Top personal finance tips: Here’s how an ace SA financial advisor manages money

One of the most commonly asked money questions is: How do I find a good financial advisor? Dawn Ridler, an independent financial advisor based in Johannesburg, goes a step further. She says you should learn to be your own Minister of Finance. In this article, Dawn has shared some of her best personal finance advice, so that you can start being just that. Importantly, make sure your significant others are deputy ministers, so that you can develop your plans together and make sure they stay on track, advises Dawn, in an article that is jam-packed with practical advice for people who want to take charge of their own finances. – Jackie Cameron

By Dawn Ridler*

How can investments be simplified so everyone understands?

One of the reasons collective investments, ETFs and insurance company investments are so popular is that they make things simple for you – but is that really in your best interests? Sure, it means less work for everyone and the investment can be explained in a simple, sentence or two:

• “Put your investment’s here, they just copy the market and your fees are tiny”, (ETFs, not so tiny in RSA Inc, but anyway).
• “Put your RA here and you’ll get a tax break and money when you retire” (Insurers, “but don’t think about stopping your contributions or ending it early or we’re going to smack you with a penalty that could cost your investment thousands”).
• “Put your money in these Unit Trusts and we will pick the shares etc for you”, (Unit Trusts, “Of course the fees are high, how do you expect us to pay for our high rise offices in Sandton, we have to live (the high life) too).

All of these are completely legitimate and legal, and the sins of the brokers (if any) are of omission and not commission. It is what they don’t tell you rather than what they do that is the problem – but do you have the time and energy to listen to hours of analysis and choices? You’ll find the disclaimers in the small print somewhere but that isn’t going to help years down the line when your expectations haven’t been met.

Also read: Money tips: How to avoid going broke in a fast-paced world – Dawn Ridler

To be fair, financial advisory is an increasingly difficult profession to break into and make financially viable, which is why the average age of advisors is over 55. If I was just out of school or varsity, I doubt I would be attracted to it when I could walk into a salaried job immediately that would take me a decade to get to in Advisory, without the real prospect of massive upside potential. The regulations that have been put in place to protect you, the client, also mean that an advisor earns less, and has to spend many more hours doing paperwork than ever before. The ideal solution for you is going to take time to evolve – and you’re going to have to do more of the legwork without getting locked into something you can’t get out of quickly and easily, (and without losing a bunch of money in fees or penalties in the process.)

I am lucky, thanks in most part to the fact I have been in the industry a fair amount of time and built a solid client base – so don’t have to be worried about instant, upfront cash-flow (which brokers usually get from insurance investment solutions). I am also ‘independent’ and have enough experience to find solutions that don’t have high fees. (“Independent” means I am not obliged to flog just one company’s solution – what is called a ‘tied broker’ which is where most of us start).

Also read: Four Retirement Annuity (RA) traps to avoid. Quick wealth-building tips.

One of the aspects I enjoy most about what I do is partnering with clients to make their financial lives better. This has to be a partnership, the client will earn and spend the money – my role is to help them grow and protect what is left – wealth. We all have to start somewhere and until you can partner with an independent investment advisor here are some tips:

• Never mix insurance and investment, if you can help it. If you already have, see if you can’t get out without huge penalties. If your investments are dependent on your health status be very sure of what you’re letting yourself in for and the potential impact later in life. “All your premiums back if you don’t claim” is, in my opinion, a con (do the math), just don’t mix them up.
• My core philosophy is what I call ‘Wealth Ecology’ and I will advise my clients on everything from health insurance, life insurance through to investment and estate planning (because of they all impact on each other) – but don’t assume your planner, advisor or broker has the same inclination. We all only have so much disposable income and need to optimise it. The last thing any of us want is a bunch of brokers going “Pick Me” and confusing us further. Unfortunately, I have to make sure I have the capacity to look after my clients properly, which is why I write these blogs – to reach a wider audience than I can in real life.
• Find out what you “need” in terms of life insurance and cover – and take that, and no more – and only for the time you need it. If you have Group (company) benefits, then your personal need is less. Your advisor should always be checking that you’re not ‘over-covered’ – and pushing premium savings into investment and savings.
• Finding out what you should be putting away for retirement is a much more difficult exercise and really needs an in-depth conversation with your advisor to determine as far as is possible, what your objectives are for your future, and to come up with a plan going forward that builds toward this (and is still tax-efficient and flexible). Be warned that many of the programs used by advisors out there have a built-in set of assumptions that may be out of date (one of the reasons I have tried and discarded many such programs in my career). With a complicated, high value, estate it might not be possible to have a short and sweet report, but for the rest of us – don’t be impressed by pages and pages of fluff and cashflows.

