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What’s keeping clients up? Debt, debt and more debt

Crue Invest director Gareth Collier on cutting debt, savings tips, succession planning and why schools must teach financial literacy.

ELEANOR BECKER: Welcome to this Financial Advisor podcast, our weekly podcast where I speak to leading financial advisors. My guest today is Gareth Collier, a director and shareholder at Crue Invest. Welcome, Gareth.

GARETH COLLIER: Thank you very much.

ELEANOR BECKER: Just as a start, give us a bit of background into Crue Invest: what does it specialise in and would you say there’s a specific client profile?

GARETH COLLIER: Crue was founded back in 2004 and we’ve always been a fully independent financial planning practice. The advantage of us being an independent practice is that we can focus on the needs and objectives of our clients, while remaining product- and platform agnostic. The core of our business is really around investment and retirement planning, but we do offer advice on tax and risk insurance, as well as medical and estate planning. I’d say most of our clients are self-employed or SME (small and medium enterprise) business owners, but we really market ourselves as planners who would like to work with individuals and companies looking for a long-term relationship.

ELEANOR BECKER: There’s definitely an increasing demand for an independent brokerage these days.

GARETH COLLIER: Yes, absolutely.

ELEANOR BECKER: How involved are your clients in their financial plans? Do they call you every second day or are they just interested in their annual review?

GARETH COLLIER: I’d say it really depends on the complexity of their personal needs. A lot of our retired clients we would tend to see two or three times a year, because their personal income needs are quite sensitive to short-term market movements. Others we would see during different times: so during different tax seasons, possibly with different offshore investments that they have. It really comes down to their personal needs, but we don’t limit ourselves to strictly an annual meeting. We like to be open and approachable for those meetings as and when they need [them].

ELEANOR BECKER: What are the questions that they tend to be asking you at the moment? What’s keeping them up at night?

GARETH COLLIER: I would say in short that it’s debt, debt and more debt. Seriously, if you look at the stats the South African Reserve Bank released [they] showed at the end of 2018 South African household debt as a percentage of their disposable income was sitting at about 72.7%. [It] simply that means that they are spending nearly 75% of their income just servicing debt. Although a lot of that is made up of home loans, the debt servicing cost is currently around 9%.

So that means that the average consumer is spending about 9% of their income just on interest and other admin-related fees concerning their debt.

ELEANOR BECKER: That’s incredible and quite scary actually. I came across a stat recently that said most South Africans are broke halfway through the month, and this would definitely contribute to that, I would imagine.

GARETH COLLIER: Absolutely, it’s quite crippling and frightening unfortunately. 

Techniques to assist in clearing debt  

ELEANOR BECKER: Just on that, you recently wrote an article for Moneyweb on tips for getting rid of debt. You’ve commented now on how bad the consumer debt situation is, so what would your brief advice be to those with heavy debt burdens to keep afloat?

READ: Destroy your debt in 10 (not-so-easy) steps

GARETH COLLIER: The debt situation is really a concern. I’ve mentioned the stats but there’s a number of techniques that people can use to keep themselves focused on clearing their debt. One approach, and certainly the mathematically best approach, is to focus on those debts which incur the highest interest rates. These are normally debts such as store accounts, personal loans, credit cards and so on, things like that. That would be from a mathematical side.

Emotionally what we’ve found is that as people we like to have small achievements, so if you focus on paying off your smallest debt first that often makes people feel like they are making progress, which can help you to keep motivated to get out of debt.

What would be important though in either which technique you use, is to try as far as possible that once you’ve settled off one of your debts, use the money that you were paying off … to reinvest into paying off your other debt, because that’s going to help to shorten the timeframe that it takes you to get out of your debt in total. [In] the recent [interest] rate cut that we had last week, interest rates dropped by 0.25%. So one thing you can look at doing is, you were used to paying X amount of rands per month towards your debt before that interest rate drop, so if you can keep the rand payment the same, all you are going to see is that of your contribution towards your debt, a bigger portion is going to go towards the capital of that debt and a smaller portion towards the interest . So, again, that’s just going to shorten the amount of time that it takes to pay off those debts.

READ: How to make the most of the latest interest rate cut

ELEANOR BECKER: Why is it that we struggle so much with managing our money?

