowincome to high-income nations within a generation. South Korea, for example, had a per capita income of $80 in 1960. In 2010 it enjoyed a per capita income of $30,000. Other states, such as Singapore, Taiwan, Estonia, Chile, the Czech Republic, and in earlier times, Germany and Japan, have achieved similar success.

Dr Adrian Saville | CIO of Cannon Asset Managers

However, a detailed analysis of the relationship between the manufacturing sector’s performance and the rand reveals that once price inflation is stripped out of the equation, the level of the rand explains little more than 5% of the observed level of manufacturing. The true explanation for South Africa’s weak manufacturing production and loss of competitiveness lies elsewhere. Admittedly, the loss of competitiveness has been exacerbated by the global financial crisis and the associated economic slowdown. However, the source of competitiveness and wealth creation reside inside an economy. This is easily demonstrated by a simple but powerful economic model that I term the prosperity pyramid (see Figure 1). Specifically, the model shows that the route to national prosperity is a combination of the level of labour utilisation combined with the productivity of that labour. Unfortunately, in South Africa, we have problems with both legs. With high unemployment (25.7% based on the conservative definition), a low labour absorption rate (scarcely 40% compared to global averages of 60%) and short working hours, we are not maximising the use of our labour force.

The Financial Planner

Importantly, while these transformations have been won through effective investments in education and skills, they have invariably been combined with increasing economic openness as a basis for promoting the flows of capital, goods and services and ideas. As South Africa embarks on the road to prosperity through effective investments in human capital, it equips us to recognise that we are immersed in a sea of economic opportunity. More to the point, whilst China, India and Brazil are often identified as home to the fastest growing economies in the world, subSaharan Africa ranks as the third fastest growing region in the world; it is forecast that seven of the ten fastest-growing countries for the period 2011-2015 come from sub-Saharan Africa; and the fastest growing economy over the last ten years is not China but Angola. South Africa is located in a robust neighbourhood; even Zimbabwe, where price inflation has normalised, is getting into the game, with a growth rate of 8.1% last year and 9.3% forecast for this year. South Africa is in the prime position to benefit from this exciting neighbourhood. Whilst much needs to be done at home, by recognising that international integration is a key driver of sustained economic growth, it is fair to expect the South African economy to fare relatively well as we take part in increasingly regional integration. However, if we add into this argument the potential of human capital then, with the right type of investment into people, especially children, opportunity for South Africa is almost endless.

August / September 2011


Tax Planning

Tax and Financial Planning increase the cash flow of a client, which ultimately makes the purchasing of the product solution more affordable. Typical solutions are medical aid contributions, policies for protection against the loss of income, contributions to and payouts from a retirement fund, key person policies, etc. All of the above risk areas have tax implications, albeit it from an income tax, capital gains tax, estate duty or donations tax perspective. Understanding the holistic tax issues relating to the above is fundamental for a financial planner. A solution may be effective from an income tax point of view, but not necessary when considering other taxes. An excellent knowledge of the interaction of all taxes is essential when making a recommendation. The above can best be explained with an example which illustrates the role of the financial planner and the tax consequences that will improve the cash flow of dependants.

Errol Meyer, CFP速

Financial planners are often confronted with tax issues when advising their clients. Financial planning and tax planning are two different disciplines, although some principles may overlap. Advice rendered by a financial planner must adhere to the compliance requirements in terms of FAIS legislation and the common law. Differently stated, the point of departure for a financial planner is to decisively assess the risk profile of a client. Most of the solutions relating to the risk profile of a client have tax implications. A financial planning solution will often propose products that create and/or protect wealth and the solution must demonstrate a causal link with the agreed risk profile of a client. The solution must make sense from a tax and financial planning perspective. Tax efficient products/solutions will The Financial Planner

Assume a client needs capital at his death to provide an annual income of R 65 000 per annum for each of his three minor children. Further assume he has an inter vivos trust with his spouse and children as trust beneficiaries. The residue of estate is bequeathed to the spouse. The agreed risk profile of the client is to protect the funds for his children in the most tax effective manner. Assume the interest received on an investment is 10%. A tax efficient solution will be to effect a life policy of R 2 000 000 on his life and to nominate the trust as the beneficiary of the policy. Tax implications 1. Each child will be able to receive an amount of up to R 82 550 without paying income tax. In the example only R 65 000 is required. The interest income of R 22 800 is exempt for each child as a separate taxpayer. Each child also qualifies for a tax threshold of R 59 750. The actual interest income of R 66 667 can be paid to each child free of income tax. 2. No estate duty is payable and the surviving spouse will have a total of R5 million available before the liability for estate duty arises upon her death. 3. Insurance policies are exempt from capital gains tax and no capital gains tax will be payable if the policy benefits are paid to the trust. August / September 2011


Tax Planning

4. Should the trust decide to invest surplus funds in capital growth assets, capital gains can be vested in a beneficiary who will qualify for the R 20 000 capital gain exclusion and the lower effective tax rates. 5. No donations tax is payable upon any distribution made to a beneficiary. 6. Trust funds earmarked for the benefit of the beneficiaries are protected, which is the main objective of the exercise. 7. In contrast, the income generated would be fully taxable at the surviving spouse’s marginal rate if the spouse was nominated as the beneficiary in terms of the policy. Less income would be available for the maintenance of the children and the cash flow principle is despoiled. Most important, the funds are not adequately protected. From the above example we can conclude that the risk profile of the client is taken into consideration and the most tax effective solution was proposed which improved the cash flow of all beneficiaries.

