All matters considered - All considerations matter
- Tax Free Savings
- Let's be Candid - The Asset Manager you Know
- Something New - Shares, Positions, Spots, Futures
The recent introduction of Tax Free Savings Accounts by Treasury has led to Financial Associates conducting an extensive due diligence process on numerous products available in this space. True to our Wealth Creation value proposition; it was imperative for Financial Associates to partner with a product provider which embraced a similar philosophy. It was also crucial that the product provider can efficiently adapt changes to the product and underlying investment options as required, in much the same way Retirement rules have changed over the last number of years.
We believe that PSG Wealth is a dynamic platform, which offers creativity and value not only in the Tax Free product space, but also within other investment alternatives which will be available to our investors in the near future.
Salient Features of the New Tax Free Savings Account
- Maximum life-time limit R500 0000 across all providers
- Annual limit R30 000
- Minimum Monthly contribution R500
- No performance charges are allowed
- Access to all asset classes
- No Interest Tax
- No Income Tax
- No Capital Gains Tax
- Full access to all of your capital
Be Aware – Whatever you take out of the product reduces your life time contribution limit.
- Due to the life time cap of the TFSA – Retirement/Pension products offer greater capital potential
- Tax Free Savings Accounts are also not protected from creditors, unlike Retirement and Pension Funds
- Retirement funding is also excluded from your estate, thus allowing you to leave substantial amounts to beneficiaries without estate duty
- Growth and Interest are also tax free in retirement products
We do expect that the deductible limit to overall pretax retirement funding contributions will increase to 27.5% as from the next tax year. Off course there are no guarantees.
Investments – General order of Merit
- Retirement / Pension
- Tax Free Savings Account
- Unit Trusts
Complimenting retirement income from discretionary savings at retirement is paramount to reducing your tax rate. All too often retirees spend their liquid savings at retirement and are left with only one source of income being an annuity, which is fully taxed. In addition, 94% of all monies returned to you by the receiver created by retirement annuity contributions are not reinvested, but spent on holidays or filling the credit card black hole. It is the reinvestment of your return from SARS that creates wealth.
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Many of you have invested with Financial Associates for a number of years and are very aware of our long term views or views taken with term association. You will be aware that during the past 5 years we have only had one change of Asset Manager, within our preferred managers. This was due to company restructuring, which we felt would detract their focus from core strategies. Our decision has been well rewarded.
In 2000, there were 253 Collective Investment Schemes in total and a total of 31 Asset Managers. Fast forward to 2015 and we have a choice of 1326 funds and 50 managers. Let’s not forget, that within those managers there are another 65 managers that piggy back on the main stream asset managers. One company has over 25 other asset managers which use their infrastructure.
For our many loyal clients who have bestowed their life savings to us; choosing the right asset manager for the right reasons, to manage specific assets is the most important function of our existence as wealth and retirement managers.
The above preamble provides insight into the unscrupulous marketing machines of the large institutions and some ‘shoddy advisors’ who encourage speculative emotive investor behavior.
Let us consider a few reasons why we make investment decisions:
- Inclusion – everyone else is doing it so it must be good and I want a part of it
- Trust – A big insurance company said it is the best deal, I even get an additional allocation on my contribution and I only pay fees after they achieve a set percentage…..
- Guarantees – A word that seems to be the quintessential deal maker of investments. Certainty is powerful
- Performance – history repeats itself, therefore it must be a good thing
- Upside momentum – It keeps on going up, we must not lose out
- Downside momentum – It keeps going down, let’s cut our losses
The above list is not exhaustive and from an investment behavioral perspective could be significantly extended, however it provides some understanding as to why investment decisions are made and seldom achieve the intended purpose.
As wealth managers we deal with sensitive investor behavior on a daily basis. This is understood behavior and something that we continuously manage. We would all love to have the ‘perfect investment’, however the reality is that the ‘perfect investment’ of the wealth manager is often different in many aspects to that of our clients or that which the big insurers use as smoke and mirrors.
Using the exact same list, let us consider a few reasons why we should not use the above-mentioned list to make investment decisions, but rather consider the underlying truths:
- Inclusion – many followers makes for lean pickings, an informed road less traveled yields superior returns over the long term
- Trust – Big insurers became giants by designing products which make substantial profits for the insurer and shareholders
- Guarantees – As wealth managers we often hear the words, ‘but they said my money was guaranteed’. The important questions you need to ask are the following:
- Who provides the guarantee? The sales person, the advisor, the wealth manager, a bank, an insurance company, or the government in the form of bonds.
