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2018

Industry Awards

+ 01.07.2018

Outlet: MoneyMarketing

Industry Awards

Tone to be challenging and cheeky, in line with the advertisement. Written journalistic style, quotes from Grant Field

Independent industry awards signal shift in status quo

Recommending a provider to manage a client's employee benefits is a critical decision for brokers. The implications are significant as these benefits are more than just a job perk – they provide employees with financial security, they make staff feel valued, and can offer a competitive advantage to attract and retain the best people.

Sticking with the big incumbents can seem like an obvious, rational and safe choice. Size, after all, has become a proxy for competence and value. “Thankfully, though, more industry experts are questioning this convention. They're asking if there isn't, perhaps, a better alternative, because they clearly understand that bigger isn't always better,” states Grant Field, CEO at leading independent financial services provider, Fedgroup.

“Big brings complexity. Big is inefficient. It creates inertia and reduces agility. Big increases costs, opacity, complacency, and apathy. Big isn't better. Better is better. But how do you define better? Well, impartial and independent recognition is a solid place to start,” suggests Field.

For five consecutive years, Fedgroup has emerged from the PMR.africa Awards as a stand-out performer. However, 2018 proved to be a particularly momentous year as Fedgroup was named the best provider in the country, in both the Group/Life Risk Products and in the Group Pension and Provident Fund subcategories.

Normally a Gold Arrow award is bestowed on winners. However, in exceptional circumstances, a Diamond Arrow can be awarded if a category winner receives an outstanding score from industry experts. It's a rare feat, but one that Fedgroup achieved this year – not once, but twice. In the remaining Employee Benefits subcategory – Investment Products – Fedgroup took home a gold award, again beating out much larger competitors.

It's a telling endorsement of Fedgroup's unique and innovative approach, because winners are awarded based on nominations and votes from intermediaries, brokers and financial advisors – providers cannot enter, motivate for or nominate themselves, they must be selected.

“These are the people working in the field, at the industry coalface, where products and services are measured against their ability to address real-world needs and meet customer expectations,” explains Field. “These industry experts also deal across providers and are therefore perfectly positioned to make informed comparisons.”

For Fedgroup to be voted number one in the country ahead of the big incumbents therefore speaks volumes. “Our awards prove that our independently-minded approach, which puts people ahead of obscene profits, results in excellence.”

Moreover, Fedgroup combines these traditional values with cutting-edge technology to contain costs and improve efficiencies, and offers transparent fees. “Placing the needs of policyholders above those of shareholders in this way delivers better, more responsive and personalised service, which has a beneficial influence on the lives of our clients,” adds Field.

It's abundantly clear then why South Africa's industry juggernauts are no longer the experts’ first choice when it comes to delivering exceptional employee benefits. “Our most recent PMR.africa awards affirm that our unique approach works and that it's resonating with industry professionals. Ultimately, we hope this industry recognition prompts greater introspection within the market and brings into question whether the traditional profit-driven and sometimes arrogant approach of big business is still relevant in today's customer-centric market,” concludes Field.

How stable is your family’s future, should you die?

+ 01.06.2018

Don't leave decisions about the financial security of your family and children in the hands of someone else

By Jeanetta Hendricks, Business development manager at Fedgroup

A parent's greatest wish is that their family, especially their children, are secure financially in the event of their untimely death. Life assurance is bought based on this promise. If you are the breadwinner in the family, have you carefully considered how your death benefits will be allocated to family members and dependants should you pass away?

Allocating death benefits according to your wishes begins with drawing up a valid will, in addition to the completion of all beneficiary nomination forms.

However, most people are unaware that the allocation of death benefits from group life policies, and those from retirement and provident funds are governed by different sets of laws, which can influence the intended outcomes.

Out of your hands

For example, if you contribute to a retirement fund through your employer, in the event of your death appointed trustees decide how death benefits should be fairly allocated among all those who are dependent on you. This could include nominated beneficiaries and any other dependants, irrespective of whether you have identified them on the nomination form or not.

This means that dependants may not receive payouts in the manner you intended, particularly when nominating minor children as beneficiaries. In these instances, insurers or trustees may make payouts intended for children, to their surviving parent.

Another common pitfall occurs when policyholders choose to allocate retirement death benefits to a spouse and provident fund benefits to a child, believing this will divide all benefits equally among the two. However, despite best intentions, a lack of understanding regarding the legislated differences in how these death benefits are allocated could mean the intended outcome may never be realised.

What is critical to realise, is that in neither of these scenarios is the protection and preservation of these funds guaranteed, despite the intention: that these lump-sum payouts secure your child's future prosperity. That's why, when minor children are the intended recipients of the benefits, one of the most financially savvy decisions is to clearly request that their portion of the money is allocated to a vehicle that will protect the minor child's financial future, and benefit them in the long run.

Your child’s best interests

One of the most effective ways to achieve this is to nominate a beneficiary fund that will manage the money until your children reach the age of 18. Ring-fencing a particular sum in this manner protects it from a spouse, guardian or relatives, while also potentially earmarking it for a specific purpose, such as education. By taking this approach, you can be certain that your child will receive the intended benefits.

Advice and care

That's why end of life planning with a certified financial planner to determine all potential outcomes is vital for every parent, regardless of the size of the death benefits. If, as an employee, your retirement fund is offered through your employer, it is likely that it was facilitated via intermediaries who manage the administration. Remember, that these intermediaries are also there to provide guidance and advice to all fund members. It's essential that you sit with these financial planners to understand beneficiary nomination forms and the implications of your nominations, particularly to identify the funds where you have full discretion in how death benefits are allocated and those where you don't.

It's also beneficial to view any personally held policies with those provided by your employer, to gain a holistic understanding of how death benefits would be split across all life policies and funds to achieve the desired outcome for your family.

This holistic approach should work through practical scenarios with the financial advisor or planner to determine exactly how much each dependant will receive from each of your different vehicles.

Get specific

It is at this point that you will also be in a position to allocate funds for different purposes, such as education, living expenses, and investments. During this process, you must clearly state what you would like to achieve, as ambiguity leaves the final decision open to interpretation by the trustee or employer.

For this reason, make your wishes known to your employer, who can then work with trustees to guide their decisions when allocating death benefits from retirement funds. This will ensure you have greater control over the welfare of your children in the event of your untimely death, instead of leaving these important decisions to someone else.

Without considering all these aspects during your estate planning, the outcome you envisaged for your family may not be realised, despite your best intentions.

Ultimately, no one ever knows exactly when that fateful day will occur, but if you prepare adequately you can be almost certain that your family will benefit in the manner you intended.

Fedgroup brand refresh

+ 17.05.2018

SPOKESPERSON: Tim Allemann, CMO, Fedgroup

Outlet: BizCommunity

Fedgroup brand refresh

8 Steps to refreshing your corporate identity

Coming up with your corporate identity is not as simple as briefing a designer and giving them free rein. There is a lot of ground work that you need to do in advance to understand where your brand is going, and how your identity will reflect this. THEN you can embark on a redesign that can carry your company’s identity into the future.

By Tim Allemann, CMO, Fedgroup

Having recently gone through a brand redesign, and having prepared extensively for the process, we’ve learnt a few good lessons. Here’s the process we followed to create a new identity that we believe truly reflects our values:

1. Define your company strategy Your new identity has to be based on where you are going, so you and your designer or agency need to have clarity on this. You need to look not only at your business strategy, but also at what your competitors are doing in the market. Be as forward thinking as you can be, because every company is evolving, so there’s no point in creating an identity that’s only perfectly relevant to where you are right now.

2. Evaluate your existing distinctive brand assets Brand assets are not only your logos, your font or your existing colour palette, but extend into multiple elements that make you recognisable, even the themes that you use in your advertising or office spaces. For example, remember the Savanna cider TV campaign that employed brand assets that went beyond the logo of the tree in the veld? Savanna was so tightly associated with the dimly-lit pub scene, the dry humour, and even Barry Hilton, that these assets became intrinsically associated with the brand – especially the dry humour. You could have all those elements together without using the Savanna logo, and the public would still know what was being advertised. So, when you are doing your corporate identity audit, don’t stop at the classic visual elements, but expand into all the brand assets that are associated with your business.

3. Carry out market and competitor research You do not operate in a vacuum, so you need to understand more than your brand’s values and identity. You also need to understand competitors’. Look at what everyone else is doing so that you can identify what is uniquely yours. This is true from both a business and from a corporate identity perspective.

4. Determine what to keep and what to let go of Once you know what is distinctly yours and what differentiates you, think about what you should keep and what you are willing to (or want to) let go. For instance, a brand asset that you like, but that is actually similar to that of a number of your competitors may not be worth hanging on to. Or something that has worked for you in the past, but is now associated with something your business is moving away from should also go. But if you have a colour that people identify you with, or a beloved aspect of your logo, then try to find a way of carrying that forward. Remember that you not only want to be recognised for what you do, but also for being unique in your category, so make your selections with that in mind.

5. Partner with a good agency with trusted talent Use a professional agency or individual to help you develop your brand identity. While you may know your brand like the back of your hand, an experienced professional will know how to translate your brand values into something simple, visual and current. They will also know how to best support you through the process of articulating your requirements so that the ultimate end-product is a representative expression of these.

6. Accept that it’s a process Don’t be alarmed if the first iteration of the process is nothing like what you had in mind and doesn’t feel right to you. It takes time and reworking to get your identity to where it should be. Don’t be shackled by outdated thinking; listen to what your agency has to say, but remember that you are the brand custodian and in the end, the identity has to fit the brand. But trust that the process will get you there.

7. It doesn’t stop at the logo Brand identity is about so much more than just a logo. Think carefully about the colours you use, the fonts, the spacing, iconography, how you treat imagery, and the many additional brand assets you might end up using. With so many platforms on which you display your identity, one image is not going to fit all, so expand your corporate identity to incorporate multiple elements. And, brands hoping for longevity must engage with a digital-first approach. Design for digital and dynamic environments, then build out into the static environment.

8. Design for 2030 Don’t perfect your brand identity for everything that your business is TODAY. Rather, try to project into the future – what are you becoming? And design to support that. Banks are moving online, taxis might become driverless, restaurants are becoming virtual – so things like tellers, drivers or tables that may have been at the very core of those businesses’ brand identities could soon be completely irrelevant. So, try to be a futurist and develop a brand identity for what your business will look like in 2030.