In the sphere of business financial planning it is important to avoid the unnecessary payment of taxes. Assume the risk profile of the business entity requires that liquidity must be created for the business, for example the loss of a key person. The resolution of the company becomes important if an insurance policy is structured for a payment to be tax free. The proceeds of the policy may be fully taxable if the resolution or the written compliance documents of the financial planner indicates that the purpose of the policy was to protect the business against the loss of profits! To ensure that the estate duty exemption is available for key person policies, SARS will insist on documentation as evidence that none of the exclusion requirements are breached. In conclusion, the content of the financial planner’s compliance documents and the resolution requirement of SARS are important to avoid double taxation. Tax considerations and good documented records are synonymous for a financial planner. Aggressive tax planning and ignoring the risk profile of a client has no place in financial planning.

The solution must make sense from a tax and financial planning perspective.”

The Financial Planner

August / September 2011



Economic perspective The first half of 2011 delivered some unexpected shocks that disrupted the pace of the global economic recovery. These unexpected events included a surge in political turmoil in North Africa and the Middle East that sent oil prices soaring; sharply higher global food prices aggravated by extreme weather conditions, a disastrous earthquake in Japan that led to a massive disruption of vehicles and electronic equipment production; and the re-emergence of financial tensions in the Euro-area, which could ultimately see some countries in the Euro-area having to formally restructure their national debt. At the same time economic growth in China is being managed lower in order to quell inflation and control the pace of housing development. These ‘unexpected shocks’ have combined to undermine the strength of the global recovery while at the same time complicating the outlook for monetary and fiscal policy across the globe. They have also led to increased financial market volatility and uncertainty, especially in June 2011, as investors try to assess the seriousness and duration of the current “soft-patch”. Of particular concern is the fact that the economic recovery in the United States has become more inconsistent and somewhat uncertain in recent months. While the US is officially out of recession – having recorded seven consecutive quarters of positive growth - a range of key economic indicators have softened in recent months, including the rate of growth in job creation. The economy is also facing a number of key structural economic challenges, most notably a weak housing market and high public sector debt. This suggests that, at least in the short to medium term, the country will struggle to return to its historical average growth rates. Japan is still reeling from one of the largest earthquakes on record. Besides the massive human tragedy, the event led to the closure of many electronic and vehicle production plants, a disruption to the supply of key motor and electronic components to factories around the world and a sharp fall-off in confidence levels within Japan. More positively, there is already some evidence of a rebound in Japanese consumption indicators, although disruptions to the production of manufactured goods appear a little more profound. Fortunately, Japan is set to record improved growth rates in the second half of 2011 as manufacturing capacity is restored. The Financial Planner

Greece, Ireland and Portugal, have all received significant financial assistance from the European Central Bank and International Monetary Fund. Unfortunately, their financial and economic difficulties have continued, especially within Greece. At the heart of the problem, national debt levels are extremely high, while economic growth rates remain depressed. In May 2010, Greece was granted a EUR 110 billion ‘bail-out’ by the ECB/IMF. Since May 2010, a little over half of these funds have been disbursed and used to finance both the fiscal deficit as well as the rolling-over of maturing debt. Despite this assistance, Greece is likely to need additional funding, which will probably have to include a formal restricting of their debt involving the main private sector creditors. Standard and Poor’s recently downgraded Greece’s credit rating to CCC. This is the lowest credit rating currently applied by S&P to any country they evaluate. At CCC, the rating agency is expecting that the sovereign debt of Greece will either be re-structured or that they will partially default. Fortunately, Germany, which is the largest economy within the Euro-area, has performed particularly well. In Q1 2011 August / September 2011



Germany’s GDP grew by amazing 6.1%q/q (annualised) reflecting broad-based growth. Confidence levels are extremely high, the unemployment rate is 7%, which is the lowest level since the reunification employment data started in 1992, exports reached a record high recently, and there has been a surge in tax revenue resulting in a lower budget deficit and reduced bond issuance. On the negative side, inflation has been above 2% for five consecutive months.

a decline in activity. Crucially, although the Q1 2011 GDP growth estimate exceeded expectations, more recent economic data suggests that the economy has lost some momentum. This is reflected in a softening of South Africa’s leading economic indicator as well as a moderation in retail sales growth, including vehicle sales, and industrial activity. The current ‘softpatch’ in global economic activity is also slowing South Africa’s growth momentum.

Developing Asia, which includes China and India, has continued to convincingly outperform the other regions of the world; although China has been trying to engineer a managed slowdown of domestic economic activity, partly in order to combat inflation, but also to control price developments in the housing market. Policy interest rates have been raised by 125 basis points in five steps since October, bringing the lending rate to 6.56% and the deposit rate to 3.50%. The reserve requirement has also been raised by 450 basis points in nine steps during the same period, bringing it to 21.5% for large banks. The government’s massive two-year ($586 billion) stimulus program adopted in late 2008 has also ended. As a consequence, economic activity has been gradually moderating this year following the strong performance in 2010. Exports have remained strong this year and rising wages have helped buoy consumption, but the booming property market is showing signs of softening and industrial activity has slowed. It is true that past tightening cycles in China have tended to become too restrictive, so clearly the latest rates hikes are becoming a concern. However, there is already evidence of a slowdown in domestic economic activity and inflation is ultimately expected to remain below the previous peak. This should help to contain the extent of monetary tightening which, hopefully, results in only an easing of real GDP growth to 9.3% in 2011 and 9% in 2012. In 2010 China’s economy grew by 10.7%.

While the growth in consumer income and spending has been a key factor driving South Africa’s recovery over the past seven quarter, consumer spending is likely to become somewhat more subdued over the next few quarters. This is due to a range of factors including higher inflation - and therefore a slowdown in the household sector’s real income growth - a rise in domestic interest rates (possibly in late 2011 or early 2012), constrained access to bank credit reflecting the increased conservatism within the financial sector, a rise in nondiscretionary household costs (for example electricity, medical aid, education, fuel levy and toll-roads) and a lack of job creation. These factors have already started to be reflected in slightly weaker consumer confidence readings. Ultimately consumer activity will lack absolute vibrancy in 2011/2012 without a meaningful increase in employment.

