In the previous part of this series, we looked at general financial advice and advisors; so let’s move on to advice specifically related to investment assets. They are both equally important, and siloing the different ‘types’ of advice can impact your long-term outcome. It isn’t always easy to find an advisor equally proficient in every aspect of financial advice, but you don’t want your “advisory suite” to be caught in a ‘pick me’ bidding war for your limited pool of funds. The tallest poppy or squeakiest wheel is the one that usually wins. You’ll need a referee to tell you how much you should be allocating to differing aspects of your wealth portfolio – risk, health, retirement, legacy. It’s ecological wealth management at its purest. Every aspect of your wealth management impacts the other, and it’s only when they are in balance that you can really grow.
One of the important outcomes of a financial plan is what suite of investments is required. It isn’t as straightforward as you might think. Take retirement planning for example. When, where, and how you retire should have a major impact on how and where those funds are invested. The popular semi-retirement trend, longer lifespans, later parenthood, and adult children staying home longer all shift what those later-life needs look like. The solutions your advisor offers will depend on what they have in their arsenal and what they are accredited to offer, especially if they are a ‘tied’ agent (an insurance platform). That does not necessarily mean that the outcome will be inferior at all; it just means that you need to be aware of the potential limitations of the advice you’re being given.
Most of us start our investment journey locally, and, as unfair as it sounds, if you’re young and still building up your portfolio and the broker knows he is not going to get much in the way of investment fees from you, you may not get the quality of service you (and everyone) deserve. (If you want to know more about fees…) If that is the case, you might as well upskill yourself and just keep on investing without trying to get clever with low-cost trackers and funds. If you want to get a tax break, you can still open a low-cost retirement annuity (hint: don’t use insurance platforms). Once your portfolio starts to gain traction (aka more bucks), then build a relationship with a financial advisor for the run-up to retirement. I am offering a free half-hour Zoom consult for pre-retirees (or retirees who are lost), no obligation; contact me if you’re interested.
When you’re starting out in your career, protecting your risk is probably going to be very important – and thanks to the fee structure by which advisors get remunerated – you can at least get an advisor who will identify your ‘needs’ (as required by the FAIS Act) and help you put a line in the sand in terms of the size of retirement fund and appropriate annual contributions in line with long-term retirement needs. A properly worded prompt can probably get your favourite LLM to come up with those numbers too. If you’re not being forced to put away for your retirement by working in a corporate retirement fund, then the sooner you do something yourself, the better – with one huge warning flag… Never accept an investment that has an ‘early termination penalty’ (insurance platform investments) – read the small print.
Over your work lifetime, your formal retirement funds should only form part of your retirement pot. Make no mistake, there are huge tax benefits to formal retirement investments, but they are inflexible, and the income that is produced at the end is taxed. Optimally, you probably need an emergency fund, a TFSA (no-brainer), flexible investments and offshore investments. Entrepreneur? Maybe a Trust to hold the company and investments. All of those need to be balanced against your needs, affordability, objectives and obligations – and the risk of you not being able to produce the income you need for your retirement or your family obligations. That’s what your advisor does in the early years – in the later years, the wealth management becomes much more important, but the other boring stuff never diminishes completely – especially something like medical aid, which has been increasing at CPI plus at least 6% for well over a decade. This has become such a problem, eating more and more of a retiree’s budget, that it has to be treated as a separate line item in retirement income planning.
If you’re closing in on retirement (say age 55 plus), you need to be especially cautious. If you have a formal retirement fund, you will have some important choices you need to make, many of which cannot be reversed. For example, living annuities have become the preferred choice for many retirees, but be very careful of getting into a bidding war, and an advisor giving you the income ‘you want’ without reading the fine print that shows that the income may well run out before you do…
Life happens. People divorce – even in retirement, lose their jobs, have unexpected household ‘returns’ (kids who must move back, parents who can’t cope alone), and whatever precious nest egg you’ve got saved up is going to have to last. Remember one little heuristic… If you want your capital to last your lifetime, don’t draw an income of more than 4,75% per annum, before tax. It’s a rough guide with plenty of caveats, but it beats a miserable, broke old age. The good news is that because retirement funds usually run to at least 7 figures, you should be able to attract a decent advisor. Fees charged by advisors are legislated, so you pay the same for a newbie or a seasoned professional. If you’re up against retirement and haven’t saved enough, don’t shop around for someone who will give you the answer you like, the income you ‘want’/’deserve’ – know the heuristic, swallow that unpalatable truth and find someone who will walk the road with you and make sure that it keeps up with inflation and doesn’t run out.
In my experience, the greatest value anyone will get from an advisor is measured not in the performance of the funds they choose to invest you in, but what they’ll save you along the way. At the end of the day, none of us has the ability to accurately predict the vagaries of economies and markets – we can just make ‘educated guesses’ and use asset allocation to mitigate some of the volatility. Advisors can offer strategies to minimise taxes, such as utilising tax-advantaged retirement accounts, sinking funds or endowments (locally and offshore), tax loss harvesting, how to handle tax in a Trust, use of retirement funds to remove assets from estate duty over time, asset-swap to postpone CGT and reduce asset concentration, optimising spousal wealth distribution, planning CGT events over time to minimise CGT, estate planning and estate duty mitigation, and, if there’s anything left, philanthropy.
If you’re still not convinced that an investment advisor can bring anything to the table, Morningstar’s Gamma research, from David Blanchett and Paul Kaplan, looks specifically at retirement outcomes. Their original paper, published in 2013, found that getting five decisions right (asset allocation, withdrawal strategy, use of guaranteed income products, tax-efficient asset location, and portfolio optimisation) can generate, on average, 29% more retirement income for a retiree than getting those decisions wrong. Often, left to our own devices, most of us buy high and sell low. We panic during downturns and chase performance during rallies. That’s where an advisor earns their keep: saying “not yet” when a client wants to sell everything mid-crash, and “stick to the plan” when a client wants to chase last quarter’s best performer. It’s hard to see the value of that on a monthly statement, because the value shows up as the bad decision that never happened. My RedFile organisational system and other resources are still available for free on request.
Articles and Blogs:
Investment series part 1 (NEW)
Investment series part 2 (NEW)
Investment series part 3 (NEW)
Legacy Series Part 4Legacy Series part 3
Legacy Series Part 2
Legacy Series Part 1
Holiday checklist
Next year – Action Plan
Next year – Vision, Mission etc
Medical Risk Mitigation
Next Year – Consolidation
Abdication or diversification?
Carbo-loading your retirement
Spoiled for choice
Who needs a plan anyway
8 questions you need to ask about retirement
What to do when interest rates drop
How to survive volatility in your investments
What to do when interest rates drop
Difficult Financial Conversations
Financial Implications of Longevity
Kick Start Your Own Retirement Plan
You matter more than your kids in retirement
To catch a falling knife
Income at retirement
2025 Budget
Apportioning blame for your financial state
Tempering fear and greed
New Year’s resolutions over? Try a Wealth Bingo Card instead.
Wills and Estate Planning (comprehensive 3 in one post)
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
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