NFB FINANCIAL UPDATE Volume56 June 2011
FROM THE CEO’s DESK
ome issues ago I referred to the various trends which might develop over the coming months and years. One such possibility was something both I and other commentators have described as a “Muddle through” economy. Very influential and often without conscience or concern for the long term, in matters affecting our short and medium term economies, are the politicians. Able at a swish of a pen to legalize the printing of money, the bailout of a favoured bank or insurer, or even in the case of the Americans, an ill considered Mortgage Originator/Bank introduced originally to help ensure “that each American owned a property and enjoyed the long term prosperity this bullet proof store of and creator of wealth and equity provided”. These decisions, often subject to jockeying and deals within deals can ruin decade's worth of endeavour, and more importantly, the confidence of people to take business risk, a critical ingredient in the sustainable growth of any economy. In South Africa, we suffer another bothersome reality. Whilst the Government is critically aware of the importance of job creation, they are beholden to their very important source of support being organized labour. On the one hand, we have the president talking about 5 million jobs being created, and on the other we have ever tightening terms of employment, minimum wages, special conditions, unreasonable wage settlements, and so forth. What a backdrop from which they expect to have entrepreneurs and Big Business alike to risk time, capital and the stability and sustainability of existing business, in a rather fickle economy, to build new enterprises, employing and training largely unskilled workers, who, if they don't measure up, are near impossible to eject. Business and Government will struggle to align their agendas and in my opinion, until this impasse is solved, there is NO chance of these heady goals, announced by politicians once again, being met. On to matters more personal and investment related. A few weeks back an article by Matthew Lester in the Sunday Times raised the issue of SARS focusing on South African high worth tax payers and avoiders. This is an important subject and warrants our individual attention. The program recently introduced covers both local and foreign investments or activities where proper declaration has not been made. This opportunity is worth taking seriously and consulting with your accountants or attorneys to establish how to act should this be necessary. We also wrote some time back of the decision to allow the switching of properties out of Close Corporations into individual's names. This was about a year ago and feels like it was just yesterday. If you might benefit by this switch, particularly if the property is your primary residence, we would again
welcome a discussion either with your advisor at NFB or suggest you engage with your accountants. The deadline is fast approaching and you do not want to be caught in a last minute dash, or being reliant on an extension being offered to us by the authorities. Changing the topic to markets, interest rates and Global trends, we note a few issues which are noteworthy. Firstly, in quite a few Economies we are seeing inflation raising its ugly head. This will eventually result in interest rates following suit, although this still might only be a general trend next year. Investors and large pension funds in the developed world continue to suffer from poor returns on safe investments in their own banks and instruments. This continues to fuel weakness in their currencies as they go abroad, significantly into developing geographies, in search of yield and returns. Should this trend reverse, the currencies in these developing economies could suffer significant weakness, complemented by material pullbacks in markets and asset prices in general. The large offshore markets currently reflect better value than our local bourse. The Rand also remains very strong on a series of crosses, most notably the US Dollar. The Americans and others seem only too happy to weaken their local units in an effort to support local industries and exports. Foreign allowance investments, if done for long term reasons, including diversification and as a long term hedge against a meltdown in the Rand, are always appropriate. Recent concessions made by the Reserve Bank in terms of a material increase in the allowances, make this channel of investment worthy of serious discussion and then implementation. Notably, these funds can be applied into formalized investments, bank or other short term deposits, as well as property (private, rental generating and commercial). Once again, I am all for these generating a yield, either in the form of a dividend if in shares, a rental, if in property, or an interest coupon, although the latter does not offer much in the majority of offshore currencies at present. A final note on investments takes a quick look at the recently discussed Dividend Income Funds which have effectively been disallowed by SARS in the recent budget. NFB has a few effective solutions for cash and funds emanating from these disallowed products. Depending on the term of investment, we have developed solutions which will help in the optimizing of both total return and net of tax returns for individuals, trusts and our corporate clients. Please chat to your advisors for updates in this important area of investment optimization. Mike Estment, BA CFP® CEO, NFB Financial Services Group
IN THIS ISSUE From the CEO’s desk Just because you're older does not have to mean more expensive life cover Is cash the safest bet?