Fedgroup’s brand refresh

These are the ideas that underpinned our brand refresh. Fedgroup is South Africa’s leading independent financial services group, and we felt that the time was ripe for us to refresh our previous identity. We also aimed to get better differentiation for our company in its category. And, we wanted to signal a change to our customers – letting them know that our focus on innovation is carrying us forward into a new era. As a company that has built its reputation in the business-to-business world, our expansion into the consumer and individual space needed to be communicated. Our old identity was conservative – “financial services blue” with a serif font – which was perfect for what the industry expected of us 10 years ago, but wasn’t right for today, and certainly wasn’t right for 2030. As we are coming off a base of lower awareness than some of our bigger competitors, we could afford to make more radical changes to our identity without this being an issue in the market. We had the opportunity to take existing customers on the journey with us, while attracting new customers with a more relevant and progressive brand expression. We worked with agency CLVR FX, a smaller agile agency with big branding agency experience, but none of the big brand bombast. Together, we reconsidered the colour of our logo, tweaking the “financial services blue” to a shade that complements our newly introduced accent colour – a shocking pink (which we’re calling “Fedpink”), and a grey. It was about find the balance between tradition and modernity, showing stability along with a less conventional, ‘challenger brand’ persona. The logo of the brand was then reimagined into the two lines, which are the negative spaces between two Fs from our previous logo, back to back. While there is a throwback to our older logo, we don't believe it’s necessary for the viewer to interpret this, or even care. Rather, they will see the clean, modern lines and associate that with our brand. It’s almost unexpectedly simple. Then we introduced a visual language based on a combination of a square, semicircle, and circle representing tradition, versatility and reinvention. Together, these shapes are combined into a unique design as an additional distinctive brand asset. This allows for further impact and differentiation in our visual communication elements beyond the logo, be it in brochures, advertising, website or office spaces. This dynamic use – interpretation rather than regulation – was critical in our brand evolution. These shapes and our logo’s lines can easily be used in different ways in any material on any medium. They can become windows, backgrounds, occupy negative space or highlight an otherwise generic image. To distil it down to three things, we wanted the new identity to have impact, have differentiation, and offer us ease of application across multiple channels. And, in addition to a new icon and typeface, we realised the importance of introducing a third brand asset in the form of a visual language – a tool that would extend our reach and agility. We believe that our new identity is all these things, and feedback from our audience has borne this out.

Cryptocurrency

+ 10.05.2018

SPOKESPERSON: Grant Field, CEO, Fedgroup

Outlet: FANews

Cryptocurrency

A third of millennials will be invested in the cryptocurrency in 2018 - The study by cryptocurrency exchange London Block Exchange reveals that 5% of those aged below 35 already have cash invested in a cryptocurrency, while 11% are definitely planning to invest next year, shunning more traditional investments such as shares, bonds and property. A further 17% are seriously considering investing in a digital currency by the end of 2018, the study found. This study underlines the gulf between the younger generation’s view of money and that of their parents and grandparents, who had assets perform so well for them in pensions or property. Millennials clearly feel left behind by the old system and are looking at cryptocurrencies as a new dawn. What does the future hold?

The pitfalls of telling millennials that bitcoin isn’t a retirement strategy

As if financial advisors didn’t have a hard enough time already trying to encourage millennials to embrace traditional retirement planning, along comes cryptocurrencies to entice an entire generation away from mainstream finance. A recent survey by US venture capital firm, Blockchain Capital, found that 30% of millennials aged 18 to 34 would prefer $1 000 worth of Bitcoin than the same amount in stocks or bonds. Millennials are also twice as likely as the general population to have owned bitcoin, while 16% say they plan on buying cryptocurrency within the next five years. While this data pertains to the US market, it is still a useful bellwether for the millennial attitude towards money.

Dangers of crypto

As a financial planner your instinct might be to warn millennials of the dangers of cryptocurrency but that might not be the best strategy. Before you can start arguing about the merits of unit trusts over cryptocurrencies you first have to convince millennials about the relevance of speaking to a financial planner. To achieve that you not only have to be adept at engaging them over the various social media platforms they tend to frequent, you also have to get to grips with cryptocurrency nomenclature and its underlying blockchain technology. Adopting a combative, anti-crypto stance is probably not going to win you many millennial friends, or clients. After all, bitcoin’s critics include the likes of Bill Gates, who has called it “one of the crazier, speculative things” he’s seen. JP Morgan CEO Jamie Dimon labelled it a fraud. Billionaire investor Warren Buffet famously called Bitcoin “rat poison” only to see veteran financial broadcaster Max Keiser, a much-loved figure among crypto aficionados, respond by saying: “He’s right! And guess what, Warren is the rat!” Merits of traditional strategies.

The point is that none of the anti-crypto criticism has diminished interest in digital money. As a financial planner, you’re probably far better off trying to make millennials see the merits of traditional retirement strategies than attacking cryptos. A good start might be to try and get millennials to understand their motivation for buying cryptocurrencies. If their motivation for doing so is not based on the very real benefits of blockchain technology – which ranges from immediate transaction settlement to preventing currency counterfeiting – then it stands to reason that it is speculative in nature. While there’s nothing wrong with that per se, it should never form the basis for a retirement strategy.

Digital gold

Another argument in favour of crypto is that it’s an alternative store of value, a form of digital gold. However, the comparison to gold is misleading in many ways. While gold does have the characteristics of a currency and is a traditional safeguard against inflation, it also has intrinsic value thanks to its many practical uses, which extend far beyond jewellery. Its unique, non-corrosive properties and high conductivity mean it can be found in almost every electronic device. It is also used in the aerospace, dental and medical fields. While blockchain technology might be able to make similar claims the same can’t necessarily be said for cryptocurrencies. Then there’s the age-old mantra of diversification of assets, which still holds true no matter what demographic cohort or generation one belongs to. Putting everything you have into a single asset class, whether its equity futures or cryptocurrencies, simply makes no logical sense. So, by all means, let your millennial clients speculate on crypto but try and get them see the merits of traditional retirement strategies. Ignoring traditional products like unit trusts means they’d be forfeiting the opportunity to invest in an array of assets like equities, bonds and derivatives. Considering how much millennials hate FOMO, that should be enough to get them thinking.

It’s about more than performance… how to evaluate an alternative fund

+ 01.05.2018

SPOKESPERSON: Sheldon Friedericksen, CFO, Fedgroup

Outlet: FANews

It’s about more than performance… how to evaluate an alternative fund.

By Sheldon Friedericksen, chief financial officer, Fedgroup

Alternative funds have been gaining prominence and popularity with investors and intermediaries in recent times, but before we can evaluate its value, it's important to establish exactly what it refers to.

In the conventional context, alternative funds include non-traditional assets and collective investment schemes held by institutional investors. The long list of examples includes private or unlisted equity and hedge funds, managed futures, real estate and infrastructure investments, and derivatives contracts The complicated structures and high minimum investment thresholds of these investment options generally make them inaccessible to the average investor.

However, the definition of what constitutes an alternative investment has expanded.

More than just financial returns

The term now encompasses a mix of traditional and alternative assets that aim to deliver more than just a financial return to investors. This emerging form of socially responsible investing (SRI) incorporates the principles of the three pillars of the triple bottom line. These target investments that generate measurable social and/or environmental benefits and drive economic sustainability, while still delivering fair financial returns to investors and adhering to good corporate governance principles.

Examples of SRI include investments by fund managers into smart farming and sustainable agriculture, renewable energy and infrastructure development.

Socially focused

Increasingly, alternative investment funds are also helping to uplift every sphere of society by building schools, medical facilities and low-cost housing in previously underserved markets. In addition to these social and environmental benefits, these investments also contribute to regional and national economic growth and create more jobs.

Fund managers with AUM worth billions are also structuring portfolios or launching indices that target socially responsible investments. Motif Investing, for example, supports female empowerment through its custom No Glass Ceiling portfolio that offers investors access to shares in female-led businesses.

A new generation of socially conscious investors, comprised predominantly by the millennial cohort, is driving this trend, as they seek to impact society positively through their investments, while still realising a return.

Following the trend?

The rising popularity of this investment approach is most evident in the developed markets of Europe and the US, where over 20% of assets under management are currently allocated to alternative investment funds. By comparison, South Africa lags significantly, with an estimated 1% to 2% of AUM invested in alternative investments. We expect this ratio to increase in line with global trends as more local options come online and investors look to diversify their portfolios. This enables them to get a fair, often comparable return to traditional funds while also contributing towards a cause they believe in.

However, when selecting where to invest, investors and intermediaries must analyse alternative investments differently to traditional options. They need to understand the market they're investing in and the inherent risks associated with the broader industry in which the alternative fund operates. These factors differ to those that affect traditional investments such as money market accounts or index funds, as examples.

Be guided by responsible investing

Investors must also consider the fund's ethos and the values-based approach that guides their investment strategies. In this regard, it is also worth investing in alternative funds that ascribe to the Code for Responsible Investing in South Africa (CRISA). This global code of investor conduct has been adapted for South Africa and gives guidance on how institutional investors should analyse investment opportunities and governs how investment decisions are made in accordance with sound governance principles. This ensures that asset managers look after investors' money and fulfil their mandate without taking unnecessary risks.

A final consideration is the fund's investment horizon. Infrastructure projects, for example, can take years to complete before earning investors a return. By understanding these risk factors, an investor can then decide what is a fair return and how much value they ascribe to benefit a cause they believe in.

Fedgroup pioneers impact investing solution in

+ 01.05.2018

With returns of between 9% and 16%, impact investing offers more than just the chance to do good.

A new generation of socially conscious investors, comprising predominantly millennials, is driving a prolific trend in global investing. They want their money to do good in the world, while still realising a fair return.

The trend, known as impact investing, has gained significant traction in first-world markets.

By investing in businesses that benefit society or the environment, be it through renewable energy, sustainable farming, infrastructure development or healthcare, impact investors aim to have a real-world impact. Their mantra is to create a positive future for more than just themselves.

While conventional impact investments construct portfolios that offer access to shares in companies that do good, South Africa's leading independent financial services provider, Fedgroup believes that investing directly in ventures is a smarter alternative.