I spend a lot of time researching and testing the various assumptions that go into my scenarios with my clients and the rate of “Capital Depletion” is one of the biggest risks that may be built into your financial plan without you being aware of it. Many programs still plan a depletion of capital in 20 years past retirement. Why? Mostly because that used to be a valid assumption for 99% of us, but it might be because it is very difficult to tell a client that they are putting way too little away for retirement, or their expectations of how much they are going to have to live on are way too high. It is actually simple maths, if you want more at retirement you’re going to have to put away more, retire later and invest it properly. Investing it properly might make the difference of a couple of percentage points ( in real terms after inflation) but the really big difference will have to come from you, the client, by putting more toward your investment and/or retiring later. More often than not a client will ‘fire’ you if you give them really bad news (you’re going to have to halve your income expectations and/or never retire) and find someone who tells them more of what they want to hear. A broker more concerned about his commission (especially upfront commission), and not expecting to be in the industry when your retirement money runs out, will make your plan look better than it actually is. Look for the following:

• A disclosure of the assumptions. Growth in your investments should be relative to CPI (inflation), and the highest growth no more than CPI plus 3% or 4% (not 6% or 7% as in the past). Your ‘drawdown’ on your retirement funds should not be more than 5%, 4.5% is what I go for at the moment.
• The fees, or ‘Effective Annual Cost’, including the broker/advisor fees should not go much above 2% max in this low growth environment. Bear in mind that ‘popular’ Unit Trust fee alone can go as high as 2.3% without the proportional better return (and then you get ‘performance fees’ added for performance that is really just a participation trophy.) Your advisor or broker should be paid fees monthly as a percentage of assets, not for 27 years upfront (insurance investments). Advisor fees should be on a sliding scale starting at around 1% pa (below R5m say, and decreasing down to say 0.5% pa when you get to R20m).
• The ‘upfront’ fees that some brokers still use is not much different from a ‘fee for plan’ – except that the upfront fee is usually a percentage of your assets (above), and the ‘fee-for-plan’ a set amount. I am not a fan for the ‘fee-for-plan’ approach, because it is a snapshot in time, and left unchecked long enough, will fail. A good plan has to be monitored and tweaked in response to environmental changes so rather pay your advisor an ongoing amount for ongoing advice. It can be a good place to start from if you’re wanting to do most of it yourself but then get it from someone who is well qualified and who will tailor-make a report not churn one out of a computer.
• Life cover can be a good way to provide a ‘Legacy’ but with a number of caveats that I won’t go into here.
• You are also going to need to keep learning all your life – but the good news is that technology has put all that information right at your fingertips by way of your smartphone. Find Websites, Blogs, Vlogs, Podcasts and Newsletters that appeal to you and can hold your attention for the 10 minutes a week you need to keep yourself in the know. Sure, for most of us it’s boring stuff. For some unknown reason people in the investment field seem to think it makes them look smart to talk in a language you can’t understand, use alphabet soup acronyms to justify the big fees they command, but if the investments and the economy can grab the attention of a scientist like me who would loves mucking about in her greenhouse or reef tank, then there’s hope for everyone. I usually have Bloomberg going in my office as ‘white noise’ while I work, and only pay attention when there is important news. Don’t overdo it, or you’ll get confused, there are loads of diverse ideas and hidden vested interests. There are also financial commentators who crave controversy and attention and are given far too much airtime.
• Appoint yourself your own Minister of Finance, be in control. If you have a spouse make sure they are the Deputy Minister and not just the Minister of Consumption. Everyone falls somewhere on the spectrum of ‘consumption’ from Shopaholic to Scrooge – know where you are, and where your spouse is (and who wins). Wealth is what is left over after you have spent your income – it is that simple. You cannot accumulate wealth if you spend more than you earn and no financial whizz is going to change that. You’re the only one that can do that hard work.
• The best way to simplify your finances is to have a single table with everything on it. This should have all your policies and investments, but also know your Liabilities so you know your ‘net worth’ at any one point in time. With simple excel skills, you can monitor this going forward, and also make some projections. This should be updated frequently (4 times a year at least). If you’re not keen on the computer, perhaps a financial journal is the answer for you. It helps to have an ‘investment file’ (or you can make it part of your “RedFile” – contact me for a copy of that system). I call this ‘making friends with your money’, doing it for the first time can be a highly stressful experience so be kind to yourself. It is the first step in taking back control. Know how you’re invested, the name of the funds and what Asset Class (stocks, bonds, property, cash) they belong to. File your statements behind the ‘one pager’. An investment advisor should be able to take that one sheet and let you know if you’re on track with your plan, but over time, if you do a bit of studying yourself, you’ll find it out for yourself.

Action: Personal financial advisors are becoming rarer every day, and if you want to trust the Robo-advice you’re going to get in the future, you need to up-skill yourself.

• Johannesburg intermediary Dawn Ridler, MBA, BSc and CFP ® is founder of Kerenga.

More articles from Dawn Ridler:

Why you should love Retirement Annuities: wealth manager

Wealth preservation: How to draw your retirement income

Tax-free investments: Do Retirement Annuities make financial sense?