A number of other emerging economies have also maintained a consistently strong performance, including Sub-Saharan Africa. During 2010, Sub-Saharan Africa grew by around 5% and in 2011 is expected to expand by around 5.5%, rising to 5.9% in 2012; although there is a wide divergence in performance across the region. Resource-rich countries have attracted an increased inflow of foreign direct investment (including increased flows from sovereign wealth funds) and there is a renewed focus by multi-nationals on gaining greater access to Africa, using South Africa as the gateway. Many challenges remain, however, including improving governance, reducing poverty and unemployment, strengthening public financial management, and enhancing infrastructure. Addressing these issues will be key to raising living standards, moving to a higher growth path and attracting more foreign investment. In Q1 2011, South Africa’s GDP rose by a robust and better than expected 4.8%q/q. The growth was relatively broadbased, with the manufacturing sector recording an especially strong performance, and only the agricultural sector reflecting The Financial Planner

Although fixed investment spending in South Africa rose by a welcome 3.1%q/q in Q1 2011, the improvement was off an especially low base and remains somewhat unconvincing. This is despite record cash levels within the corporate sector, significant plans by the public sector to expand infrastructural development and the lowest interest rates South Africa has experienced since 1974. The rapid slowdown in the rate of growth of investment activity since the World Soccer Cup has meant that investment spending now represents only 18.7% of SA’s GDP, which is the lowest level since Q3 2006, and extremely low by emerging market standards. The most recent peak was 24.6% of GDP in Q4 2008. The country has an informal target of increasing investment spending to over 25% of GDP and maintaining it at that level for many years. Internationally, there is a reasonably clear relationship between increased investment spending and sustained higher GDP growth, with the level of investment ultimately determining the level of employment. While reducing the level of unemployment (and hence job creation) has become the number one economic objective in South Africa, the country’s employment target cannot be achieved without a commensurate increase in investment activity by the private sector. During 2010, South Africa’s inflation rate surprised on the downside, averaging 4.3%. However, the inflation rate has drifted higher in recent months and was last recorded at 4.6%. There are a number of clear upside risks to South Africa’s inflation rate. These include higher food inflation, as well as higher energy prices. The extent to which these price August / September 2011



pressures will impact on inflation will be heavily influenced by the Rand exchange rate. There is little doubt that the relative strength of the Rand in 2010 cushioned South Africa from some potentially damaging price pressure, but this is likely to change in 2011/2012. Further electricity price hikes, coupled with other service costs and administered price rises (including water costs) as well as the concerning increase in wage demands could also push South Africa’s inflation higher during 2011/2012, necessitating higher domestic interest rates. The first upward adjustment to interest rates is expected within the next 6 months. Conclusion While the risk of a return to recession conditions, globally, has diminished significantly in the past year, other risks have worsened. These include an uneven economic performance


across regions, a potential debt default in the Euro-area and significantly higher food and energy inflation. The key challenge for most economies in 2011, including South Africa, is to find a way to balance the need to contain rising inflation against the desire to maintain a high growth rate. South Africa has now experienced seven consecutive quarters of positive growth, following the recession in 2008/2009. The growth rate is reasonably solid and reflected in most major sectors of the economy, but remains somewhat unconvincing given the lack of fixed investment spending as well as job creation. Consequently, in order to move the South African economy to a sustainably higher rate of expansion over the next few years, there is going to have to be a significant improvement in the level of fixed investment activity and job creation.

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August / September 2011


Employee Benefits

Fund Governance and Compliance, where are we now? the more likely a court would regard conduct that conforms with these practices as meeting the required standard of care. The corporate governance practices, recommended in King III therefore lift the bar of what are regarded as appropriate standards of conduct. Any failure to meet such a recognised standard, even if it is not legislated, may render a board liable at law. This code is enforced on an “apply or explain” basis. This means that the board of trustees could resolve that it is not in the best interests of the fund to follow a particular recommendation contained in the code. In such a situation, the board can apply the recommendation differently or employ another practice as long as it still achieves the objective of the over-arching corporate governance principles of fairness, accountability, responsibility and transparency. By explaining the reasons for not applying the recommendation, a board may in this manner still achieve compliance.

Kobus Hanekom | Executive Consultant, Simeka Consultants and Actuaries PF 130 PF 130, issued by the Financial Services Board (FSB) in June 2007, spearheaded the concept of fund governance for most retirement funds. In the preamble it explains that because not all circumstances relating to the management and functions of the board may be circumscribed or defined within a legal framework, the introduction of governance measures are necessary. It also includes values and ethical principles which requires a certain standard of behaviour of the fund. In layman’s terms fund governance is an attempt to eliminate nasty surprises. We want to know that the fund has the structures and procedures in place to be able to comply with its responsibilities in terms of the fund rules and the law. In addition we want to know that the fund is monitoring and measuring their actions to ensure compliance. PF 130 identified a wide range of governance documents and procedures considered essential for good governance. They include a trustee code of conduct, an acceptance of trusteeship, a declaration of interests, a protocol on the acceptance of gifts, a system of appraisal and an investment policy statement. These documents have since become generally accepted and have contributed significantly to the management and control of retirement funds. King III – apply or explain The King III Code of Corporate Governance became effective on 1 March 2010. The code was designed with listed companies in mind but applies to all entities, also to retirement funds. It consists of nine themes, a number of principles and many recommended practices. The code does not constitute law but all listed companies are required to comply with King III on account of the listing requirements of the Johannesburg Stock Exchange. Criteria for good governance helps determine what is regarded as an appropriate standard of conduct for directors/trustees. The more established certain governance practices become, The Financial Planner