That's because investing in shares and funds can be unnecessarily complex and often diminishes returns through hidden costs. In addition, barriers to entry can be prohibitive. Fedgroup has therefore leveraged the ubiquitous nature of mobile to deliver a fast, lucrative way for investors to directly own assets in farming ventures.

Fedgroup's Impact Farming investment platform offers investors access to a growing network of local crowd-farming ventures that generate solid profits to deliver competitive returns. From as little as R300, investors can own assets across six accredited farming partners, including blueberry, sustainable honey, and urban solar farms.

Once purchased via the app or online, Fedgroup installs the assets on one of its approved sites, along with those of other Impact Farmers, to form a venture network that is managed by farming experts, who take care of the rest.

Investors get paid in regular cycles for the yields their assets produce once they're are harvested and sold to Fedgroup's contracted customers. This money can then be enjoyed as passive income, or reinvested to benefit from compounded growth. Impact Farming assets also qualify for a tax benefit associated with renewable energy and sustainable farming.

Not only does this model significantly lower the barriers to entry inherent in traditional fund investing, but it also allows socially-conscious investors to make a big impact with their money, regardless of the amount invested.

And there's also less risk compared to various traditional investments thanks to the innovative approach. Extensive due diligence is performed on every product line to ensure its viability before it is brought to market. The company then carefully vets and selects Impact Farming ventures for both the financial impact they have on investor wealth creation, and the positive impact they have on the world.

Fedgroup also built market-tested financial models that were deliberately designed to be conservative when forecasting returns. However, as investor assets are pooled, so too are the yields, which mitigates the risk of individual assets underperforming. And with service level agreements in place with all providers, Fedgroup ensures that assets continue to perform in line with projections, unlike the unpredictable nature of company shares.

The assets are also insured, the cost of which is included in the purchase price. Therefore, if an investor's asset is ever destroyed in a natural disaster, Fedgroup replaces it. This asset class also runs counter to market cycles and therefore offers diversification that is virtually unmatched.

Fedgroup's Impact Farming platform offers a unique wealth creation tool for a new breed of investor. To find out more, visit www.fedgroup.co.za/impactfarming.

Fedgroup's awards achievement shows bigger is not necessarily better

+ 12.03.2018

SPOKESPERSON: Grant Field, CEO of Fedgroup

Outlet: PMR.africa awards

Fedgroup’s wins at the PMR.africa Awards indicate that independence, agility, and innovation result in excellence.

Fedgroup’s run of wins at the latest PMR.africa Awards shows that South African industry juggernauts are often not the experts’ first choice in delivering employee benefits. Fedgroup was named the best provider in the country in two subcategories, and achieved a gold award in the remaining subcategory, ahead of the larger institutions.

“What makes these wins so significant for us is that there is no way to motivate for or nominate ourselves. The outcome of the survey is purely based on feedback from the industry – from interactions with brokers, intermediaries and financial advisors. These industry experts deal across providers and are therefore perfectly positioned to compare like with like. For Fedgroup to be voted number one in the country ahead of all the big incumbents therefore speaks volumes,” says Grant Field, CEO of Fedgroup.

Only three awards are up for grabs in each PMR.africa subcategory, a Gold, Silver and Bronze arrow, for first, second and third place respectively. In exceptional circumstances, a Diamond Arrow can also be awarded if a first-placed finalist receives an outstanding score from industry experts. Fedgroup achieved this rare honour in both the Group/Life Risk Products and in the Group Pension and Provident Fund subcategories. In the remaining Employee Benefits subcategory, Investment Products, Fedgroup took home a Golden Arrow.

Fedgroup is the country’s leading independent financial services group. Field says that since inception 28 years ago, the goal has been “to combine traditional values with cutting-edge technology, putting people ahead of obscene profits.”

“As an independent provider, Fedgroup has the flexibility to improve year on year, based on the praise and criticisms of our customer base,” says Field. “We believe that best practice in our industry should be defined by the beneficial influence we can have on our clients’ lives. And these awards affirm for us that we’re getting that right.”

In an industry that is dominated by a mere handful of bloated providers, one can be forgiven for believing that there is a lack of choice. Field, however, believes that it is the mid-sized companies that are best positioned to make the greatest impact.

“Our high growth in recent years bears testament that the tide is turning against the profit-centric and sometimes arrogant approach of big business. Clients like to be treated as people first, and we believe that’s where independently-run organisations like our own can make a difference.”

Specifically, Fedgroup has in place an innovative management model that encourages improvements to service levels, and sophisticated technology supporting its staff.

“We support our staff – our people – with a management approach that encourages innovation, initiative and, naturally, great service. This approach, we believe, attracts staff that think the same way we do – and it is because of them that we are in a position to achieve these awards,” says Field.

This is essential at a time when clients are expecting increased levels of personalisation and responsiveness from their service providers, thanks to advances in technology, data analysis and social media. Consumers expect to be heard when they are unfairly treated – and are increasingly intolerant of organisational inefficiency.

Because Fedgroup has invested heavily in tech solutions, its workforce will never shirk the ethic of personal responsibility and efficacy, even as the company continues on its high-growth path. “We will never pursue profits at the expense of people because we don’t have to pay ever-increasing dividends to shareholders,” says Field. “Rather, we can reinvest in the business, hire the right people and work towards long-term relationships with clients, and a sustainable organisation. We are confident that our performance in the PMR.africa Awards will continue to bear this out in the years to come.”

Can alternative investments transform retirement fund returns?

+ 12.03.2018

Op-ed: Sheldon Friedericksen, Chief Financial Officer

Outlet: FANews

Diversifying Your Portfolio Requires More Than Just Adhering to Regulation 28 “Diversity is Strength.” Nowhere is the aphorism more appropriate than in the world of investing. It is the principle that underpins Regulation 28 of the Pension Funds Act, which aims to protect people from poorly diversified portfolios by limiting how much they can invest in certain asset classes, particularly riskier ones, like equities, property and foreign assets.

Yet, one of the downsides of Reg-28 is that South Africans tend to regard their portfolios as sufficiently diversified by adhering to the legislated asset class caps (75% equities; 25% property; 30% offshore; 10% Africa ex-SA). Often investors don’t consider diversifying within these broader asset classes, particularly in fixed-interest securities. For example, an individual nearing retirement wanting to place a significant portion of their savings in a low-risk, income generating portfolio would likely look no further than an income fund or fixed deposit money market account. A five-year, fixed deposit money market investment at one of SA’s major banks would pay interest of between 7.75% and 8.75% per month for someone 55 years and older, depending on the principle amount invested. An enhanced income fund, typically comprising 75% stable income bearing assets like cash and bonds and around 25% “growth” assets like preference shares, listed property or international assets, would likely pay a premium to cash deposit rates of just over 1%.

While there’s nothing wrong with either of these options for someone looking for stable, predictable returns, it is possible to diversify further within the fixed interest paying space to achieve the widest possible balance between risk and returns within a particular asset class. Participation bonds for instance, provide stable, fixed rate returns that are also backed by the underlying asset class of commercial property. While income funds have exposure to listed property as well as preference shares or corporate bonds, they are exposed to the balance sheets of the listed entities underpinning these securities. Participation bonds on the other hand earn their income from mortgage payments of the underlying commercial properties, which are underpinned by the market value of these bricks and mortar assets. In addition, they are legislated by the Financial Services Board (FSB) and Collective Investment Schemes Act, which stipulate that the ratio of loan to property value can never exceed 75% (i.e. the combined value of mortgages on the underlying properties can never exceed 75% of the combined property values). This provides an inherent 25% buffer to any investor worried about a worst-case scenario in which property values might sink below their loan value.

Historic returns on participation bonds have averaged roughly three percentage points above the prevailing consumer price index (CPI), making them ideal for people nearing retirement.

So why haven’t South Africans been more receptive to alternative investments? This is at least partially explained by the inherent conservative nature of South African investors and, by extension, money managers. Despite the fact that Reg-28 upped its allocation to alternative assets to 15% in 2011, from 1.5% previously, local money managers still allocate less than 2% of assets under management to alternative assets, compared to 29% in the US and 24% in Europe. Additionally, South Africa’s equity market has been the best performer worldwide in the 117-year period beginning 1900, delivering an average annual return of inflation plus 7.2%. What’s more, that performance is in dollar terms! With equities performing so well there just hasn’t been a reason to look at alternative asset classes.

Yet, with equity markets across the world hovering near all-time highs we’re heading into unchartered waters with many predicting a prolonged period of more moderate performance, or even a sustained bear market. This is where alternative, income-yielding assets could come into their own. Thanks to technology, the world of alternative investments is taking a truly innovative and diversified turn. Investors are starting to investigate options as varied as farming and solar energy, all delivering attractive returns.

If there is one key message it is this: don’t fall into the trap of thinking that you are sufficiently diversified merely by adhering to the stipulated asset class caps. There is a lot of scope for further diversification within asset classes and by ignoring this you may be forfeiting exposure to some unique asset classes that pay solid returns with very low risk.

Is digital innovation driving down rates?

+ 29.01.2018

By Grant Field, CEO of Fedgroup Using digital innovation to create a competitive advantage is not new to the financial services industry. Recently, platform-based business models have emerged as an area of industry disruption with the potential to significantly drive down costs. However, there are several barriers to effective implementation.

New market entrants on the one hand, and traditional providers on the other, can both reap the benefits of building a new tech platform to drive down costs, although their challenges differ substantially.

For new entrants, cost is the main barrier. Not only are these platforms extremely costly, but once the platform is created, there is the need for substantial marketing to drive new clients to the platform. Once the clients start to come, the platform is cheap to scale, which then justifies the initial expenditure.

For traditional businesses, the challenge is not so much the affordability of investing in a new platform, but migrating existing business to the platform, as this means getting rid of the legacy business model. Legacy inefficiencies are already priced into the product and may prove hard to get rid of.

However, once these initial growing pains are addressed, the scalability of the platform and its ability to drive down costs substantially present a compelling value proposition for both new entrants and traditional businesses. These cost savings can then be passed on to consumers, increasing competitiveness.

This ability to be competitive will only become more important in the coming years. Not only will traditional and start-up financial services providers be in competition with each other, but they will also face competition from other platform-based online businesses such as Facebook and Google. As these services become increasingly monetised, they will expand their offering to encroach on financial services’ turf. Hence, the need for a competitive advantage becomes obvious.