financial services group
JUST BECAUSE YOU'RE OLDER DOES NOT HAVE TO MEAN MORE EXPENSIVE
LIFE COVER “Life is what happens when you're busy making plans!” ~ John Lennon. Article written by Grant Magid, NFB Gauteng, Private Wealth Manager
ver the past few years we have seen the technology
bubble burst in 2001, the South African equity market
B.Compt CA SA
rocket to all-time highs, the financial credit crunch
= Current gross income:
more than R50,000 pm
impact global financial markets, the Eurozone in trouble
= Smoker Status:
and, most recently, the natural disasters and nuclear threats in Japan.
= Description of duties
All of the above have caused dramatic changes in equity markets and
# Administration: 40%
currency markets, and investors' investment behaviours have
changed because of the uncertainty surrounding investment returns.
While we are all consumed by investment returns and continuously striving to outdo the next manager, we forget that there is another area of our portfolio that needs attention and where you can, with little effort, make a significant cost saving. While it is not something we like talking about, most of us are falling foul of paying higher premiums than required for our life insurance policies. Most of us are not aware of the opportunity that life insurance can be cheaper even though we have moved on in years. NFB will compare and analyse the most appropriate risk benefits for your specific requirements. The first step is to understand the costings, benefits, premium patterns and the benefit term. The second
Any risk benefit proposal needs to take into account: = the results of your financial needs analysis – the level of cover
you really need or want = the affordability of the premiums now and in the future –
important to compare different premium patterns = the competitiveness of the various available risk products. This is
based on the extensiveness of the cover considered and, in particular, the comprehensiveness of cover for disability and severe illness benefits. = the most cost effective rates.
step is to understand the actual underlying benefits themselves. This is not always an easy exercise, as life company products are designed
When looking at the various risk benefits we have decided to focus on
to be different from their competitors.
the three main types of benefits:
Our example below is based on the following information:
Life insurance, like any insurance, has traditionally been a grudge
purchase, but it most certainly has its merits. Essentially, life cover is put
in place to ensure that your dependents will be able to maintain their
have an annual benefit increase, the premiums will stay constant. If,
standard of living should you, the main income earner, pass away. The
however, you wish to have your benefits increase annually, the
lump sum paid on your death to your beneficiaries is used as a capital
premiums will increase in a smooth fashion.
injection that you have otherwise not accumulated through investment. Other purposes for life cover are as follows:
Age Rated Premium Pattern
= Settling of current debt in the estate
An age rated premium pattern is cheaper at inception of the policy,
= Liquidity for estate duty purposes
but as the life assured gets older the premium increases at an age
= Provision for your dependents
factor on an annual basis. Age rated premiums are generally selected for business assurance purposes and for those that require cheaper
Life cover is the simplest and easiest product to understand as it only
premiums at outset with an ability to afford more expensive premiums
pays out when you die. The decision is generally made on the cost of
in the future.
the cover and credit risk. Credit Risk is the ability for your chosen life company to meet the obligation on your demise. NFB will only quote
Compulsory Premium Pattern
products offered by the major South African life assurers to minimise
This type of premium pattern has a compulsory premium increase of
any credit risk.
either 5%, 10%, 15% or even inflation linked on an annual basis. The higher you select your compulsory premium increase, the cheaper the
Lumpsum Disability Cover
premiums will be at inception of the policy.
The disability benefit is designed to pay you a predetermined amount
This is graphically represented as follows:
of capital should you not be able to do your nominated occupation or profession. Types of Disability Cover 1. Own Occupation Disability A claim will be paid out to the life assured if he/she is totally and permanently incapable of earning an income from his/her own occupation. The own occupation disability benefit is more comprehensive as the definition does not consider whether you are able to perform other similar occupations, but only your own specific job. 2. Dread Disease / Severe Illness Benefit Severe illness cover is a benefit designed to compensate you in order
While the above is a brief summary of the main types of benefits
to pay for doctor's fees, special treatments and lifestyle adjustments
and various premium patterns available we deem appropriate, our
necessary once you are diagnosed with a dread disease. The main
main focus for this article is to show you that a middle aged healthy
severe illnesses are:
professional is able to buy risk benefits at the age of 50 at a significant
= Cancer = Heart attack
saving. This is possible because of the developments in the South African
insurance industry that have driven the costs of cover lower and
= Coronary Artery Bypass Graft
hence our ability to give clients a better pricing structure. The actual
Typically, most severe illness benefits cover many more illnesses,
example below illustrates the savings. This quote was based on age
but the above mentioned are the main events that result in claims at
rated premiums and the most comprehensive benefits available.