Many of the principles contained in King III are already contained in PF130. Some of the new ones are however problematic, such as the requirement that in order to ensure a balance of power, the majority of the trustees must be non-executive trustees and the majority of those non-executives should be independent. Waiting for the revised PF 130? We understand that the FSB plans to incorporate the requirements of King III and issue the revised document in the form of a directive. At this stage, it is not clear when the revised PF130 will be published. The revised draft will be very important for the retirement fund industry as many of the requirements of King III are considered over the top or not applicable to retirement funds. An industry specific interpretation or guideline will therefore provide much needed certainty. It appears that many funds have adopted a wait and see approach and resolved to comply once the revised PF 130 is issued. King III however places a positive duty on funds to consider and comply with its requirements. Many funds therefore adopted the recommended board charter and are in the process of implementing the requirements of King III based on their understanding of appropriate behaviour The Institute of Directors (IoD), the custodians of King III, developed a governance assessment tool for listed companies. This tool has now been adjusted and made available for retirement funds. In return for a reasonable registration fee, funds can complete the questionnaire and print a compliance report. Although the tool is easy to use the results can only really serve as an industry benchmark once there is a measure of industry consensus on the appropriate practices for retirement funds. The way forward At Simeka Consultants and Actuaries we have embraced King III and are implementing it in the interests of the members and employers of the funds we consult to. Many of our clients are listed companies who require their fund governance to be aligned with their corporate governance. Compliance for these companies is essential and they have no problem explaining the practices they believe are appropriate and in order. We are also in favour of the use of a Governance Assessment Tool and are working closely with the IoD to develop and refine it. August / September 2011



Debt levels and growth, a look at developed vs developing markets The message in the presentation was simplicity it itself. The situation can be summarised as follows: 1. The developed world is in trouble because of debt levels. 2. The developing world is growing at a pace that may need slowing down. South Africa in itself is OK. The economy is not great, but debt levels are manageable. Luckily for us, the main markets for our exports (mainly commodities) are developing markets, so we are hanging on the success of their economic growth. There are some risks around: • Developing markets are facing some inflation risks (food and oil). They have increased interest rates (and used other measures) to try and contain inflation. They will be successful, but this could slow the growth rate down more than anticipated. So the outlook is not positive in the short term. • Developed markets have a longer term structural problem – all related essentially to debt. Governments have to tighten their belts and this will take a decade or to sort out. The effect of this will be to reduce growth rates for a sustained level. There will be scares like Greece, Ireland etc on a fairly regular basis, but this immediate sovereign crisis has passed.

Wayne McCurrie | Executive Director, RMB Asset Management

The countries that have had a very good time over the last sixty or so years by spending more than they earn, must now spend less than earn and pay back debt. It is always pleasant to be asked to write an article on a presentation that you did a while back, because then you can massage the story that you gave at the presentation in the light of actual events that have taken place subsequently! Not that my message gave incorrect information (perish the thought!), but I could possibly have been mistaken at the time! For example I did not even mention the US debt ceiling crisis, if increasing the ceiling itself is indeed a crisis.

The Financial Planner

As normal we all get very caught up what is dominating news currently. Therefore some perspective is necessary. The current slow growth / debt situation in the developed world does not mean that we are on the brink of another recession / crisis. It does mean that we cannot expect the developed world to be the engine of growth. The USA debt ceiling / European government debt crisis also does not mean that another recession is imminent. Inflation in emerging markets also does not mean that they have gone ex growth. However it is also quite clear that the short term outlook is not positive. Another theme of the presentation was around the fact that emerging market consumers can take on debt over time. This has already started and will continue. This will be the growth engine (with speed bumps on a fairly regular basis) for the next few decades. The summary for South Africans is simple: •

China is our China. We as a country must be very courteous to every Chinese consumer that we meet. Chinese consumers must become American consumers. They must spend and take on debt. American consumers cannot become American consumers because they already are American consumers. They are paying back debt.

August / September 2011




We must tell them to send more than they earn because this will support South African exports, but they must eat less so that food prices do not go up. We as South African will have to work very hard at this because there are +-45 million of us and +-1300 million Chinese. So each one of us must persuade 30 Chinese consumers to become American consumers.

despite politicians in the mix. Growth, especially credit growth, is muted. Inflation unfortunately is rising, but not structurally. Most likely we will not see interest rate increases this year, but they are coming next year. The Rand, while clearly overvalued on a longer term basis, is unlikely to weaken materially in the shorter term.

As a summary then: The countries that have had a very good time over the last sixty or so years by spending more than they earn, must now spend less than earn and pay back debt. This equals lower growth. Counties that currently earn more than they spend must now spend more than they earn and take on debt. This will be the growth engine for the world.

Turning to markets: The factors that have influenced equity markets world-wide are actually not that different as what we have had for a while now. BUT THE PROBLEM is that equity markets are significantly higher than a year or two ago. We do not see opportunities in equity markets at this level. They are (for want of a better term) FAIR VALUE.

South Africa is OK, but subject to the fortunes of both China (big) and the developed world (big, but smaller than China). The purely domestic equation (other than jobs), is reasonable,

Global developed bond yields are very low and clearly do not represent value. In a few years’ time investors are going to look back and say why did we own these things?