Another tech area where financial businesses can establish a competitive advantage is through artificial intelligence (AI)-enabled robo-advisors or chatbots. These technologies have the potential to bring industry engagement into a scalable model, in contrast to the lack of scalability of face-to-face interactions.

This does not necessarily mean that platforms reduce costs by cutting out intermediaries. Unless the entire process is automated from end to end, certain administrative requirements must still be fulfilled by a human resource, be they on the side of the provider or the intermediary.

Because face-to-face interactions cannot be scaled, intermediaries also need to consider how they are going to compete against the inevitable rise of tech solutions. They may wish to devote their time to selling group products or advising high-net-worth individuals, for instance.

However, technology can create efficiencies in manual administrative processes, which benefits both the intermediary and the provider. A feature-rich administration system that strips out complexity and simplifies onerous processes such as compliance and data collection is one such example. This can translate into better customer service, fund performance and, potentially, lower fees due to reductions in administration costs.

The application of technologies such as big data, analytics and AI in risk management and underwriting is yet another way in which digital innovation can lower rates. With the ability to process vast amounts of data and more accurately rate risk, these technologies can deliver significant savings on premiums.

In the face of these developments, the question often arises which business category will be most successful in future: new entrants, traditional businesses or platform-based businesses. I believe this is the wrong question, as there are going to be winners and losers in each category. It is not a particular category that is going to be successful, but those who are the most successful at driving down costs. The rest won’t survive.

2017

Investing in cryptocurrencies

+ 17.11.2017

By Grant Field, CEO, Fedgroup. This article was first published in Business Report on 3 November 2017. Grant Field is the CEO of Fedgroup, South Africa's leading independent financial services provider. As a BSc engineering and MBA graduate, Field has built up extensive industry experience in financial services and IT. His passion for people and technology has led him to build a company that integrates old-fashioned values with industry-leading systems and solutions to meet the full spectrum of clients' needs.

With the boom in cryptocurrency values, investors are clamouring to make returns like those experienced by early adopters. As an example, Ethereum ballooned by 5 000% at one point this year.

However, cryptocurrency investing can be confusing, and most people don't understand the underlying mechanism of cryptocurrency. As Buffett wisdom imparts: "If you don't understand a business, don't buy it."

For starters, the term 'cryptocurrency' is misleading, as it's not a single currency. There are currently over 900 digital currencies available, including Bitcoin and Ethereum, and 'altcoins' such as Litecoin, Peercoin, Primecoin, Dash, Monero, Ripple and Quark.

Additionally, there is still not universal acceptance on whether cryptocurrency should be classified as a ‘currency' or an ‘asset', particularly from a regulatory standpoint. Further, while technically a transaction medium, the issue is further complicated by the underlying blockchain – again, a misunderstood technology on which cryptocurrency is built. And, the nature of blockchain continues to evolve.

Furthermore, the blockchain is inherently slow, making it a less-than-ideal platform for large volumes of immediate transactions – a fundamental attribute of currency. While the introduction of cryptocurrency bank transfers and credit cards offer a workaround, limitations still exist. As such, cryptocurrencies function more as transaction enablers than a currency or medium of exchange. And, the innate complexity of cryptocurrency is compounded by the introduction of "tokens". Tokens are a mechanism used predominantly as a fundraising method through initial coin offerings (ICOs), blockchain start-ups or projects distribute these units of cryptocurrencies to fund expansion or development.

Putting aside the classification semantics and complexity, investors are trading cryptocurrencies on a growing number of dedicated exchanges such as Kraken, GDAX and Gemini, as they would conventional currencies.

Currency trading is inherently volatile due to the influence of external factors (politics, government policy, inflation, and the balance of global trade, to name a few). Such factors make investing highly speculative, and cryptocurrencies are no different – exemplified by the large fluctuations in values over recent months.

This volatility has largely been driven by the artificial demand created when investors piled into cryptocurrencies, creating the potential for a 'bubble'. But, if investors are willing to speculate, they can make returns.

However, part of that speculation should be an analysis of the challenge to scarcity – initially a huge benefit to the model. Because cryptocurrencies have a finite number, there is a corresponding limitation to supply. This effect was similar to the value that conventional currencies held when linked to the gold standard. However, once abolished, central banks printed more money, which devalued currencies and drove up inflation.

Now, with so many cryptocurrencies on offer, this scarcity has been eroded, which will drive devaluations.

Another concern pertains to growing calls from governments around the world to regulate cryptocurrencies. Initially, the removal of government and regulatory interference in the currency was touted as a major benefit. However, amid mounting global concern, there has been increasing interest from regulators. While a primary driver is the attempt to curb the use of cryptocurrency in elicit acts and money laundering, there is clearly a push to bring them into formal taxation frameworks.

The consequence is some degree of uncertainty, particularly as the potential exists for cryptocurrency trading to be declared illegal in certain countries.

That's not to say cryptocurrencies cannot serve a purpose in the financial services sector. For instance, the blockchain offers the ability to transact in a transparent, non-reversible manner, and cryptocurrencies utilise this underlying tech to store value. This makes applications like transparent legal document processing, exchanges, or its use as a ledger, all valid options. Certain cryptocurrencies are also well-suited to applications such as ensuring privacy in smart contracting and payment scaling.

The industry has not yet settled on where cryptocurrencies fit in. Until there is wider market acceptance and use, real-world applications will remain limited, resulting in muted adoption. This may change as the millennial and digital natives of Generation Z become more financially active. For the immediate and mid-term, however, the chance remains low that a cryptocurrency will dethrone sovereign currencies or replace the dollar as the standardised global currency.

Should this point be reached, cryptocurrencies may face other challenges. For instance, if a digital currency becomes the global currency of choice, a case of 'too big to fail' may develop. The consequence of hacking then becomes extremely serious. While security is improving, there also exists a risk that the development of quantum computing could break the blockchain and lead to a global collapse.

Accordingly, the future of cryptocurrencies would most likely be one where it is kept outside of government hands, and offer a valid hedge against risk. It does require greater stability and refinement, and the entire ecosystem must be simplified if it is to become a pervasive transaction medium.

Currently, most people do not understand how it all works, particularly as the focus remains on the technology. Unless this changes, cryptocurrencies will fail to meet basic human needs. The underlying technology will need to work in the background without the need for a fundamental understanding to use it.

From an institutional investor perspective, it is too early to include cryptocurrencies as a dominant asset class in a portfolio. That is because the fundamental elements necessary for value investing, such as the ability to conduct due diligence on listed companies before investing in equities, are lacking.

Until that point is reached, sound investing principles that pertain to volatile asset classes should prevail, namely: never invest more than you can afford to lose.

Fedgroup acquires controlling stake in Emergent Energy

+ 05.10.2017

Market demand for investment in income generating renewable energy assets leads to acquisition of leading solar PV provider.

Financial services provider Fedgroup today announced its acquisition of a controlling stake in Emergent Energy, the largest provider of installed solar photovoltaic (PV) commercial projects in South Africa.

The strategic acquisition aims to vertically integrate Fedgroup's pioneering Direct Ownership investment platform into the solar energy generation sector, to rapidly scale the project and meet growing demand. It also gives Fedgroup the ability to leverage the economies of scale this footprint creates to drive down the cost of solar on a scale that has never been achieved before in South Africa.

In November 2016, Fedgroup launched the first iteration of the Direct Ownership fintech platform as a new way for local investors to generate wealth through the burgeoning sharing economy. "Our vision was to disrupt the traditional investment paradigm by offering the public access to a broader range of income-generating assets," explains Grant Field, CEO at Fedgroup.

Interest in the Direct Ownership model has outstripped predictions, which has justified Fedgroup's move from partnering with Emergent Energy to acquiring the company. "We looked to the market to expand rapidly and capitalise on the opportunities we've identified. As a pioneer in its sector, Emergent Energy's expertise and experience in rooftop solar systems made it the ideal choice," says Field.

Solar panels through Fedgroup's Direct Ownership model have to date earned investors a nominal rate of return of 9%, with the financial projections expected to deliver a nominal rate of return of 11% and an effective rate of return of 15%. As a result, since launching less than a year ago, Fedgroup has gone live with five commercial solar farms, four of which have already sold out.

"There is no doubt that green energy is in demand. The opportunity to save the environment and contribute to a greener, more sustainable future, while enjoying robust returns, is resonating with local investors," continues Field.

Fedgroup's investment in Emergent Energy aims to take advantage of this value proposition and meet increasing investor demand for the offering. "Our stake in the company will enable us to scale the platform by leveraging Emergent Energy's existing base of over 65 commercial and industrial solar installations," he adds.

Emergent Energy also boasts the technical and practical experience needed to make solar PV a high yield, low-risk, and reliable investment due to its safe and fully predictable outputs.

Emergent Energy boasts a significant project pipeline, which will offer Fedgroup numerous opportunities to grow its Direct Ownership platform. "The combined value of the installed base and project pipeline exceeds R1 billion, which is significant for the future of renewable energy in South Africa," he adds.

Through Fedgroup's investment and the additional source of funding provided through Direct Ownership, Emergent Energy aims to increase its share of the private sector renewable energy market from 2% to 10%.

Fedgroup manages every aspect of the process: Investors purchase solar panels via Fedgroup's online Direct Ownership platform. Once 70% of all panels in a project are sold, installation begins. Fedgroup then manages, maintains and insures the solar farm on behalf of investors. The panels generate electricity, delivering electricity savings for the landlord, who in turn pays a rental fee for the use of the panels.

By converting unused rooftop space into an income-generating asset without a capital outlay, property owners enjoy additional benefits by way of a passive income from unused real-estate. The platform is also unique in that it has created a new funding model for private sector renewable energy projects in South Africa. In the past, providers needed to either raise funding to buy panels outright, or secure financing. However, by leveraging the Direct Ownership platform, they gain access to an additional capital market.

Look ma: no hands

+ 26.07.2017

The future is driverless, says Grant Field, CEO at Fedgroup. Technological advancement now happens at a rapid rate, with massive innovation happening at the cutting-edge of research and development into driverless, automated transport. However, as with most new advances, there is often a pronounced lag in the rate of consumer adoption of these innovative technologies.

The reason why it takes so long for new technology to filter through to consumer level is affordability. While early adopters are willing to pay the premium attached to owning the latest technology, as is evident by the number of Teslas on the road with their auto-pilot mode in the United States at present, it will still be years before true driverless, automated transport becomes pervasive, particularly in emerging economies like South Africa.

