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Giving advice when scepticism is the norm

Sibonelo Ngema, of Masthead Financial Planning, on investing in times of uncertainty, understanding implications of excessive drawdowns, and risk planning.

RYK VAN NIEKERK: Welcome to this financial advisor podcast – our weekly podcast where I speak to leading financial advisors. My guest today is Sibonelo Ngema. He is an independent financial advisor at Masthead Financial Planning, he has a postgraduate diploma in financial planning, as well as a national certificate in wealth management and an advanced certificate in financial planning. He has seven years of experience and before Masthead he was a financial planner at Liberty, Discovery and Standard Bank.

Sibonelo, welcome to the Moneyweb studio. In the Moneyweb news meeting on Wednesday morning, we discussed at length the pressures that consumers are under and we can see the impact of that especially on retailers and leisure companies, the fast food companies. Can you see the impact of this pressure in the financial advice industry? Do potential clients actually react or act differently in such an environment?

SIBONELO NGEMA: Thank you very much for having me, Ryk. In short, the answer to that is yes. To elaborate on that, scepticism has become the norm in this current financial sphere that we find ourselves in. For clients to think of investing in a time when you don’t even have enough to live on on a monthly basis is a problem. So for you to see the value of just putting that little [bit away] on a monthly basis is a no-go area because there’s nothing to put down. Like right now, on Tuesday or Wednesday, it was announced that there’s a huge petrol hike that will be taking place soon.

So when you think about all of those things, that’s when you start to realise that our job as financial advisors is actually becoming more and more difficult – to get a client to commit to an investment, never mind risk products. A simple investment where it’s going to be beneficial for the client becomes a huge problem.

RYK VAN NIEKERK: But it all comes down to consumer confidence. There’s a lot of negativity currently in South Africa – does that flow through to the industry? When you see negative things about the future of the country, people become so negative. When that client is sitting in front of you, does it impact the way he or she receives the advice you give that person?

SIBONELO NGEMA: It does very much so. Like on Wednesday I had a very interesting meeting which then became some sort of an interview with the client, when he was asking me how I feel about what is happening currently, politically and all of those things. Being the financial planner that I am, it was easy for me to say that having confidence in this financial situation becomes the most important part of what it means to be South African. We are conservative in terms of our approach; we are observant [of] anything that is happening and the news is affecting a lot of our decision-making. So by me saying that he then said what is best for me to invest in currently and should I invest offshore because things are going well that side? And my question was where did you get the information from, how do you know that overseas or wherever is actually better than South Africa? So it became that type of a debate in terms of how they perceive what is happening currently affecting their pockets.

The sad truth is, our jobs are now very much on education rather than providing solutions or just having a client take-out a product, so that’s what we’re trying to do at this point.

RYK VAN NIEKERK: But these are short-term noises we hear, both in South Africa and offshore. You need to structure and design a long-term plan – do you think there’s appreciation from a client’s side of that role you have?

SIBONELO NGEMA: Very much so, because on my side my investment philosophy has become somewhat simple and my approach is time in the market versus timing the market, because if you had to look at short-term investment strategies, all of these factors that you’ve just spoken about will very much affect the client in terms of what their objective and goal is.

But now if you look at what your objective is as a client – you could be wanting to invest for your child’s education, who’s going to high school in the next five years – but these short-term noises that you’re hearing currently are now affecting your mentality in your long-term investment strategies. So just bear that in mind and just take it easy in terms of you analysing the information that is provided and having financial advisors sitting down with you and saying ‘r(s) Client, this is your objective. You are looking at a five- to seven-year plan. Volatility will always be there in the market: you’ll hear great things, you’ll hear bad things, but that should not deter you from the goal or objective that you are striving for.’

Client demographics

RYK VAN NIEKERK: The majority of your clients, are they either people who are really proactive – they’re in their 20s, they’ve got their first or second job, they want to start planning for retirement in 40 years – or do you see people in their 40s realising that 60 is a few years away, [and they] really need to start now and it’s more an act of desperation on their side to go and see an advisor? What is the demographic of your typical client and obviously the expectations are different for those two scenarios.