The Financial Planner

August / September 2011


Retirement Planning

Baby Boomers - The End of the World? Recently, some prophets of doom announced 21 May 2011 as the end of the world. It seems we somehow received an extension. Others are focused on 21 December 2012 as the date when everything ends, as this is when the amazingly accurate Mayan calendar stops. However, in the financial world, there are some who have heralded 1 January 2011 as the end, or at least the beginning of the end. Why? This is the date when the first Baby Boomers turn 65. The Baby Boomer generation is defined as those people who were born between 1946 and 1964. The term “Baby Boomer” was coined because, after World War II, the United States saw a dramatic increase in the number of births – a literal baby boom. While the term was coined in the USA, there are 28 countries, including South Africa, that have some form of a Baby Boomer generation. Baby Boomers are characterised as the generation that pursued personal success. They are not afraid to challenge tradition and sought to change the world. Where their parents saw education as a privilege, Boomers regard education as a right, and to date are still the generation with the highest education levels in the USA. Workaholics, image conscience and adaptable, they have been a major influence on our society and economy. In the USA, Boomers are the most prosperous generation to date. They control over 77% of the assets in the US, command some two trillion dollars of annual income, but only make up around 27% of the population. So why would the retirement of Baby Boomer generation in the US, or anywhere else in the world lead to such a dire world outlook? With such a large, prosperous generation potentially stopping earning an income and instead drawing a pension, there are several concerns. The first worry is the impact of the Baby Boomer generation on Social Security. In the USA, the ratio of tax payers to pensioners has been steadily decreasing. As the graph shows, the ratio has deteriorated from 16 tax payers to 1 pensioner, to as little as 3.3 tax payers per pensioner in 2010 and is expected to decrease further to 2 tax payers per pensioner in

The Financial Planner

Craig Aitchison, CFP® | OMAC Actuaries and Consultants 2025. The retirement of the Boomers means a large portion of wealthy tax payers leaves the system and instead starts drawing pensions. Given that there are around 76 million Boomers in the US, and only 46 million Generation X (the next generation after Baby Boomers), the Boomers’ retirement could add significant strain to the system. Ratio of Tax Payer to pensioner 1950



16 3.3 2 0 2 4 6 8 10 12 14 16

August / September 2011


Retirement Planning

Added to this growing concern is that the unfunded pension deficit in the US now stands at an estimated at 3.2 trillion dollars, while in 2010 social payouts started exceeding the received tax income earmarked for social security.

rising costs and demand for healthcare for retirees also makes living costly. At the same time, Boomers face a world where social security benefits could decrease significantly, as governments find they are no longer able to afford them.

This level of debt threatens economic stability, both for the USA and ultimately the rest of the global economy. In Europe, where some countries are defaulting on their sovereign debt, generous social security benefits have had a large part to play in creating the massive debt burdens these countries are now struggling with.

Some studies estimate that in the US, only a third of Boomers have enough money saved up for retirement, and many Boomers fear not having enough in retirement. It is probably not surprising then, that as much as 83% of Boomers expect to be working in some capacity after retirement. Many seek the continued mental stimulation and challenge and aim to continue working until they do have sufficient resources to retire, regardless of their age.

A second concern is that Baby Boomers’ retiring will lead to a slowdown in the global economy. Some economists believe that this slow down is already happening. This concern is based on the assumption that people spend less in retirement than they do while working. McKinsey have estimated that a Baby Boomer related slowdown could carve a quarter off current US GDP growth rates. There would also be downward pressure on housing prices as demand for new homes falls, which in turn could increase the vulnerability of the economy. A third concern is that the retirement of Baby Boomers will lead to a massive exodus of skills from economy. In many organisations, Baby Boomers are the experienced, skilled staff. Where adequate plans have not been put in place, their loss represents a loss of experience and skills that is not easily replaced. Professions most at risk include engineers, pilots, teachers and nurses.

Studies have shown that even a two year extension to the Baby Boomers’ working lifetime will double the number of Boomers who should have enough to retire. So maybe 1 January 2011 is not the end, but the beginning of a new way to do retirement and Baby Boomers in their inimitable style will redefine how we think of retirement. One thing is for sure, the Mayans may have been good with calendars, but Boomers aren’t quitting yet.

While there is growing concern over the impacts of the retirement of the Baby Boomer generation, some economists regard the prophets of doom’s predictions as a non-starter. They cite the fact that Baby Boomers are not expected to stop working in retirement, as perhaps earlier generations did, but are expected to remain economically active for some time after retirement. These economists also feel that high immigration rates into the US will fill the gap in size between the Boomer generation and the Generation X. They also believe that many Baby Boomer skills will actually become obsolete and that technology will bridge any skills gaps. How things will pan out will remain to be seen, but one thing that is clear is that in true Boomer style, Baby Boomers are challenging the norms when it comes to retirement. However, Boomers face some tough challenges in retirement. People are living longer, and Boomers are no exception. These days, at least one member of a 65 year old couple can expect to live to 88. Living longer after retirement makes planning for retirement more difficult, and means that Boomers may not have saved enough up for retirement after all. The

The Financial Planner

August / September 2011


Practice Management

Building capital value in a business

In most cases, building value is about evolution, growth and a journey.”

In most cases, building value is about evolution, growth and a journey. Many advisors start their careers as tied agents and then take the big step to independence. Unlike tied agents, independent advisors set the rules – deciding when to work, what to do and with whom to do business. Independent advisors need to take a further step by choosing to build and run a business with entrepreneurial flair. In other words, advisors must want to drive and create value. Capital value in a business is built through both financial and non-financial drivers. Financial drivers are the advisor’s selected business/economic model, as well as expense management and cash flow. Non-financial drivers include business operations, risk management and post-sale client retention and transferability.

Ian Middleton, CFP® | Managing Director, Masthead

Value in a financial planning practice cannot be built overnight.The value of a business is a compound picture of all the decisions one has made to date. Value means different things to different people and ultimately lies in an individual’s perception. It is agreed that capital value has an end value greater than the beginning and can also be understood as what a willing buyer would pay a willing seller. To run a successful business requires the right mindset. Advisors who wake up every morning thinking they are unemployed do not have the right mind-set and this will reduce their success in building value.

The Financial Planner

The business model determines aspects such as the nature and source of income, product diversification and the product providers from which solutions are sourced. Income comes in various forms, with transferable recurring income streams offering the greatest value. Being able to track and forecast revenue enhances this value. A variety of product lines may add value and reduce risk due to diversification. Diversified offerings mean customers experience one-stop service, while the advisor enjoys crossselling opportunities and the benefits of diversified income streams. An important aspect here is to ensure that the products offered to customers are actuarially sound product solutions from sustainable product providers. This involves doing a due diligence and choosing providers and products carefully. Moving to expenses, advisors should keep track of both current and future expenses and know the cost of acquiring new clients and providing ongoing service. Some expenses should rather be seen as a business investment.

