Monthly Archives: November 2016

Advice or not to robo

Financial advisors Warren Ingram and Craig Gradidge battled it out at the 2016 Money Expo over the weekend in a debate entitled ‘Man vs Machine: Why a financial planner trumps a robo-advisor’.

Ingram, who is an executive director at Galileo Capital, a firm of financial planners, was fighting the cause of the robo-advisor. Gradidge, the CEO of financial planning company, Gradidge-Mahura Investments, was defending the (human) financial planner.

“Robo-advisors enable the scaling of advice, which is impossible for a single financial planner or financial planning firm to get right,” Ingram argued.

“Robo-advice can’t yet give the same quality of advice as the best financial planners, but they are better than the bad average,” he said, suggesting that robo-advisors provide investors with a set of tools to navigate investment decisions, which is better than being sold a product by a commission-incentivised salesman.

Although not right for everyone, particularly for individuals with very complex financial planning needs, robo-advice provides helpful investment tools and advice for the average, R300-a-month-debit-order investor, Ingram explained.

“[Robo-advice] is not going to help you with the most complex situation, if you have a number of different requirements, it’s not there right now. But in the future, that is going to change. Technology and social media are starting to know you better than you know yourself, or to know you a lot better than one person can get to know you,” he argued.

Having said that, Ingram pointed out that it’s not only investors with small amounts who use robo-advisors. Personal Capital, a robo-advisor in the US, has an average portfolio size of R1.8 million.

You don’t know what you don’t know

Even if effective where you have simple financial planning requirements, Gradidge argued that even then, robo-advice “cannot help you manage the behaviour gap, which is the real reason investors don’t meet their objectives”.

“Robo advisors might provide you with the right asset allocation, but most people don’t achieve their investment objectives because of the behaviours they exhibit after they have invested,” Gradidge said.

Financial kick in the pants

  • Prepare an itemised list of all your expenses and divide the expenses into Group A, being fixed expenses, such as car repayments, other debts and payments you are contractually bound to pay monthly. Other discretionary expenses you are able to reduce or even cancel without suffering any negative legal or financial consequences such as entertainment, clothing, cable TV should be included in a Group B.Select certain Group B expenses you wish to reduce or stop [that gym subscription?), do so and allocate extra payments to shorten the outstanding payment periods (and reduce the interest payable) of Group A expenses or start a small rainy day account for those unexpected financial surprises. Which expenses should be reduced and in what order of priority will depend upon circumstances such as interest rates, tax deductibility, outstanding payment periods and so on. Always a good idea to consult a professional to assist you in making the correct decision.
  • Make an appointment with your financial planner to verify whether your life, disability, dread disease and accident benefits are adequate or surplus to your needs and whether recent product developments have resulted in more cost efficient and/or comprehensive cover being available at the same or at a cheaper cost to you. Planners are, today, required to provide you with comprehensive comparative information to provide you with the peace of mind that you are making a decision that is in your best interest.
  • Create a filing system (whether it be a lever arch file or a folder on your desktop for emailed documentation) for all your financial records such bank or credit card statements, accounts and invoices. This will save an enormous amount of time when a payment is in dispute. If you have other important legal documents, why not also save these using a similar format?
  • Request your short term broker to review your insurance to ensure that your house, car and other property is sufficiently insured against damage or loss.
  • You will have, in all probability, already made a decision as to your medical aid plan for 2017. Speak to the medical aid consultant about so-called Gap cover to meet any possible shortfalls you may experience in the event of a medical emergency. These plans are relatively inexpensive and worth consideration.
  • Harass your banker for a better deal around your banking options. Is it really worth all those bank charges to have a Rolls Royce cheque account and credit card if you are not making use of all the benefits they offer? Consider a down grade of the banking package, at the risk of losing benefits you don’t use anyway but in so doing your bank charges may very well be substantially reduced.

Contribute to an RA in retirement

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know what the benefits would be of investing a lump sum into a retirement annuity at retirement.

Q: I am of retirement age, have worked for myself my entire life and never contributed to any retirement scheme. I have a lump sum to invest, which is my accumulated savings on which I now plan to retire.

I have been advised to invest this money into a retirement annuity, but I am unsure if this is the best approach. Why should anyone invest money that was not previously tied to a pension fund into a vehicle that will tie up the capital forever? I could invest it elsewhere to generate the same returns and have access to the capital at any time.

Are there tax or fee implications that would make putting the money into an RA a better deal, or is my adviser the one trying to get the good deal?

Contributing a lump sum of voluntary money to a retirement annuity has various advantages and disadvantages. Some apply to the retirement annuity itself, and some apply to the vehicle you choose for producing your income in retirement. For the purposes of your question, I have assumed this to be a living annuity.

First of all, the lump sum you contribute to a retirement annuity will be allowed as a deduction against your income. This is up to a limit of 27.5% of your remuneration or taxable income, or R350 000 (whichever is lower) in the current year. So initially, you will get a tax deduction.

The amount that exceeds this limit would however be carried forward and can be deducted against your income in subsequent years, or will be deducted against your annuity income that you receive from your living annuity at a later stage. So although you only get an immediate tax deduction up to the limit, you don’t lose the full 27.5% allowance.

In addition, within the retirement annuity, and later in a living annuity, you will not pay tax on interest, dividends or capital gains.

However, within a retirement annuity there are restrictions as to how you may invest. These place limits on the amount you may have in equity (no more than 75%), property (no more than 25%) and offshore assets (no more than 25%). As you are close to retirement, it is unlikely that you would want to take on the risk of exceeding these limits anyway, but it is something to take into consideration. When you retire and move the funds to a living annuity, these regulations will not apply.

Put money that you will need

In this advice column Rick Briers-Danks from Veritas Wealth answers a question from a reader who wants to know where to put short-term savings.

Q: I have about R100 000 which I would like to invest with little or no risk whilst keeping up with inflation at the same time. This is the money for my wedding, which I anticipate will be happening in the next two years.

My research tells me that a money market account is the appropriate investment tool. Would you agree? If so, how do I go about choosing one, there are so many available?

Firstly, well done for accumulating this money towards your wedding. It shows serious determination and commitment to a savings plan.

As your investment time horizon is only two years we would agree that using some form of money market is the appropriate investment tool. This is because you can’t afford the risk of too much volatility in the short term.

The main disadvantage of any money market investment, however, is that it probably won’t keep up with inflation over the longer term. For this reason, money market investments are often opened by those who are looking for an interim place to “park” a sum of money for a deposit on a home for example or saving for a wedding in your case.

Having established that the money market is probably the appropriate investment mandate for the funds the next question is which type to use. Not many people are aware but there are two types of money market investments – money market accounts and money market funds.

Money market account

A money market account is offered by a bank, which is a deposit-taking institution. It is an alternative to a savings account or fixed deposit.

Unlike a fixed deposit there is no defined investment term so funds can be invested indefinitely and the rate of return will vary depending on the deposit balance. It is likely to return a slightly lower rate of interest than a fixed deposit account mainly because it is more liquid with quicker access to your funds.