In addition to the issue of cost, other factors such as government regulation and legislation can also hamstring the roll-out and adoption of something as complex as facilitating a driverless environment.

Gradual progression

Regardless, there can be no doubting the fact that driverless transport will become reality. While this may seem like a massive step change in the way we commute, the truth is that, like most significant advancements, it has been a gradual and progressive road to this point. For instance, the first car to offer guided cruise control emerged some 25 years ago, but that was the first step towards the driverless vehicle.

Next came park distance control, radar following, and lane assist. Driverless cars now simply bring all these technologies together. In addition, the technology that enables us to not own a car and hail a ride on demand also exists. These elements will eventually come together to deliver the massive step change that is true driverless transport – no humans behind the steering wheel – but it certainly won't happen overnight.

Insurance consequences

Ubiquitous driverless transport should result in a reduction in both short-term insurance claims and accident-related life insurance claims as most accidents happen due to driver error. If fewer people own vehicles due to the ability to simply hail a driverless car to transport them, there would also be a reduction in premium business on the short-term side.

There will also be a huge amount of data made available to insurers from the telematics in these vehicles, which could be used to better rate risk. It's hard to predict exactly how this will specifically play out, but it should mirror the impact that GPS vehicle tracking technology had on the short-term insurance market when it first became available.

One aspect of driverless transport that will prove to be the biggest challenge facing insurers is that of determining fault. When a driverless car does crash, who will be liable? Will it be the designer of driverless technology, the vehicle manufacturer, the owner, or the person in the car? Unintended consequences

The other aspect to consider in the context of insurance is the changing types of threats that would face operators. While the risk of unintended accidents will decrease, the risk of hacking and the potential for intentional crashes will replace it.

Fedgroup

Established in 1990, Fedgroup has grown into South Africa's leading independent financial services group.

Its independence has allowed it to develop its own point of view on the business of insurance and investment. It puts people before profit. It believes in old-fashioned ideas like honesty, integrity and dignity. And it places a lot of value in its dedicated and committed staff.

How will the Internet of Things affect your world?

+ 19.07.2017

By Grant Field, CEO at Fedgroup. Estimates suggest over 500 billion devices will be connected to the Internet by 2030, which means the Internet of Things (IOT) is set to revolutionise every sphere of life, including the insurance and financial advisory sectors.

There'll certainly be inherent risks to our 'connected' future, with greater opportunities for hackers to use these numerous 'entry' points to disrupt networks, or to sniff out information from our digital footprint to commit fraud or theft.

However, our growing digital footprints also offer numerous opportunities, particularly in the world of insurance, as they help to predict behaviour and are rich sources of information to help rate risk. Unobtrusive, in-depth market research

With the opportunity to track every aspect of life, from daily food intake, sleep patterns and activity levels, to the routes travelled most, average distances travelled per month, average speed, where petrol tanks are filled most often and which card is preferred when paying, data analysts have at their fingertips an opportunity for unobtrusive in-depth market research. While this needs to be solicited on the part of the data provider (and technology user), the application of big data and advanced analytics tools has the power to revolutionise both short- and long-term insurance, with further applications in financial planning.

In this regard, by using data and analytics, financial services will be able to better individualise investments, establish financial plans and offer insurance against hard data and facts, rather than the biased, incorrect or, often, patently false self-reported information supplied by clients.

Human bias

This is because human bias and expression, often doesn't correlate to actual behaviour. However, with the assistance of hard data from telematics or the use of smart devices to gather information, these biases can be reduced or eliminated and there'll be less chance to hide specific facts. This not only helps advisors to better understand their clients and select the best products for them, but more accurate data and insights can also assist in improving underwriting to secure the best possible premium. These processes may also reduce the potential for material non-disclosure, which could affect a claim, for example.

Furthermore, with the continued collection of data, which establishes trends and patterns, there may be opportunities to regularly improve premiums through continuous underwriting based on monitored behaviour. This could lead to new products such as dynamic life insurance, which scales in accordance with real-time changes to a client's risk profile. While this has been possible in the past, it was prohibitive due to the administrative requirements. However, IOT and its integration with other systems has the power to change that.

There's no emotion with technology

The truth is, technology is much better at performing certain tasks, especially where emotions can influence decisions. However, an element of interpersonal engagement will, for the foreseeable future, still be required in the sector. It will therefore be advisors who best understand these new technologies, embrace the way they're changing the industry, and accordingly adapt their business model, who will survive and thrive in the information age.

Fedgroup

Established in 1990, Fedgroup has grown into South Africa's leading independent financial services group.

Its independence has allowed it to develop its own point of view on the business of insurance and investment. It puts people before profit. It believes in old-fashioned ideas like honesty, integrity and dignity. And it places a lot of value in its dedicated and committed staff.

HR: Are one-size-fits-all employee benefit models relevant?

+ 14.07.2017

Modern society is characterised by diversity, where uniqueness and individuality are considered admirable traits. Accordingly, people tend to over-value the importance of individualisation. However, in the context of employee benefits, particularly group life insurance products, individualisation can be costly, inefficient and, in general, is largely unnecessary.

While a one-size-fits-all solution that considers all people as the same and offers no differentiation is definitely not a suitable offering to companies of any size, an appropriately structured solution that offers the right combination of medical benefits, retirement savings with group life, critical illness and/or disability insurance, along with the right combination of options to offer a degree of appropriate choice, is better.

Employer's discretion

It falls to employers to determine the appropriate mix of products in the basket of employee benefits, which align with the specific needs of each company, the industry in which it operates and the characteristics of the workforce. There are, of course, central themes that apply to all people, such as the need to save towards retirement, for instance.

The question of appropriateness should therefore centre on cost – determining how everyone can maximise their retirement savings, no matter how much, and get appropriate life insurance cover through a product that charges the lowest possible fees. This is what ultimately delivers long-term value by ensuring more of what is paid to product providers gets invested, and to further benefit from the power of compound interest and deliver the appropriate long-term return, and provide adequate insurance cover.

In this context, product flexibility and options such as member choice add layers of complexity, which increased administration, fee and other related costs and therefore erodes long-term value. As such, individualisation is not always the answer, especially for big groups that are price sensitive, such as companies composed primarily of low to mid income earners.

True, meaningful benefits

To deliver true, meaningful benefits, many providers have worked hard to create employee benefit schemes that yield long-term value. However, when providers offer members too much choice and flexibility, customers tend to make poor choices because people tend to think and act according to short-term views and sentiments and their investments and decisions around money-related matters are all too often influenced by emotion. This is why member choice is a poor option in the context of long-term savings and employee benefits.

To combat perceptions that individualisation and attributes such as member choice are indicative of premium offerings or key differentiators, which is just a hollow marketing ploy, providers in the employee benefits industry should aim to communicate better with their customers, with particular focus on upfront education to teach them what group products are and what they can offer if used correctly. Employers should insist that providers engage with staff in a language that they understand, with open, proactive channels of communication to ensure that a constant flow of information is provided to help make customers more aware of the ways in which their choices and decisions impact their financial futures.

Navigating death benefit distribution

+ 11.07.2017

IRFA, Fedgroup aim to help boards determine dependency for fair, equitable death benefit distribution.

The Institute of Retirement Funds Africa (IRFA) will this year host a series of workshops presented by Fedgroup that aim to assist in navigating the veritable minefield that is fair, equitable death benefit distribution.

The workshops will address the many pertinent concerns and challenges faced by the industry, while also working towards industry consensus for a uniform approach to the complexities of the process. "As Section 37C of the Pension Funds Act provides that death benefits do not form part of the deceased's estate, when a member of a pension fund dies before retirement age, the board has a fiduciary, legal and professional duty to determine how the death benefit of the fund member is distributed among all beneficiaries and dependants, whether listed in the nominees form or not," explains Jeanetta Hendricks, business development manager at Fedgroup. This could include any person who was factually or legally dependant on the fund member, which could therefore include spouses, children, parents, and/or any other legal or financial dependants.

According to Hendricks, this makes ensuring that all dependants receive a fair and equitable distribution of the death benefit a highly subjective process that can become an ethical minefield when trying to meet the expectations of nominated beneficiaries, while also satisfying the duties required of trustees.

"Factors that can potentially confound the process include South Africa's unique family dynamics and societal practices, such as fragmented familial structures, child-headed households, and the absence of formal marriage structures, or even legal unions as there are six recognised forms in South Africa," she adds. Other considerations include factual dependants such as same-sex partners, step children, foster children, or common law spouses.

Adding further complexity to the process is determining the level of support required by each dependant, which could include a deceased's spouse, children or even parents, and the difficulty of ensuring that all possible beneficiaries have been located, which should be concluded within 12 months of the fund member's death.

"The Act fails to offer regulated guidelines or directives on how to determine who qualifies as dependants and how trustees should apportion the benefit when making a determination, and there are no express instructions, procedures or formulae to outline what steps could be regarded as reasonable," elaborates Hendricks. Furthermore, many within the industry only read the Act in silos, and rely mainly on industry best practices and value judgements to make these determinations. Accordingly, the workshops aim to highlight all relevant legislation and legal frameworks – both within the retirement industry and other ancillary legislation – that can be used to make informed decisions. This includes the Financial Services Board's PF 130 circular, as well as case law precedents and ancillary legislation, such as the Children's Act, Divorce Act, and Maintenance Act when making determinations on minor children, or the Civil Union Act and Recognition of Customary Marriages Act to determine spousal or partner apportionment, which can help support the process and ultimate decision.

"There are no clear guidelines on which pieces of legislation should be applied in cases where acts conflict," continues Hendricks. "Accordingly, arriving at a decision on how to distribute a death benefit requires a multi-faceted deliberation process, which we hope to elucidate," she concludes.

"The workshop will provide immense value to attendees," says Wayne Hiller Van Rensburg, IRFA President. "Both industry and the public need more clarity in this aspect of retirement funds, and as such the Navigator Workshops are extremely valuable."

Attendees of the workshops will earn six Continuing Professional Development (CPD) points. For more information or to register for the conference, visit www.irf.org.za

Retirement savings: can they benefit your dependents?