GARETH COLLIER: I think within SA, financial education is really, really lacking. I’m not even referring to formal tertiary education and finance, but rather just the basics from making and actually keeping a budget to understanding the actual cost of credit, the difference between good and bad debt. We are constantly encouraged to spend and to actually be consumers. We’re bombarded daily through advertising and social pressure to keep up with the Joneses – without the basic financial education to actually understand the consequences of those decisions. We really see with our clients that those who make a success with their financial lives had parents who have given them great foundations and a respect for money. Or, quite honestly, on the opposite extreme we’ve had a lot of clients whose parents have set terrible examples and been horribly overindebted, and they are really scared of repeating those mistakes, so they make a concerted effort to actually get themselves financially educated.

 

Top five savings tips

ELEANOR BECKER: As this is Savings Month what are your top five savings tips?

GARETH COLLIER: Long ago my dad actually told me that the money that you make is money that you don’t spend. So I think for most people the best thing you can do is actually look at your expenses that you incur in your daily life, stuff that you’re going to pay for anyway. So maybe a great thing is to actually go and print a couple of months of bank statements and go through this with a highlighter, so that you can actually understand what you spend your money on, on a month-to-month basis, because that’s really going to help you decide what are your wants and what are your needs. It talks back to that budgeting as well – it helps you make those budgets.

Other little things like bank charges [are worth evaluating], particularly the way those terms work now: do they charge you a fee for drawing cash at the ATM, whereas maybe they don’t charge you a fee if you draw money from a till point. All these little bits and pieces can add up quite nicely.

Another one is looking at your store accounts: again check the statement because you might have unnecessary subscriptions on there or admin fees that you’re unaware of, all little bits and pieces that you’re spending. Certainly, from a savings perspective you could look at really trying to minimise your tax and that’s where you use investment vehicles like retirement funds to bring down your tax burden over your lifetime.

Lastly, if you are looking to save, don’t be afraid to shop around for the best interest rates. Just because you bank with a certain bank doesn’t necessarily mean that you can’t have a savings account with another bank. Also remember that it’s not only the banks that offer those types of accounts, there are a lot of asset managers who can offer you a money market or a fixed income-type investment fund directly with them.

ELEANOR BECKER: These are all doable, it just requires starting.

GARETH COLLIER: Absolutely.

 

Business succession planning

ELEANOR BECKER: Onto a different focus, one of your focus areas is in business succession planning. A number of state-owned and private companies are currently battling with C-suite execs leaving the firms. Are companies focusing enough on grooming successors and if not, how, in your opinion, should they go about this?

GARETH COLLIER: I can’t really talk to SOEs but certainly private companies. Within our own client base we often find that those companies, quite honestly, are so focused on just operating and actually growing that the succession planning is quite often sidelined. It’s not that they don’t want to implement succession planning, it’s just something which is not of an immediate need. So generally through our engagement with them we often start the discussion of looking at the scenario that if there was a death or a disability to an owner or a shareholder, those can be insured, but that often leads to the conversation of identifying who within the employee base or possibly their family members would be the most likely to continue running their business.

So, therefore, if they understand the who, the what and the how of what would happen to their business if they suddenly were no longer around, this can lay the foundation for longer-term succession planning.

A lot of times with the more natural occurrence of possibly retirement, or the internal sale of their business to their successors, you find for the owners themselves it helps for their personal retirement planning because more often than not, the business will form a sizeable portion of their retirement funding. So the succession planning will help them to realise their business asset at a fair market value. Conversely, it can be quite beneficial for those who they identify as their successors – if those people actually know that they have been identified and they understand their importance to the business  – because this can give them a greater sense of their value and belonging within the business, which can possibly lead them to consider whether they would be willing to give that up if they are looking at moving onto other opportunities.

ELEANOR BECKER: Definitely, and for the person in question I would imagine this lends itself to estate planning too.

GARETH COLLIER: Absolutely, that all forms part of that succession planning, the impact is not just theirs, but it has an impact on their greater family life as well.

 

Employee retirement fund benefits more cost effective than private annuities

ELEANOR BECKER: Another of your focuses is employee benefits. Would it be true to say that if a company doesn’t offer medical aid and retirement fund benefits, employees are less likely to obtain these products privately?

GARETH COLLIER: Currently unfortunately yes. For medical aid it’s one of those things where it’s not a problem until it’s a problem. Much like car insurance, we don’t need it until we need it.

ELEANOR BECKER: A grudge purchase.