SIBONELO NGEMA: It’s been both. I have seen a lot of clients in their 40s and there are clients in their 20s, and the nice thing about the clients in their 40s is they already know where they are heading, which is always a beautiful thing. So they have a goal already because they can see that ‘I’ve got either 15 years, if I want to retire at 55, or I’ve got 25 years if I want to retire at 65’, so it becomes easier for them to look at retirement as an asset as compared to a liability.

Whereas, if you look at the youngsters who still have 40 or 45 years to think about retirement, they are more concerned about ‘what can I do right now to ease my mind from worrying about retirement?’ So you’ll find them going and looking at all these scams. Forex has become the quick money-making strategy that has been introduced to us. Not to say anything bad about it – it’s actually a very good strategy – but it also needs consultation, it needs education, it needs training. So these guys think ‘let me not worry about retirement at this point, I still have a long way to go. Let me just look at how much I can save right now and in two years’ time how much I can make from there’.

So it’s just one of those glitches that we find ourselves in, whereas if you had to put these two people in the same place – the 40-year-old and the 20-year-old – that’s when you find out that their objectives are very much aligned, they’re talking the same language but in a different context.

SA retirement

RYK VAN NIEKERK: How many people can still retire at 55 in South Africa?

SIBONELO NGEMA: Unfortunately that number is becoming lower and lower, and also it’s affected by the fact that we have a long lifespan that we are facing. So if you see yourself retiring at age 55 and you’ve [live] to the age of 90, then you’ve got 40 years after retirement to think about how much retirement you have right now that will sustain you for that time.

So it’s becoming more and more difficult for a person to try and retire at age 55, which I try to somewhat discourage. If you are still able to work and still able to make ends meet, getting your salary, you have protected all of your assets, in most cases at the age of 55 you’ll find that that person has already paid off most of their liabilities, they don’t have any stresses in terms of ‘I need to pay this and this and that’, so you’ve got somewhat more of an investment opportunity that you can structure for another five, ten or 15 years…. Even 65 is still a huge problem because we have not saved enough or that ‘enough’ that we think we have saved is not going to be enough to last for my lifespan.

Understanding the implications of excessive drawdowns

RYK VAN NIEKERK: There was research released on Wednesday from ASISA regarding the drawdown rates for living annuities and it seems to be increasing. Over the last three years it’s been rising from 6.5% to 6.65%, which is a steady rise, and of course the more you drawdown on those annuities….

SIBONELO NGEMA: The more it chows down your capital.

RYK VAN NIEKERK: Exactly, what do you see is the trend that clients take your advice to try and limit that drawdown, especially shortly after they retire?

SIBONELO NGEMA: The sad truth about this is you have the haves and the have-nots and unfortunately if a client is going to be living off his annuity income for that time and – based on the salary that they have already been used to and now to what they currently need to be living on in terms of the annuity – then that 6.5% is relatively what the inflation is. So the client will say ‘let me just get enough to survive, even though it’s not going to be enough, but let me try and do that’. Then you’ll find those clients will say ‘rather I take out as little as possible so that I can have that capital accumulating interest for a very long time, so that by the time things are bad I can revise and increase or whatever’. So it’s a very tricky environment that we’re finding ourselves in in terms of encouraging or persuading a client to take my advice in terms of the drawdown that is applicable or necessary for them to live on an income that is going to be sustainable for their longevity.

RYK VAN NIEKERK: Do you think clients appreciate that, understand exactly what they are doing when they drawdown too much?

SIBONELO NGEMA: They do and the sad truth is their understanding doesn’t last for that long, because at that point the client only understands one thing: ‘you are talking about my money right now so let me understand what you’re saying’ but as time goes on and with the drawdown that they’ve taken and things are now going south, that’s when they start realising the impact of the information that you’ve given to them prior.