- What is the guarantee? Is it based in Rands or another currency, is it your original capital or a maturity value, or is it a combination of both, or is it a % of an index movement, or a specific share price movement, or is it based on a geared movement or an option on another asset.
- What is the cost of the guarantee? More often than not, the guarantee will cost more than what it is worth.
- Performance – Many investors consider 1 year as a measure for the skill of an asset manager. As most of our investors have 10 years + to invest, the worth of an asset manager should be viewed over that past period, and related to as many cycles with similar indicators as the present to establish their skill.
- Upside momentum – It keeps on going up, we take risk off the table
- Downside momentum – It keeps going down, a great time to invest
Financial Associates offers a value proposition of building wealth for our clients. Good service, honest opinions, efficiency, efficacy, specialist associates and all the other things that we do well are part our success; however wealth creation is our core focus.
As an additional offering to our loyal clients, we recently established an agreement with PSG Hermanus to manage bespoke share portfolios for our clients in collaboration with Financial Associates, at substantially reduced asset management rates in comparison to their normal fees. In addition to boasting some of the most renowned stock portfolio managers in the country, PSG Hermanus was also the founding PSG stockbroking office in South Africa.
Our brief to the stockbroking team is to manage a concentrated stock portfolio with no more than 20 stocks and to maintain an agreed grouping of core shares, for risk mitigation. Unlike unit trusts, which are required by law to invest your money immediately, this discretionary mandate allows the stock managers to transact as and when they are comfortable with valuations, structures, or changes within the various companies. They also have full discretion to overlay a position with downside protection should they feel it necessary.
In contrast to a vanilla equity unit trust, a direct share investment can be tailored to meet your needs and risk preferences. Our joint venture also means that your bespoke share portfolio is more cost-effective (than an equity unit trust fund). This is because Financial Associates, in partnership with PSGH, fulfils the role of the financial advisor and portfolio manager at a rate that is more competitive than the fund manager fee, which is eliminated. It is imperative that you view a share portfolio as part of your long-term wealth creation strategy. PSGH will not speculate and actively trade in high risk stocks, but will instead buy and hold quality companies with an international presence in the same way that reputable equity unit trusts do.
The PSGH share portfolio will consist of SA Listed Ordinary Shares with an exemplary track record and market reputation, such as Sasol, Remgro, Richemont, BPH Billiton and British American Tobacco. These shares form part of the core portfolio which we maintain and review frequently based on reputable research from top analysts. Our policy is to gradually phase in available funds into shares at predetermined target prices which we also review regularly.
Exposure to SA Listed Property such as Redefine and/or Growthpoint will be included in your PSGH share portfolio. Listed property provides exposure to high quality commercial, industrial and office real estate. It is a liquid property investment where the investor is not burdened with the maintenance and management of the properties. Rental income of approximately 5% - 7% p.a. can be expected.
The inclusion of several international (dual-listed) companies and local companies with offshore business operations will ensure that the share portfolio is adequately hedged against a weakening Rand.
The PSGH share portfolio will be managed in accordance with their “Managed Full Discretionary” mandate which reads as follows:
“PSGH is authorised to manage your share portfolio at its sole and full discretion, having obtained your approval of the investment proposal. PSGH may affect any transaction relating to your share portfolio in order to achieve the investment objectives without it being necessary to obtain further authority or consent from you.”
It is necessary to highlight a few very important aspects of the new offering:
It is 5 times more concentrated than a standard unit trust. As an example Allan Gray Equity fund holds 91 stocks. This offers much downside mitigation through diversification. This implies that risk is substantially higher in a concentrated portfolio, yet the returns could prove to be far greater over the long term.
As an investor you need to assess your risk tolerance and risk propensity. Often these do not agree. If you have a high propensity for risk and can with full conviction tolerate the movements of a concentrated portfolio on a portion of your funds, then we suggest that you consider this option.
Due to CGT implication and deemed value within your existing portfolios, we would suggest new monies coming available to be invested in this manner. However, exposure to this share based investment is recommended at no more than 40% of your portfolio.
Furthermore, we can now access this concentrated share portfolio managed by PSG Hermanus through the PSG platform within any type of investment. Living Annuities, Preservation Funds, Retirement Annuities, etc.