+ 14.06.2017

Contributions into pension funds serve to provide financial independence into old age, but what happens to those funds should you pass away before retirement age?, asks Jeanetta Hendricks, business development manager at Fedgroup. Issued by: Headlines

Many people making these monthly payments are unaware that, as defined by the Pension Funds Act, beneficiary funds exist, which provide a means to manage and administer these funds on behalf of minor beneficiaries and dependants. In the event of a pension fund member's death, a beneficiary fund ensures that they're able to derive meaningful benefit from this money until they reach the age of majority, says Fedgroup Financial Services.

Should a member of a pension fund pass away before their retirement age the fund's board of trustees are tasked with determining how the lump sum death benefit, other approved benefits such as retirement funds, and employment-related unapproved benefits such as funeral and accident cover should be allocated among the member's beneficiaries, dependants and nominees, according to the dictates of Section 37C of the Pension Funds Act.

Death benefits fulfil an important function in a society where those who are formally employed can often support up to 10 dependants. As such, these benefits act as a type of social fund that aims to ensure families and dependants do not become reliant on the state or, worse, destitute following the death of a sole or primary breadwinner.

And, beneficiary funds are one of the most cost-effective funds available and also offer institutional investment returns. Once lump-sum benefits have been placed in a beneficiary fund they're also tax exempt as they're taxed in the same manner as pension funds. This means that no tax is paid in the fund and any payment made out of these funds to beneficiaries is also tax free, as are investment returns.

Thanks to tax reforms the pre-retirement tax-free threshold for lump-sum benefits also increased to R500 000, which ensures that those who need this money most – the dependants – receive a larger portion of the death benefit.

However, these benefits are mitigated if a surviving spouse or legal guardian attempts to invest and manage these lump sum pay outs in their personal capacity or through a trust as they don't have access to institutional investment platforms, nor the aforementioned tax benefits. Furthermore, Beneficiary Funds are safer than trusts and are less onerous in terms of taxation. They are therefore a better tool to ensure fund preservation and protection.

Accordingly, it can be highly beneficial for Pension Fund members to understand the role of Beneficiary Funds and the benefits and advantages they offer to surviving family members and dependants. They are then able to stipulate in their nomination form that this is their preferred financial instrument to administer and manage their approved benefits – their Pension Fund and group life cover – as well as their unapproved benefits on behalf of their dependants.

To make 100% certain that these funds are invested in this manner the nomination form can be supported with the stipulation in a last will and testament. Supported and guided by the member's stipulations trustees are better able to decide on the disbursement used, ensuring peace of mind for fund members as they know the money will be used for what it was intended, and that it is ring fenced to deliver lasting, meaningful benefit to their children.

From strength to strength: Fedgroup awarded for excellence

+ 10.05.2017

For the fourth year running, PMR.africa has recognised Fedgroup in the Excellence Awards. Fedgroup was honoured last night for the fourth year running at the prestigious PMR.africa Excellence Awards. This year, Fedgroup won its fourth consecutive (and second consecutive gold) PMR.africa award in the Group Life/Risk category.

Fedgroup was also named in the top three in the country in Investment Products, and Group Pension and Provident Funds, further underlining the high quality of the Fedgroup offering. The reason the industry takes these awards so seriously, says Fedgroup Life CEO, Walter van der Merwe, is because these awards cannot be entered into and are determined solely by the ratings received from brokers in this field. "Because of this impartiality, they are highly coveted in the industry."

Each year, Fedgroup sees a steady improvement in perception and recognition by the industry. This, according to Van der Merwe, is as a result of a thorough examination of the feedback, which is used to constantly improve on systems and procedures. "As a people-centric organisation, we take customer service extremely seriously. We utilise all feedback to ensure we are constantly evolving and improving to meet ever-changing needs and expectations."

PMR.africa measures "competitiveness, effectiveness, excellence, leadership, and resilience", and the awards set a benchmark in the industry.

The allocation of awards is based on a national research process where a company is rated across a range of 14 criteria that include flexibility, innovativeness, quality and competitive pricing of products. Competence, efficiency and integrity are key in the voting process.

"The awards are the culmination of a research process whereby companies and institutions are rated based on respondents' perceptions, with a strong focus on evaluating and measuring customer service and customer satisfaction," according to PMR.africa.

Says Van der Merwe: "Fedgroup has always maintained that our staff show a commitment to our clients that is hard to surpass. Additionally, we have a highly innovative management model in place that encourages improvements to service levels, and sophisticated technology supporting our staff. As an independently run company, which encourages and values independent thinking, we do things differently, and attract staff that are motivated by an ethos that runs throughout our company – Fedgroup certainly owes this honour to them."

Fintech: Disintermediating the industry

+ 28.04.2017

The smartphone has certainly been one of the most important drivers of disruptive financial technology (fintech). This device has been the pivotal tool used in the disruption of the traditional banking paradigm, with the banking app effectively making any smartphone a ubiquitous 24/7 branch. Consumer and business transactional banking can now be done anywhere at any time, rendering physical branches irrelevant outside of administrative and regulatory compliance requirements.

While this form of disruption has been a boon for banks by improving customer satisfaction and reducing expensive people-driven processes, fintech disruption is also hurting traditional models. Take, for instance, mobile peer-to-peer money transfers and point of sale payments, in all their various guises – PayPal, Alipay, M-Pesa, Nomanini, Google Wallet, and Apple Pay are just a few examples.

This type of disruptive technology was a massive step toward disintermediating the banks from the transaction process, and even led to the disruption of the concept of money itself, with digital currencies such as Bitcoin offering a new means to transact and invest.

In developed markets such as those of the US and Europe, this form of fintech has started to erode the traditional revenue streams of banks. Interestingly, though, in developing nations, fintech is helping to give the unbanked masses – the so-called unclaimed market – a means to transact outside of traditional channels, thereby helping to grow the market.

It is understandable then that global investment in fintech ventures tripled to $12.21 billion in 2014 and continued climbing, with US$19 billion invested into the sector in 2015, according to research by KPMG and CB Insights.

And it is not just transactional banking that is receiving all the attention. The insurance and investment markets are now poised to experience a period of disruption that will undoubtedly change the sector's landscape, including the traditional role of the intermediary.

In a process that is being dubbed the 'Uberisation' of fintech, the smartphone and Internet have become the platform on which financial services and products are delivered on demand, at the touch of a button.

In this realm, the virtual world is disintermediating the real one – no more trips to your banker or broker to complete a mountain of paperwork, because your smartphone is now the middleman. It's DIY investing via a Web-based platform, giving investors direct access to anything from stocks and currency trading to peer-to-peer (P2P) lending and equity crowdfunding.

All of these on-demand services are helping end-users bypass intermediaries to access the financial products they want and need to build their own portfolios and manage their wealth. But it's not just the process of accessing traditional financial products that is changing, as the types of investments and financial instruments being offered are rapidly changing too.

Crowdfunding via services such as SeedInvest and Fundable, for example, enables individuals to fund an idea or company for an equity stake. Whether it's a fintech start-up or renewable energy provider, the opportunity to invest across market verticals and in just about any asset class imaginable is now readily available.

With so much disruption happening, particularly in the intermediary channel, should the traditional financial industry be worried? The general consensus is, no. Rather than compete, most banks and financial service providers are acquiring fintech start-ups or are developing their own platforms, services and apps to evolve alongside them.

And, with such an abundance of options, coupled with what is proving to be an increasingly difficult sector to regulate, the need for sound financial advice from intermediaries who are savvy to this new breed for financial offering has never been greater. The ‘Uberisation' trend can apply to independent financial service advisors, too, with the potential for a Web-based advice and engagement channel. This will obviously require a shift in the knowledge and understanding of the investment and insurance market, along with the new tech that underpins it, not to mention a new revenue model, but in this age of rapid innovation, it probably won't be long before there's an app for that, too.

Employee benefits: a powerful business differentiator

+ 24.04.2017

While consumers generally only think of insurance when they need it, in the current economic climate, employees from large corporates to small-to-medium enterprises (SMEs) are increasingly ranking high on their list of importance the financial security that comprehensive employee benefit schemes offer.

By offering benefits that include medical aid and wellness schemes, retirement annuities and, increasingly, group risk cover that includes lump-sum critical illness and disability cover, and income protection, companies are not only able to meet this demand, but are also finding it is a powerful tool to attract and retain key employees, most of whom now understand the inherent benefits of these perks.

Comprehensive group risk cover can, for instance, ensure that should an employee be unable to work due to injury, most commonly caused by car accidents, or illness, the most prevalent of which is cancer, they continue to receive an income through an income protection plan, to sustain their standard of living.

This could be in addition to receiving a once-off lump-sum disability or critical illness payment that could assist with any other financial commitments or to cover additional medical treatment or medication, should there be a shortfall in their medical aid.

While both income protection and lump-sum disability would both require a waiting period before the employee receives the benefit, and specific definitions of impairment would have to be met for the insurer to pay out, they are distinctly different products. Where a disability claim is an upfront, lump-sum payment, in the case of income protection, there would be an ongoing monthly benefit received to replace the employee's monthly after-tax salary.

In this way, income protection is generally a larger benefit as it is paid over a longer period, which means that premiums are often higher. These monthly payments would continue for as long as the employee is unable to earn an income due to an impairment that meets the insurer's definition, or for a predetermined period in the case of a temporary income disability plan. If the employee recovers and is able to return to work, then the disability income benefit would end. The employee could, however, make additional claims should there be another instance of impairment or illness. Understanding these parameters is important, particularly at the group scheme inception stage.

Employers have a duty to clearly communicate the specifics of the group risk cover options that are being selected and that employees will be entitled to. Selections in this regard are often dictated by affordability, which means companies with large work forces of lower income earners will structure their group risk offering differently to companies with predominantly higher earners, and income protection is usually a significant contributor to premiums. As such, a temporary income protection product is often preferred in terms of affordability, but in so doing, the financial implications to staff of this choice need to be taken into account.

From a group risk perspective, there will be one benefit definition that applies to everyone as individualisation costs more. However, there may be occupations or positions that are riskier from an insurance perspective than others within a company, which would need to be rated to ensure everyone gets the right amount of cover, at the right price. In this regard, the help of a qualified and competent financial planner can be invaluable.

Not only can they perform a financial needs analysis for staff to determine if additional individual gap cover may be required to supplement the group cover offered by the company, but their knowledge of the various products on offer from the numerous providers is essential at inception stage to ensure a good fit for the company and that their employees receive the most relevant and affordable cover.

