Martin Hesse. Former Personal Finance editor, Martin Hesse. Explore ten invaluable lessons on managing money and navigating the financial services industry, drawn from nearly a decade of insights in the Words on Wealth column.
Image: File Image: IOL
After writing this weekly column for about nine years, this is my last Words on Wealth contribution for Personal Finance. I thought it apt, therefore, to revisit 10 important lessons I have shared with readers over the years about managing money and dealing with the financial services industry.
Our financial regulators are generally doing a good job, but this is one area where they can improve. Our legislation, grounded in Treating Customers Fairly principles, bans deceptive financial advertising, yet there are still advertisements in the media that are designed to deceive. Question everything. That attractive interest rate or return? Don’t take it for granted as being guaranteed or that it is a compounded rate.
2. Ask your adviser ‘what’s in it for you?’
Financial advisers are compelled by law to disclose their commissions or fees, any incentives for selling you a certain product, and any conflicts between their interests and yours. There should be no such thing as a “quick sale” – the long-term consequences of any investment or insurance decision need to be discussed and evaluated. Make sure your interests prevail. One sign they don’t is if the adviser recommends a specific product without considering alternatives. If in doubt, or if you feel undue pressure to sign, walk away.
3. Make use of the ombud system
With one or two exceptions, which I won’t go into, we have an excellent financial ombud system in South Africa that allows you to complain about a product or service to an industry (insurance and banking) or statutory (financial advice and pension funds) ombud or adjudicator. Complaints, which should be lodged only after having no luck with the provider in question, are generally dealt with expeditiously and fairly, at no cost to the consumer.
4. Consider RSA Retail Savings Bonds
Treasury’s retail savings bonds for South African consumers are virtually risk-free at interest rates better than private-sector offerings, with zero fees. There are three types: fixed-rate bonds (similar to bank fixed deposits); inflation-linked bonds (on top of an attractive return, your capital increases in line with CPI); and top-up bonds (which allow for recurring contributions). Pity about the awful website and limited channels of access.
5. Don’t ever buy a contractual RA
Personal Finance founder Bruce Cameron waged a relentless campaign against contractual investment products, including retirement annuities (RAs), offered by life insurers. In the intervening years, the RA market has broadened considerably – most are now the flexible, unit-trust kind that don’t lock you into a fixed term or impose penalties should you break the contract. But, like a delinquent tenant refusing to vacate a property, contractual products refuse to go away. Don’t go near them.
6. Fees matter less than net returns
Much has been made by low-fee providers of the impact of fees on your investments. While this is true – a one- or two-percentage-point reduction in return has a massive cumulative effect on long-term outcomes – what really matters (and something the higher-fee active managers should do more to emphasise) is your net return – in other words, your return after fees. You’re better off in Fund A, which charges 1.5% but delivers a 10% after-fee return, than Fund B, which charges 0.5% but returns only 8% after fees.
7. Passive investments are for active investors
I have recently come to the conclusion that if you invest in index-tracking passive funds, you need to take an active role in your investments, because you don’t have a portfolio manager to do it for you. I don’t mean jumping in and out of the market like a trader; I mean ensuring you are appropriately diversified. Investing in a single exchange-traded fund (ETF), such as one tracking the MSCI World Index, won’t cut it. You need exposure across geographies, including South Africa, and across asset classes, including bonds. This involves actively maintaining a multi-ETF portfolio.
8. Active managers consider risk
This is another area where active managers could be marketing themselves better. One reason that an active manager may underperform an index on straight returns is that the manager, if diligent and prudent, doesn't just chase returns; he or she, or the investment team in some cases, takes risk into account when making an investment decision. Thus, a better way to judge an active manager’s performance is by comparing risk-adjusted returns, by looking at a fund’s Sharpe or Sortino ratio. Lower risk translates into a smoother, less stressful investment journey.
9. Don’t dodge tax, minimise it
If you dodge the tax man in paying what you rightfully owe the State, you will be caught sooner or later. And if you are caught, the penalties are high. This is more likely today than, say, 20 years ago, when the monitoring of money flows was relatively undeveloped. So do the right thing: pay your taxes. Just don’t pay more than necessary. Claim back what you can, and make full use of the tax breaks on retirement-funding investments and on tax-free savings accounts.
10. Get life insurance right the first time
You can shop around for short-term insurance all you like. You cannot do the same for life insurance. The older you are when you sign on, the higher the premiums will be. Watch out for premiums that escalate with age. I learned this lesson the hard way, with the result that my premiums are now sky-high. Get it right the first time, preferably when you’re younger, accepting that for a level premium, you will initially pay more. It works out a great deal cheaper in the long run.
To conclude
While tightened regulation of the financial services industry over the past two decades has given consumers much-needed protections, unethical actors continue to find novel ways to part you from your money. Stay alert, improve your financial knowledge, and remain healthily sceptical of offers that appear too good to be true.
I leave you with some words on wealth by one of my favourite financial writers, Morgan Housel, from his book “The Psychology of Money”: “Wealth is income not spent. It’s an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.”
* Hesse is the former editor of Personal Finance.
PERSONAL FINANCE