Hence, our job is to always review the policies, either in six months or a year and to say, ‘Mr Client, this is what we spoke about last year and when I said to you your drawdown is going to affect you in the long run, this has just been a year and this is how much you have drawn down, and this is what your capital is sitting on’. So it helps the client to become educated in terms of them understanding what the impact of their decision is, because as financial advisors our job is to help them get to a point where they make an informed decision rather than forcing them down into decision-making.

The importance of risk planning

RYK VAN NIEKERK: On the Masthead website, www.mastheadfp.co.za, which is a pretty nice website, you list risk planning right at the top of your areas of expertise. I wouldn’t place risk planning at the top of my expectations of a financial planner. Why is it so important?

SIBONELO NGEMA: If we look at the word ‘risk’, the sad truth about it is it’s nothing that anybody anticipates or anybody expects. So if you want to live a peaceful life, a financially well-structured life, you need to start by protecting the most important assets that you have currently and those assets would be your earning ability. So you looking at risk and – looking at your earning ability – the risks are there. You travel to work almost every day, whichever mode of transport, but the risks are there and it might affect your earning ability.

So if you had to cover risk first, you cover the unknown for you to start realising and benefitting on the known, because if you think of investments it’s all about growth. A client will say ‘I want to invest because I’m looking for growth’, or ‘I want to invest because I want to save my money’. So there’s a huge possibility of realising your goal if you are looking at it as an investment as compared to you realising the risk that you are putting yourself into if you don’t think about what risks are currently out there. So that’s why to me risk is very important, be it long term or short term, rather cover yourself thoroughly so that if anything happens you know that your family or you are fully taken care of.

RYK VAN NIEKERK: But it is a balance, you can take too much life cover and save too little or invest too little for your retirement, or you can invest too much and not have adequate life cover. What is the balance between the two?

SIBONELO NGEMA: The balance actually comes with thorough financial advice…which is holistic financial advice where I look at your objectives, I look at your income, assets, liabilities and everything that you have currently, and look at the probabilities of in five years, in ten years where that income or salary or anything that you have right now could be short lived where it could not be sufficient enough. So financial needs analysis is the tool that we use to determine how far a client will actually get with what they currently have or what the risks incurred in their decision-making will be. So on our side it’s very [relevant] to actually look at both because yes, there’s a huge [choice], especially in the market right now.

Clients have got access to information and technology; a client can simply wake up and phone and take out life insurance – whether that’s going to be enough or too little they do not know, at that point all that matters is ‘I’ve got life cover’ or ‘I am covered’.

So our job as financial advisors is once I sit down with you and we actually go through everything that pertains to you, what you are. Financial advice is not about your family or anything else – it’s about what you want as a client. So it’s then a process that becomes easier for both of us to understand where you want to go and how I can simply facilitate in reaching that goal. So that’s where we avoid that risk of you being over- or underinsured or over- or underinvesting.

RYK VAN NIEKERK: So when you get that SMS telling you that you can get R10 million of life cover for R5, rather go to a financial advisor so that it’s part of the plan.

SIBONELO NGEMA: Rather come to us and, most importantly, the way in which marketing has been done it is done to attract your attention. If you are looking for life cover and the first thing you see is R10 million for R5 a day and you don’t understand that at the bottom of that SMS it says risk profile….

RYK VAN NIEKERK: The small print.

SIBONELO NGEMA: The small print. So you think if ‘I want life cover for R10 million, it’s going to be R5’, it’s not that simple because when you call these guys you’ll find that if we had actually sat down or you sit down with your financial advisor and say ‘do I qualify for R10 million life cover?’ then my job as a financial adviser is to say ‘alright let’s look at what you have now and let’s look at if R10 million is going to be either enough or too little’. So that’s what we do and the nice thing about it is it all boils down to one thing: what can you afford currently and with that then how much do you have to actually save in terms of creating that balance that you were talking about, because it’s not only about you living a great life or a sub-standard life to leave R10 million for your family, you need to have enough to enjoy the lifestyle that you have created for yourself and for your family.

RYK VAN NIEKERK: Thank you, Sibonelo, for coming into the Moneyweb studio and sharing your insights. That was Sibonelo Ngema: he is an independent financial advisor at the Masthead Financial Planning Group.

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