insurance companies. There is, unfortunately, no real way to determine the appropriate amount of cover for severe illness. Things that would be considered: = If I were to be diagnosed with a severe illness, does my medical
insurance cover me for superior overseas treatment facilities?
R1 100 000
R1 100 000
= What adjustment in lifestyle would I need and would I be able
to afford it? For example private nurses, wheel chair ramps etc.
One of the main differences between premiums available now
= Should I be diagnosed with a terminal illness would I like a lump
compared to historical premiums is the introduction of different
sum paid to me so that I can enjoy the last few months of my
premium patterns that life companies have introduced. Over and
above this is the introduction of more innovative assurers challenging the South African life industry and thereby forcing the traditional big
assurers to change their product offering in order to maintain their
The premium pattern you choose has a significant effect on the
costing structure of your policy. Depending on your age, affordability
We are also living longer and have healthier lifestyles which are
at outset and the purpose of the risk policy, you can structure a
making it possible for assurers to offer cheaper premiums and reward
premium pattern to suit your needs. We will discuss the three main
healthy living. Some institutions also have loyalty programmes which
premium patterns below.
are designed to enhance your risk policy by ensuring you are living healthier for longer and therefore reducing the chance of a
Level Premium Pattern
Level premium patterns are more expensive at inception of the policy, but because premiums do not increase as you get older, the level
We recommend that your advisor reviews your current life policy
premium pattern will be cheaper later on in life. If you select not to
pricing every 3 to 5 years.
Is Cash The Safest Bet? Written by By Marc Schroeder, NFB East London, Private Wealth Manager
f you accept that inflation is the biggest threat to the value of your
0.91%, surely this provokes a change in paradigm when considering
money the answer to the question above is definitely â€œnoâ€?. The
which of the two is really the risky asset class?
after tax cash yield over the longer term has been 6% per annum,
Fortunately the picture is not black and white; there are shades in
which is less than the longer term average of CPI of 7%, meaning
between, represented by multi asset class portfolios. There are funds
that cash only investors have suffered a -1% per annum real return over
that have had significant successes through balancing assets,
the longer term.
increasing cash holdings when equities are expensive and vice versa
On the other side of the spectrum you have equities, known to all
when there is value.
as the risky asset class. It's a confusing title as this asset class provides
For those more than 10 years away from retirement, the maximum
investors with the greatest chance of beating inflation over the longer
equity exposure should be adopted for obvious reasons. Those closer
term. Equities, over the long-term, have provided investors with
to retirement should still have significant exposures through high equity
inflation plus 10%. Investors are rewarded for taking on the volatility
balanced funds. The most difficult period for any investor is during
factor associated with this asset class. A study was recently
retirement, where most investors do not have enough. Funds such as
conducted to determine, based on historical data, what the
NFB's Cautious Fund and Coronation's Balanced Defensive Fund are
probabilities of loss were for investing in equities.
specialist low-equity balanced portfolios designed for this purpose their mandates are to achieve inflation plus 4%. Simply put, if you can
afford to live on 4% of your retirement capital, you can look forward to
inflation linked returns.
Probability of less than 0% 27.03%
The point is: in order to get to, and get through, your retirement, you will need to reconsider your view of risk. Inflation is the biggest risk,
Source: Rand Merchant Bank
and equities are the best defence against it. The table above is taken from analysis conducted on each rolling Should you wish to review your risk profile or revisit any of your
period depicted for equity returns since 1960. If you consider that over the past 10 years the statistics for a real loss of money, if holding cash, has been 100%, and for holding equities
investment portfolios, we suggest you give your NFB Financial Advisor a call.
for any rolling 10 year period the statistical chance for loss has been
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