August / September 2011


Retirement Planning

Finally, it is essential to know the cash flow situation and the key financial ratios of the business, such as income to expenses. One should be aware of the profitability of both the business and each client. There are several areas through the business operations where value can be built, for example backing up and offsite storage of client database, documenting of processes such as financial planning and client reviews. In addition, the business plan and regular reviews and assessments of services rendered should be documented. The business plan should set out what the business wants to achieve, the desired business culture and the experience that is to be delivered to customers. From an HR perspective, which is often neglected in small businesses, there should be written job descriptions for all staff roles, with responsibilities defined and records of regular performance appraisals. Furthermore, one should not neglect the importance of brand and reputation. This is linked to the product providers and product choices offered, as one is known by the company one keeps. The danger is that value can easily be destroyed if one doesn’t pay attention here.

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A significant driver of value lies in improving client retention and being able to provide evidence that clients will stay with the business once it is sold. This means having an ideal client profile for your practice, a Customer Value Proposition (CVP), Service Level Agreements with clients, a segmented client base with differentiated services for each category, a CRM system and evidence of scheduled client review appointments for the next year. You should preferably also have formally conducted a client satisfaction survey within last the last 12 months. Yet, based on our research, many advisory practices have room to build value in their businesses. While some 71% of advisors have a CRM system, only 61% have an ideal client profile, and only 33% have a CVP. We say it is important to do customer reviews and assess customer satisfaction, but only 24% of advisors can evidence that they have diarised customer reviews while a mere 14% have conducted a customer satisfaction survey in the past year. Building value takes courage as it requires every business and business owner to make decisions and take act on these. It also requires hard work as value is not built overnight.

August / September 2011



Building wealth is simple: Compounding investments returns at a low risk Building wealth is simple: compounding investments returns at a low risk. Whilst these two seem mutually exclusive, they are not. Especially when one is able to invest globally it is amazing how many good quality companies one can find that have good track records: generating high returns on capital (ROE) whilst trading at a low multiple or even at a discount to their capital.

the 1960’s or 1970’s, large cap valuations are not necessarily cheap. This makes sense as a major macro driver over the next 10 years will be debt reduction, both at government and individual level. A period of low growth where corporates will compete ferociously for market share. Hence at SIMG, whilst not ignoring the fact that there will be winners in the USA and Europe, we spend a lot of time searching for undervalued companies in the high growth emerging markets. Due to historically poor education and infrastructure, these countries have large and cheap labour pools which draw increasing amounts of capital. Firstly because interest rates in India, Indonesia, Turkey, Brazil, etc are considerably higher than in the West and at the same time have a lower risk. Indonesia and Turkey’s debt/GDP levels average 45% whilst those of the USA/UK exceeds 90%. These capital flows create jobs and an upward virtuous circle. The newly (or better) employed get access to debt and start a wave of consumer borrowing (which eventually will be a problem) and create more jobs allowing these countries to maintain a growth rate of 6% - 9%. The staggeringly low mortgage debt/gdp or motor vehicles per capita in these countries highlight how underdeveloped their financial systems are. Taking a 20 year perspective, picking winners in these countries must be much more rewarding than picking winners in the West.

Kookie Kooyman |Head of SIMS Sanlam, Investment Management Global The advantage of global investing is that one is not stuck in one economy or geographic area (e.g. Europe or the United Kingdom) that might be battling through a period of painful adjustment. Whilst it is true that many large corporate in the USA and Europe appear undervalued, in reality they are not. Firstly, the mistake most make is looking only at the 1985 – 2011 period which was a liquidity fuelled bull market. If one goes back to

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Compounding high levels of earnings growth off an initial low valuation over 20 years generates astonishing returns. For example, investing in Bank of India in 2001 when it was trading at a price/net asset value of 0.3 generated a compound investment return of 48%. R1 million invested is in 2001 is worth R61 million today, whilst a similar investment in Citigroup or Barclays is still around R1 million. Unfortunately, this is a well known secret. Hence the valuations of most large cap emerging market shares are “on the rich side”. To get the higher returns one has to be prepared to take a higher risk. One has to search in the small-cap world, where there is less information available. Yet, often these smaller companies have 10 year track records, and management are very open and accessible. The trick is to get off your backside and visit them, inspect the environment, and reduce the investment risk via increased vigilance when doing the financial analysis. That and a heavy dose of experience, over time has built wealth via excellent returns.

August / September 2011


Practice Management

How to Change to a Fee-based Practice

Aside from death, taxes and what happens when you let your kids eat in your car, few things in life are certain. But in the ever-evolving financial planning environment one thing that we can be sure of is the fact that what financial planners do and how we get paid for it will change over the next number of years. As financial planners we must accept one thing: If we fail to adapt to our changing environment, our businesses stand a very good chance of going the way of the Dodo (or Egoli). Making the changes we need to before we have to can only benefit us. When we take a step back to consider what needs to be done, we first need to understand what the changes are that are likely awaiting us. For this we can look toward Financial Planning Standards Board (FPSB), which globally oversees the CFP® mark. FPSB has a significant influence on global financial planning trends and developments. In short FPSB advocates that anybody that professes to be a financial planner should not be able to provide product-driven advice or to receive

Henry van Deventer, CFP® | Head of Coaching, acsis

any form of payment from product providers. Closer to home, this view seems likely to lead to some significant

payment of a fee. Product providers will likely be allowed to

consequences. As is the case in Australia and England from

facilitate the payment of such fees from investments or premiums

next year, we are likely to see that any form of income paid

to advisers, much in the same way that banks pay debit orders

by investment product providers (and very possibly long-term

from the funds in our bank accounts.

insurance risk products later on) will be banned. This means that commissions and rebates will fall away. So how will financial

The further interesting development is the fact that, as in

planners then earn their living? The answer will lie in an

Australia, we may well see the introduction of an ongoing

agreement between the advisor and the client about the

“opt-in” by clients for the payment of ongoing fees. This

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August / September 2011


Practice Management

will mean that once every while (two years in the case of Australia), clients would need to sit down with their advisers and agree to continue paying ongoing fees. If clients did not experience ongoing value from their advisers in the preceding period, they are unlikely to keep paying. The above leads us to a very important question: What can we as financial planners do to make our businesses bulletproof against these impending changes? Basically, financial

How will I charge my clients?