Moreover, because disability and critical illness claims, be they for income protection or lump-sum disability, are not as clear-cut as death claims, it is beneficial to know which providers pay claims based on the relevant medical info and their ability to assess claims against predetermined definitions. This ensures there are seldom any surprises should an employee need to access the financial support provided by this form of insurance at a time when they need it most.

Technology's hand in reshaping insurance

+ 20.04.2017

By Grant Field, CEO, Fedgroup The life insurance industry has seen many technological advances in the recent past. First, the large life insurers invested heavily in developing bespoke systems or implementing legacy IT platforms that are able to manage administrative and operational requirements. These systems were expensive, but deliver economies of scale that create cost and operational efficiencies. Then, the rise of cloud computing enabled greater access to these systems, particularly back-end access for the intermediary market to expedite the risk-rating process and speed up the sales process considerably.

However, this type of technology has become the de facto standard within the life insurance market. While there is still innovation happening on a systems level, the next technological evolution that will reshape the industry is happening outside of the life insurer's network, and actually requires minimal capital expenditure.

The rise of big data – extremely large data sets that can be analysed to reveal patterns, trends and associations – is being driven by cloud computing, where data can be integrated and easily accessed, and in large part by developments in consumer tech, most notably advancements in wearable devices and smartphone technology.

These devices are yielding massive amounts of information about the habits of people in their everyday lives, which insurers can then use to improve underwriting and better manage risk. This ensures better outcomes for the insurer, while also enabling better ratings for consumers who lead healthier lifestyles, and for various populations as a whole, too.

While these capabilities require investment into data analytics tools, the major costs of developing these devices are carried by the manufacturers. Take the Apple Watch as an example. Apple invested huge upfront capital and considerable expertise into the research and development of this device, which is something that life insurers simply cannot afford to do. However, monitoring heart rate and activity tracking, as examples, have now been made relatively cheap, both for consumers and insurers. The same applies to vehicle satellite tracking technology, which now delivers data on driving behaviour to help create more personalised short-term insurance premiums.

Beyond the device, we're also experiencing tectonic shifts in the data available to insurers through the rapidly advancing sphere of biotechnology. Spearheaded by advances in modern medicine and other disruptive technologies that are still in their infancy, such as DNA analysis, these technological capabilities are reshaping the way life insurance is underwritten.

From a medical perspective, take the treatment of HIV as an example. Not even a decade ago, those with HIV had heavy loading applied on their premiums, but today, it is a disease that can be controlled to the point where it hardly impacts mortality risk. If you take away the stigma, it is conceivably easier to live with HIV than it is to live with diabetes.

In terms of the insights that DNA analysis offers, biotech companies are now able to ascertain the potential risk that an individual has of suffering from various dread diseases. However, this is dependent on myriad other factors, but this technology could conceivably be used to rate mortality risk once stronger associations between genes and these diseases can be made.

While issues such as data ownership and how best to make use of this depth of information still pose barriers to implementation, those who get it right first will have a huge competitive advantage.

Despite these advances, the business of life insurance hasn't changed much. It is still a matter of taking what we know, and then using predictive, statistical modelling to determine what will happen in the future, but now we have extended means to make these predictions. It is not so much the data that matters most in the information age, but rather what you're able to do with it that determines your success.

2016

PF 130: Providing trustees with a moral compass

+ 31.08.2016

By Carmen Schubert, legislative advisor at Fedgroup There are various pieces of legislation and good governance procedures that shape the retirement fund industry in South Africa. These pieces would include the Pension Funds Act, the PF130 circular drawn up by the Financial Services Board (FSB) which outlines principles of good governance and the guidelines set out by the Adjudicator, which she refers to as a “basket of factors”. However, these various documents are often utilised in isolation – to the detriment of the funds and their governing trustees. This is especially evident when it comes to making decisions regarding death benefit distributions in terms of Section 37C of the Pension Funds Act.

In South Africa, the general rule of law dictates that each person has complete freedom of testation and can bequeath their estate to whomever they please. However, this freedom does not extend to the distribution of approved death benefits payable from a fund registered under the Pension Funds Act. Thus, if a member of a retirement fund dies before he has exited the fund, his benefits are not paid in terms of a nomination form or in terms of his will. The fund’s board of trustees have a fiduciary duty to determine how the death benefits should be allocated among the member’s beneficiaries, dependants and nominees,; using the member’s nomination of beneficiary form and will as a guideline or investigative tool.

According to Section 37C of the Pension Funds Act, it is clear that there is a duty on the board of trustees to determine the dependency of each beneficiary and to make a fair and equitable distribution among the member’s beneficiaries and, under certain circumstances and conditions, the member’s nominees, using the member’s beneficiary nomination form as a guide but not an absolute instruction. The trustees’ decision becomes onerous as they have to make every reasonable effort and take all the necessary steps to identify and make contact with all the member’s dependants and nominees without prior knowledge of the deceased’s household circumstances, to ensure that an informed decision regarding payment of benefits can be made.

However, there are no express instructions, procedures or formulae to outline what steps could be regarded as reasonable and that reasonability would depend solely on the particular circumstances of the member’s household at the time of the Section 37C investigation. For example, it would not be reasonable for the trustees to track down a person living in a remote area of the country who might have been semi-dependent on the member, if the benefit available for distribution would almost wholly be utilised to track down that potential beneficiary. This would be especially pertinent if there are confirmed dependents who were totally supported by the deceased. However, where there is evidence that a minor dependant’s benefit may be squandered by the guardian, it would be reasonable for the trustees to conduct further investigation into the finances of that guardian and possibly pay any apportionment into a beneficiary fund for the benefit of the minor. In fact, failing to do so may, in certain instances, constitute a breach of fiduciary duty and be considered unreasonable, as the rights of the minor have not been protected.

While arriving at a decision on how to distribute a death benefit requires a multi-faceted approach to the board of trustee’s deliberation process, the actual apportionment is also based on how the trustees interpret the information. Thus, different trustee boards may make different allocations, although all the allocations could be seen as equitable and fair. While the unique circumstances of each distribution and the manner in which the trustees come to a distribution resolution makes it very difficult to criticise that decision, the trustees will fail to fulfil their fiduciary duty in apportioning death benefits if they do not act in good faith, apply their minds to the problem, or fail to exercise discretion after taking account of all the various known facts.

Thus, the fiduciary duties placed on trustees by the Pension Funds Act, the somewhat vague guidelines on how they should apportion benefits in the best interests of the beneficiaries, the need to be apply their minds, be reasonable, fair and equitable, all combine to force trustees to make decisions by relying on industry best practices and previous value judgements.

However, the trustees often overlook the fact that they can also use the guidelines put forth in the PF130 circular released by the FSB, which provides some form of guidance in the field of good governance, when conducting such investigations. This document attempts to promote legislative compliance and good governance with regard to the trustees’ duties and responsibilities in all decision-making processes. And, while this document does not deal specifically with the distribution of death benefits, it serves as both a guide and a reference on recommended best practices by promoting the drawing up and implementation of policies and mandates that govern various decision-making processes. These policies would include provisions to outline the trustees’ code of conduct, declarations of interest, communication policies and sub-committee mandates. While none of these items would provide the trustees with a rule of thumb when making decisions regarding death benefit distributions, they will provide the trustees with principles and guidance in the due diligence aspects of the Section 37C process.

To expand, familiarising themselves with the code of conduct policy would ensure that the trustees are made aware of their fiduciary duties and what is expected of them, and a declarations of interest policy would ensure that no trustee is promoting an allocation to a specific beneficiary because of a vested interest.

A communication policy would help to educate members on how death benefit distributions are made and how members can help the process by providing full and correct information. And, finally, the wording of the mandate which appoints a sub-committee to investigate and propose a death benefit distribution will ensure that the members of that subcommittee are fully aware of the scope and power of their duties.

To quote the circular, good governance “includes values and ethical principles which require a certain standard of behaviour of the board”. Therefore, the various principles and policies espoused in circular PF 130 will ensure that the good governance and due diligence structures are in place as a support for the trustees when making a difficult decision such as a Section 37C distribution.

Settlement Trust eases burden

+ 05.08.2016

Personal injury lawyers are in a unique position to understand the emotional turmoil that afflicts a family following the injury or death of a loved one, and often find themselves fulfilling a counselling role for those affected by the event, in addition to performing onerous administrative tasks. To ease the burden on both the families and the lawyer, Fedgroup has launched the innovative Settlement Trust solution.

The significant shock that a family suffers in the event of the injury or death of a loved one is often compounded by the lengthy delays between the life-changing event and the final court order to receive payment from the Road Accident Fund (RAF), or from a medical malpractice suit. Even after a favourable judgment, more delays follow from the date of the court order to the actual date of payment.

These delays are often difficult for family members to understand, especially those who have not gone through this experience before. This is particularly true of the often lengthy lag time between the court order and the payment from the RAF. This prompts them to be in constant communication with their legal representative, who often cannot provide any certainty beyond advising them to be patient and wait for the payout. In the meantime, the family often faces financial hardship in the absence of a breadwinner. Fedgroup therefore identified the need for a solution that could ease the burden on both the family and the lawyer during this time.

The proprietary Settlement Trust account structure was therefore created to ensure that money is made available to meet the basic everyday needs of a beneficiary soon after the court order is granted and the Settlement Trust is registered, but before the lump sum payment from the RAF is made.

To make use of this offering, those affected by road accidents or medical malpractice can sign up for the Settlement Trust product with Fedgroup, even before a court order is made. Then, upon the issuing of the court order, and immediately upon a Settlement Trust being registered, an amount up to R30 000 is paid over to the trustees to cover the waiting period until the court-ordered payment is made into the trust.

“Beneficiaries often wait up to ten months from the date of the court order before they receive any financial support or benefit,” explains Grant Field, CEO at Fedgroup. “This can materially impact the quality of life of a beneficiary as it denies them access to these vital financial resources, which may be needed for continued medical treatment, or to improve the quality of life for those who have been left with diminished capacity or permanent impairments.”

The money may also be needed immediately to cover loss of income or provide ongoing financial support to dependents, should a primary breadwinner be injured or pass away.

