| One of the ongoing challenges of being a financial advisor is managing a client’s expectations – and the only way I have found to do that is by communicating, doing skills transfer and understanding the human psyche when it comes to wealth. Financial behaviour is a whole hornet’s nest to itself, and often other aspects of psychology just do not apply. You might expect that one’s upbringing, particularly your parent’s attitude to wealth and investments might affect how you respond later in life – but I have found that not to be true. Our behaviour, financial or otherwise, is a result of hundreds of thousands of outcomes and decisions we make as life unrolls in front of us. Think of the silent generation (born 1928-1945) whose attitudes to money were shaped by the great depression, not their parents’ view of money.  Managing wealth is not a simple process, there are hundreds of variables and outcomes that you have to consider, project forward and make decisions on – creating the investment in the first place is even more so. Having an asset manager/s is a good way to grow the wealth you have already created – and it is easily delegated, with just some oversight on your part to make sure they are achieving your goals. That is only one side of the equation though. Wealth is what is left over after you have consumed your income – and even the greatest asset manager or planner is not going to be able to make a meaningful impact there. It’s up to you. In a world where instant gratification often drives these outcomes and decisions, it’s all too easy for impulsiveness to drive quick, emotion-driven decisions without thoroughly considering long-term consequences. You can think of this like setting a pre-determined destination of your GPS, deviate from it and you might be in for a bumpy ride and end up driving off a cliff. In the asset manager/financial planner team the asset manager allocates the incoming and existing wealth to maximise the objectives – which have been clarified and are continually tracked and modified by the planner. One less well-known role of the planner is to save you and your estate from unnecessary fees, tax and general erosion. That ‘saving’ can and should be quantified because it has a substantial impact on your portfolio over the long term. One ‘wrong’ line in your will can cost your estate hundreds of thousands of Rand. Ill-considered non-use/use/abuse of a Trust can end up in penalties and eye-watering tax brackets. Misunderstanding the implications of donations tax, again, can cost you 20% of that ‘largesse’.  A financial planner will give you recommendations on how to bring down the ‘consumption’ of your income. You could be over-insured (or you could be leaving huge gaps in your risk profile that could put your future wealth in the incinerator, let alone the trashcan.) Managing the fees in your portfolio/s is very important – because the compounding effect of these can significantly erode your wealth. If the fees you’re paying for your wealth management, Trusts and estate planning aren’t transparent – and reasonable – then there might be a problem. Once you’re in retirement the ‘income’ side of your wealth equation usually becomes fixed – and the only wriggle room you have left to grow and preserve your wealth is the ‘consumption’ of that income. If you’ve never had an advisor before then this is the time to find one. As much as you dread the thought, the older you get, the less able you’re going to want or be able to navigate making sure your money doesn’t run out before you check out. Much has been written about the notion of ‘paying yourself first’ before that same income is consumed, but even the greatest asset manager or planner is not going to be able to make a meaningful impact there without you applying the discipline to do it. Take Trusts for example. Have you paid for multiple cascading Trusts – when one would do the job? Each of those trusts will generate separate fees, require annual audits and trustees. What are the AUM fees (assets under management) you are paying? The tax rate for Trusts is considerably higher than that for companies (45% as opposed to 28%) – have your Trust advisors considered using a company within a trust – for example to hold a property? Loan accounts used to make Trusts a no-brainer, they used to be interest-fee, and would ‘cap’ the value of the asset in an estate. Those days are gone (thank you SARS) and interest now has to be paid on that loan account. In terms of Section 7C of the Income Tax Act that interest rate is repo plus 1%. If you’ve got a loan account that has been there for a while, check that you’re still complying with the act – or it would be considered a ‘deemed donation’ on which you’d pay 20% donations tax. Trusts were originally designed as an ‘estate planning tool’ – a way to avoid playing estate duty. It’s no coincidence that estate duty and donations tax are the same (20%) until it’s over R30m – and the ‘benefits’ of a Trust have been eroded over time. They still have a role in estate planning – but they need to be managed by a professional. One area where I find they can be very useful is in preserving a legacy.  I think we all know by now that unless wealth is preserved and protected, if the second generation don’t blow it, the third certainly will. With the advent of ‘complicated’ families with several spouses, half siblings, step siblings, ex-spouses etc, sometimes a Trust is the only way to keep family peace. One of the factors to consider – is that only a sustainable income (and not capital) can be paid out to the beneficiaries of the Trust, even as a loan. This ensures that the wealth accumulated in the Trust will grow and last generations, but still ‘help-out’ beneficiaries. This is how Trusts are managed for ‘Trust Fund Babies’. Just an idea – you can still manage beyond the grave. Remember that Pension products can be left to a Trust (if it is properly structured) – so that beneficiaries don’t cash in that hard-earned investment – and the estate usually pays the tax. Be careful that the people you are taking financial advice from are qualified to do so. Most accountants, even Chartered accountants are not. In terms of the FAIS act, a representative is anyone who renders financial services to clients for or on behalf of a financial services provider, including employees or mandated persons. This excludes those providing purely clerical, technical, administrative, legal, or accounting services. If you’re taking advice from your mate and he/she is not a FAIS representative they could end up on the pointy end of FSCA fines and sanctions. We all have those know-it-alls in our friend circle that like to brag about their latest scheme that’s made them some bucks – and love to get you onboard (it satisfies their ‘cognitive dissonance’. (Cognitive dissonance is a psychological concept that refers to the discomfort or tension that arises when an individual holds two or more conflicting beliefs, attitudes, or values simultaneously. This discomfort can also occur when a person’s actions are inconsistent with their beliefs or values. This can be satisfied by getting ‘affirmation’ from others that they have done the right thing.) I digress…  There is only one person responsible for your past and present income as well as past and present consumption – you. No amount of focussing on the performance of your investment and beating up your wealth advisors is going to change that. Do your future self a favour and get on top of your incomings and outgoings – and make sure you’re adding to your wealth. You’re welcome to ask me for my RedFile (which will organise all your important documents) which comes with a personal income statement and balance sheet template which can help you get on top of that side of the wealth equation that you, and only you, are responsible for. Articles and Blogs: Tempering your Fear and Greed instincts when it comes to investing NEW New Year’s resolutions over? Try a Wealth Bingo Card instead. NEW Wills and Estate Planning (comprehensive 3 in one post) NEW Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |
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