There are basically two things that clients should pay for – the financial planning process (initial and ongoing) and putting the necessary solutions in place (implementation). Make sure that you get paid enough for both. Calculate what your hourly rate should be and compare that to what each client is paying you for the time you give them. And do not be afraid of charging for the advice process – this is where most of your time and value resides. It also pays for your time if your client chooses to implement elsewhere.

planning businesses will need to change from product-driven, commission-based businesses to advice-driven, fee-based businesses. Although many of us believe that we have already made the change, there are two questions we should ask ourselves to test this. When you look at your financials, how large a percentage of your overall income consists of direct payments from product providers? And if you were to ask all of your clients to pay you a realistic fee for past and ongoing advice, how many would be willing to? In order to make the changes that legislation is likely to ask of us, the following should be taken into account: •

What is my value to my clients?

In an advice-driven business, your advice process becomes your “product”. Is this process unique, meaningful and valuable to your client? Is it being consistently applied by all the advisors in your business? And are all your clients paying what they should for it? Global trends in financial planning have shown us that ‘cleverness’ or cost is not a sustainable value proposition – someone cleverer or cheaper is bound to come along. Spending time to help your clients understand how to achieve what is meaningful to them is much more important. •

Do I have the right clients?

Some of the clients that brought your business to where it is today may not be the right clients to sustain you going forward. If you had to start a brand new fee-based financial planning business today, what would your clients need to look like?

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Taking the above points into account, the following practical steps can help you make the change: 1. Build an advice process you can charge for. Use this for all new clients and migrate your existing clients onto it. If you’re uncertain how to do this, get an external consultant to help you. 2. Decide how you will price it. Know exactly what clients need to be paying you and make sure that you’re getting it. Combining planning fees with implementation fees will leave you with a number of ways in which you can put a costing framework together. 3. Positioning the process and the costs up front. Make sure that all new and existing clients understand exactly what they will get and what it will cost. The more clearly we can help our clients understand what their needs are and why they need us, the more clearly they will see our value and the more likely they will be prepared to pay for it. If your current advice process fails to do this, consider what you need to change. 4. Invoice your clients. Detail the cost and the manner of payment at the end of the process. As a leading feebased Australian financial planner once told me, “The only way to start charging fees is to start charging fees.” I have been asked on occasion if the South African public is ready to start paying fees for financial planning. Evidence would suggest that this has been the case for quite some time. If paying fees is not the major issue, the question that remains is this: Are we prepared to start charging them?

August / September 2011


2011 Convention

2011 Annual Convention: The Leading Edge The 2011 Annual FPI Convention themed The Leading Edge was held on 1 and 2 June 2011 at the Sandton Convention Centre.The event saw over 800 top international and local financial planning professionals from across South Africa get together to discuss the latest trends and hot issues in the financial planning industry, focused on how financial planners can obtain the leading edge during a period of rapid change. Almost 50% of delegates provided us with feedback, which has been summarised below (for the good to very good ratings): Overall Conference Likelihood to attend next year Registration process at the venue Master of Ceremonies Gala Dinner Venue Location and comfort Catering Audio Visual and delegate packs Delegate packs

77% 80% 95% 70% 87% 93% 71% 96% 92%

Highest rated plenary speakers Richard Mulholland Kevin Lings Dr Adrian Saville Errol Meyer Karen Schaeffer

98% 94% 93% 91% 84%

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Highest rated breakaway speakers Employee Benefits: Craig Aitchison Case Study: Marius Botha Practice Management: Henry van Deventer

93% 90% 83%

Regional attendance JHB KwaZulu-Natal Western Cape Pretoria Other regions

58% 10% 16% 10% 6%

At the Gala Dinner The Gala Dinner was attended by over 600 guests and included senior representatives from government, industry associations, university and corporate partners, media, FPI board members and senior FPI volunteers. At the Gala Dinner members who actively promote the financial planning profession were recognised and awarded.

August / September 2011


2011 Convention

Warren Ingram, Executive Director at Galileo Capital, was the recipient of the prestigious annual Financial Planner of the Year Award. Finalists in the competition were Shaun Latter from Quaestor Wealth based in Bryanston, Johannesburg and Jan-Carel Botha from Ultima Financial Planners based in Lynnwood Glen, Pretoria. Wessel Oosthuizen, who is currently the Director of the University of the Free State’s (UFS) Centre for Financial Planning Law in the Faculty of Law, was awarded the Chairman’s Award for lifelong outstanding contributions to the financial planning profession. Nico van Gijsen, Managing Director of Finlac, was awarded the first FPI Media Award to recognise an FPI member who is actively involved with, and has made outstanding significant contributions to, the media (print, broadcast or online).

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Other award winners were the Top Students for the FPI’s board exams as follows: • • •

RFP™ professional board exam awarded to Alex Cook. AFP™ professional board exam awarded to Suzette Naude. CFP® professional board exam awarded to Ruan Schroder.