GARETH COLLIER: Absolutely, yes, because of things like waiting periods and other terms and conditions for a medical aid, it’s important to get on that sooner rather than later, [so] if and when you do need to claim those benefits, there are no nasty surprises or possible exclusions, which will prevent you from getting that medical coverage that you need. I think with regard to the retirement funding, hindsight is a perfect science. I cannot tell you how often we meet with clients who will often lament how if they knew [earlier] what they know now … they wish that they were forced to start saving as soon as they started working, because they’ve got so much catching up to do now – because now they’re ten or 15 years into their careers.

The irony is that the perception, as you mentioned earlier, is that the company is forcing staff to save and it really becomes a bit of a grudge purchase – these pension and provident funds – but what people don’t realise is that these structures can be far more cost effective than private retirement annuities if they are structured correctly. Again, that kind of goes back to the lack of financial education, because a lot of employees see this as a grudge purchase; they don’t understand how their fund actually works.

We certainly see that when we go and do these education sessions, once we complete these sessions the staff contribution to their company fund actually starts to considerably increase because now, they actually have an understanding of what they’re investing in.

ELEANOR BECKER: That does make sense. I read today that institutional fees in employer funds are, in fact, lower than a provident fund or retirement annuity investment fees, is that true?

GARETH COLLIER: Absolutely, if you think about it you are getting those economies of scale. So like anything that you’re wholesaling, if you or I go to an asset manager and we want to invest our R500 a month, they’ll say that’s great, we’ll take the contribution but we’re going to charge you full retail price. But if it’s you, me and 500 of our co-workers now making those contributions, they still want those contributions but obviously they’re going to offer it at a far lower fee than if it was having to do the administration for all of us on an individual basis.

 

Forced retirement savings

ELEANOR BECKER: That’s definitely a huge consideration when it comes to employee benefits. Just going back to being forced, do you believe that government should be involved and should force everyone to contribute to retirement savings?

GARETH COLLIER: In a roundabout way they currently do, because our taxes are being used to fund grants for pensioners, but those grants are, generally speaking, nowhere near sufficient for people to live on month-to-month.

I think it would be a lot more impactful if government were actually to force basic education to include financial literacy and education in their syllabus.

I think long term we would see those household debt levels coming down if people have an understanding of the cost of credit. Conversely, I think, again, if you are educated on a voluntary basis, I think people would start saving and investing towards their retirement, because they’d know the kind of value that they’re going to get out of it, as well as [the] tax incentives to do it as well.

 

Best and worse advice

ELEANOR BECKER: Lastly, what would you say is the best and the worst financial advice that you ever received?

GARETH COLLIER: I think certainly the best advice that I ever got was really to understand the difference between good and bad debt. I look back over my lifetime now and I think jeez, that’s helped me to avoid some pretty bad financial decisions. I think the worst that I got – but I managed to avoid because I had that understanding – was a good few years ago and I was still in a sales job. My manager tried to encourage me to go out and buy a new car and put myself in debt because that would then motivate me to go out and make more sales. I already had a car that was fully paid for. So luckily for me I understood that that’s not necessarily going to help me, so I managed to avoid that but I was a bit flabbergasted that people still bought into that philosophy and mentality.

ELEANOR BECKER: A lot of us unfortunately did not dodge that bullet.

GARETH COLLIER: Well, maybe if we have that financial education within our syllabus it will help people with that.

ELEANOR BECKER: That was Gareth Collier, a director and shareholder at Crue Invest.

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Gareth Collier

Crue Invest (Pty) Ltd

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As someone who teaches financial education to employees’, One big problem (not talked about) is why individuals with “policies” have their payments go up at 10% – 15% (old policies) a year and their cover DOES NOT GO UP?? It actually comes down, in the whole time value of money, or rule of 72’s.So if you get a 3% raise (if you are lucky) your policy expenses go out @ 10% – 15 %. You are going backwards.I just came back from training the Central Bank of Lesotho and I was so proud meeting the Reserve Bank Governor. She told me that they have instituted financial education in the schools. I am VERY PROUD of her!!!! joe@finfit.co.za

For me financial education starts with parents that show their children the advantages of saving and investing these savings in worthy projects. Once these children start going to school, further financial education will be an enormous advantage. However, if parents show their children the pleasures of reckless spending and ways of ducking repayments, schooling will have very little if any effect.

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