First FPI Induction Ceremony The first FPI Induction Ceremony for new members in the three levels of FPI membership was held on 2 June 2011 after the convention and over 100 professionals were inducted at this event. FPI Chairperson, Gerhardt Meyer congratulated all the inductees and as professionals in the financial services industry, emphasised the importance of belonging to a professional body. Our thanks go to Momentum for the platinum and Poken™ sponsorship, Old Mutual for sponsoring the Gala Dinner, Acsis for sponsoring the Practice Management breakaway session and Liberty for sponsoring the Case Study breakaway session. Should you have difficulty in downloading speaker presentations from the convention page on the FPI website or require photos from the convention, please contact 2012 Annual Convention Thank you to those who participated in our convention survey during September. The Convention Committee, chaired by Derek McGowan, will be meeting on Thursday, 29 September 2011 to start the planning for 2012 and will take the survey results into account. Watch the FPI website for further details as there are some exciting changes planned.

August / September 2011


Board News

New appointments made to the FPI Board of Directors

We are pleased to announce the appointment of Ben Raseroka and Bongani Sithole and the re-appointment of Prem Govender, CFP ® to the Board of Directors of the institute for a two-year term. These appointments were made to fill three vacant positions as a result of the term for Artwell Hlengwa, Sheshi Kaniki and Prem Govender coming to an end on 1 June 2011. “We are very confident that the knowledge, expertise and industry experience of these distinguished individuals, coupled with their strong sense of urgency in fully professionalising the financial services sector and also of making quality financial planning accessible to all South Africans, will prove to be invaluable in helping the institute fulfil its mandate”, said Gerhardt Meyer, CFP®, FPI Board Chairperson. We wish to thank Artwell Hlengwa and Sheshi Kaniki for their contribution during their term on the board. New and re-appointed members are: Prem Govender runs her own company, Mosswick Investments (Pty) Ltd, a financial planning, accounting and tax firm, established by her late father in 1962. She is a CFP® professional, former Chairperson of FPI and currently serves as a director on the board of Financial Planning Standards Board (FPSB), which is the international standard setting body for financial planners worldwide. Govender serves on both the Financial Services Board’s (FSB) FAIS Advisory Committee and

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the Advisory Committee for Long Term Insurance. She is also a member of the Policy Board of the FSB and Chairperson of the South African Savings Institute (SASI). Ben Raseroka is the Managing Director of Legal Exchange Corporation. He successfully concluded a joint venture with Santam Limited to set up a Legal Expense Insurance Agency, LEXCorp. He was previously Manager: Niche Business at Santam Insurance Company and prior to that, Raseroka was Manager: New Markets. He currently serves on the FSB’s FAIS Advisory Committee. Bongani Sithole is currently Head of Entry Level Markets Business Unit for Liberty Life Head Office. He frequently represents Liberty in various media platforms (online, broadcast and print media). Prior to his position at Liberty, he was the Business Design Consultant for AVAF and in 2003-2004 Sithole was Project Manager for Transnet Ltd in the distribution, warehousing and freight sector.

My fellow board members and staff of FPI join me in welcoming these new directors and look forward to serving with them in leading the institute to greater heights”, said Solly Keetse, CFP®, FPI Board Chairperson-Elect.

August / September 2011




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These are the only events of their kind in South Africa at which financial planning professionals are updated on developments during the year in the financial planning industry and the impact on their businesses in one session, including compliance, legislation, court cases and determinations. These workshops are the second highest attended FPI event, second to the FPI Convention, and attracts members and non members to learn more about issues facing those who work in the financial planning arena. All financial planners and advisors who need to refresh their knowledge or those studying towards a career in financial planning will benefit from these workshops. The programme is developed annually by Wessel Oosthuizen (Director of the Centre for Financial Planning Law at the University of Free State) and Marius Botha (independent training consultant), both CFP® professionals who, with their combined extensive knowledge, also present these workshops.

Delegates will benefit from: 1. Early bird discount of 15% if you register before or on 14 October 2011.

3. Exhibitors showcasing the latest financial services products, services and tools.


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The FPI is proud to present the annual Refresher Workshops for Financial Planning Professionals.

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PROGRAMME Warren Ingram, CFP® • My journey to becoming the FPI’s 2011 Financial Planner of the Year. Marius Botha, CFP® • Amendments as per the Taxation Laws Amendment Bill 2011 as it affects the taxation of the proceeds of life insurance policies in the hands of a policyholder or a person other than the policyholder. • The proposed amendments in respect of taxation of retirement fund benefits. • The effect of the new Companies Act on Buy-and-Sell agreements and the taxation consequences of a buy-and-sell agreement based on a company’s “buy back” of its shares. • Selected practice notes issued by SARS of the Registrar of Pension Funds. • A selection of reported Income tax cases and Adjudicator determinations. Wessel Oosthuizen, CFP® • Putting your client first and treating customers fairly. • Important FAIS Ombud determinations of the past year. • The impact of matrimonial property regimes on financial planning. Practical aspects will be discussed for example: - What are the implications of not claiming or enforcing an accrual claim at death? - The practical implications of taking out a life policy to pay or cover a claim in terms of the accrual system at death. - Financial Planning for unmarried couples living together. - Customary law and the validity of a will. • Revocation of wills – be careful. • Disqualification to receive a benefit from a will in terms of section 4A of the Wills Act. • Section 4(q)(ii) of the Estate Duty Act or not? • Responsibilities and duties of executors: - Full disclosure from estate executors required. - Duties of executors – failure to perform duties in terms of mandate. • Variation of Policyholder protection Rules. • Be aware of your restraint of trade agreement. Speaker presentations will be made available to delegates before the event. Printed notes will also be included as part of the workshop. REGISTER NOW... Visit the FPI website,

Register at

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August / September 2011


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August / September 2011


FPI Aug - Sep 2011 Magazine  
FPI Aug - Sep 2011 Magazine  

FPI Aug - Sep 2011 Magazine