“Because of Fedgroup’s passionate commitment to Beneficiary Care, we have sought additional ways to support and care for the vulnerable and potentially destitute following the often devastating effects of road accidents or medical malpractice and negligence,” says Field.

In addition to providing instant financial relief to beneficiaries, Fedgroup is also able to assist attorneys and advocates in managing the process of Settlement Trust registration, and to ensure that the ongoing process of trust administration and asset management are made as simple as possible.

“Our end-to-end administrative services ensure that the assets in a Settlement Trust are accessible within 48 hours of being released by the RAF – a record in the industry,” says Field. “This ensures that we can further reduce the administrative burden on attorneys and advocates because lump sum payments can immediately be paid into the Settlement Trust once received by the attorneys. This negates the need to hold assets in an attorney’s trust or investment account, which reduces the costs associated with multiple transfers. It also allows attorneys to move on and help new clients rather than spending additional unnecessary time on administration.”

In addition, Fedgroup’s centralised management, enabled through a bespoke IT system designed and built to manage this specific need, ensures that the company becomes the central point of contact for all stakeholders during every stage of the process, with automated regular updates that keep attorneys and Beneficiaries informed of progress.

Once the Settlement Trust is registered, and the lump sum payment has been made into it, Fedgroup will continue to provide administrative services as part of this seamless offering.

“This includes maintaining the delicate duty of caring for Beneficiaries entrusted to us by advocates and attorneys, and the management and preservation of the assets needed to provide them with meaningful financial support,” concludes Field

Navigating the maze: EB for a diversified market

+ 30.07.2016

When structuring employee benefits for the small-to-medium enterprise (SME), there are certain principles that should be applied regardless of the size of company or the socioeconomic circumstances of staff members.

Foremost among these is the selection of an employee benefits provider and the cost implications thereof.

Advisers need to understand that, from a risk-rating perspective, group cover will be cheaper than individual policies due to cross subsidisation; males cross subsidise females, and the youth cross subsidise the mortality risk of older individuals.

The cost factor
As such, underwriting is only required above a certain limit for some employees, whereas individual policies require underwriting from the first rand insured.

The cost of these benefits will then come off contributions to an umbrella fund, along with the provider’s administration costs. This is priced into the offering and included in the total contribution rate.

Providers that levy additional admin fees against retirement savings erode value and nullify the cost benefits of umbrella funds. Therefore, advisers need to be aware of cost structures before advising their clients on potential offerings.=

They should also be wary of providers that undercut the price for group cover initially to secure business only to implement double-digit escalations in subsequent years to cover the shortfall. Always remember, if it sounds too good to be true, it usually is.

Focus on metrics
With these principles in place, the information then needs to be extracted from employees for the insurer to determine adequate cross subsidisation ratios and price the group benefits. These include gender, date of birth, occupation and income of employees.

While occupation determines risk, income ultimately determines employee group benefits as a person’s basic financial requirements generally do not vary based on industry verticals.

Take for example a small manufacturing business with 20 employees; most of whom are semi-skilled or unskilled. They work with machinery and income levels are usually low. They generally support an extended family.

In this instance, an adviser should look at the basics, bearing in mind the cost of benefits because the higher the sum insured the more expensive the premium. The cost of the group cover is proportional to salary. The basic requirement would include life cover which should not exceed three times the annual salary for management and no more than once the annual salary for factory workers to remain affordable.

Funeral cover of at least R15 000 should be included as it’s a relatively cheap benefit comparatively and meets an important need for these socio-economic groups, because the benefit extends to the entire family. To cover the potential risks of working on the factory floor, capital disability should be included. A lump sum benefit is preferable as it’s more cost effective than income protection.

The other side of the coin
Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the adviser should consider to categorise levels of cover between high and low earners.

Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the adviser should consider to categorise levels of cover between high and low earners.

As a starting point, the higher earners can consider life cover that equates to five times their annual salary to take advantage of the cheaper cover through the group scheme. The lower income earners can consider life cover of three times their annual package to keep it more affordable.

In this instance, income disability cover is more important than capital disability for higher earners to maintain their standard of living. They can also afford the premium. The lower earners should consider lump sum disability of three times their annual salary. Due to the low cost and the minimal impact it has on premiums, funeral cover is worth including for both groups as it pays out within 48 hours.

Additional cover for higher earners should include critical illness and education trust cover, which continues to pay for the education of their children should they pass away as they can afford both benefits.

Encourage following the standard
The industry standard for retirement savings is 10% of pre-tax income. Higher earners could go higher to take advantage of new tax structures. However, it’s wise to keep the all-inclusive premium – risk benefits and retirement – to no more than 15% of pre-tax earnings for lower income earners.

Finally, advisers need to understand that they should never negate their requirement for consultation, regardless of the degree of cover offered. While individual consultations may be the norm with high income earners, there is a need to meet with everyone before structuring employee benefits because all employees have a right to consultation regardless of the fees that will be charged. This can of course take the form of a group consultation for lower income earners.

The adviser should also be involved in regular client engagements. This is an opportunity to provide updated info to employees and foster stronger relationships. This could lead to opportunities to up-sell to clients or find other opportunities to sell financial products to make the whole transaction more viable rather than relying solely on once off upfront commissions that do not benefit anyone in the value chain in the long term.

Applying even-handedness to beneficiary fund administration

+ 15.07.2016

Highlighting the need for trustee impartiality in selecting a beneficiary fund provider The issue of the impartiality of trustees when deliberating on the placement of pension funds following the death of a fund member was recently highlighted by the Pensions Fund Adjudicator.

In this regard, the Pensions Fund Adjudicator’s deliberation on the matter clearly outlined her concern with the fact that when a fund member passes away and a beneficiary fund is selected as the ideal mode of payment, that trustees often place funds with the pension fund administrator if they have a suitable beneficiary fund offering.

It is an important statement for trustees to understand, mainly because a fund administrator who offers this service as part of a broader end-to-end offering may not always be the best choice when it comes to meeting the unique needs of beneficiaries.

It is a common practice that trustees should reconsider and, in so doing, aim to act with greater impartiality for the best interests of beneficiaries. This is because trustees are ultimately responsible for the continued care of beneficiaries, with the placement of these funds the primary enabler thereof as they provide ongoing financial support to those left destitute following the loss of a primary breadwinner.

It is therefore the responsibility of trustees to ensure that the beneficiary is catered for according to their specific needs, which is why this important decision should not be based on convenience, shareholder requirements or even nepotism. Accordingly, when deliberating on which beneficiary fund provider to entrust with this role, trustees need to base their decision on objective criteria, setting aside subjective biases and preferences.

This approach is also required of trustees to fulfil their mandate and meet their fiduciary duties as outlined in the Pensions Fund Act, which dictate that beneficiaries should receive the same level of care and support that was provided by their parents. Therefore, there should be no discrimination in the process of selecting a beneficiary fund provider and distinctions of an adverse nature should not be applied.

The Act also requires that trustees act independently and without conflict of interest, which is why all reasonable steps need to be taken to ensure they act with due diligence and consider their responsibilities carefully.

Further informing a trustee’s approach in this critical decision-making process and guiding them in terms of governance requirements, Circular PF 130 issued by the Financial Services Board recommends industry best practices in the rendering of services to a board of trustees. The document clearly defines the need for independence in the execution of tasks by members of the retirement industry through the application of transparency, ethics, equity and the absence of self-interest or a conflict of interest, and always in the best interest of fund members – in this instance, beneficiaries.

To this end, trustees should consider how often they review all suitable beneficiary fund providers in the industry, how much they apply themselves to making an unbiased evaluation of these providers and not simply stick with the status quo, and just how much credence they give to the administrator’s ability to perform the beneficiary care role in the same manner that they fulfilled their pension fund management duties.

Further to this, trustees should also consider if a single beneficiary fund provider would be sufficient or even capable of meeting the specific needs of a beneficiary, or if two or maybe three might be better able to according to their unique capabilities, on a case-by-case basis. While there may be cost implications, there is not always a one-size-fits-all approach to the provisioning of optimal care to beneficiaries. When all of these requirements are considered in totality, simply taking the easiest route when selecting a beneficiary care provider is definitely not an option.

In a similar vein, a trustee does not relinquish their responsibility to the beneficiary once a beneficiary fund provider has been appointed and the funds transferred. By ending their role prematurely by not ensuring the provider delivers adequate care to maintain the wellbeing and on-going support of the beneficiary following their appointment, a trustee also fails to meet their due diligence requirements.

A pension fund cannot be deemed to be paid to the beneficiary after it is placed in a nominated beneficiary fund. The onus still rests with the trustee to ensure that the provider they selected fulfils their duty with the requisite skill, expertise, ability, administrative capabilities and experience for which they were selected. Only once these services are provisioned and a suitable level of care delivered to the beneficiary can a trustee consider their responsibilities fulfilled.

Ultimately, trustees are handing over the care of a vulnerable human being. It is not simply a financial transaction. A trustee needs to leave a beneficiary under the aegis of a suitable caretaker, and without impartiality during the selection process this predominant duty entrusted to a board of trustees is not always met. It is ultimately up to the trustee to make the right choice in selecting a beneficiary fund provider, not the fund administrator, in the best interests of the beneficiary. While this may not always be an easy choice, it is certainly the most important decision from the perspective of the beneficiary.

Counting the true cost of upfront fees

+ 09.06.2016

When it comes to the ultimate success of retirement savings, every rand invested over time will have a meaningful impact on the final outcome thanks to the power of compound interest.

Excess, often unnecessary fees, particularly upfront fees and percentage-based admin fees, can therefore have a deleterious effect on the ultimate value of an investment and the returns an investor will enjoy on retirement as it reduces the impact of compounding interest.

Unfortunately the modern-day retirement investment industry is characterised by complexity – complicated, tiered products that supposedly offer greater returns that are accompanied by complicated fee structures.

Various funds today also apply differing cost structures, with some charging asset-based management and administration fees that increase in relation to the sum invested, which penalises those who save or invest more. These investment fee structures also tend to look cheap at quotation stage when there is no asset, but become excessively high as the fund accumulates over time.

It is also not uncommon for funds to attract other fees such as portfolio-based multi-manager fees and performance-based fees. In many of these instances it is often only the top-line costs that are disclosed, not the underlying asset manager fees. These so-called hidden fees also erode fund value as they add up over time. And don’t forget that the financial advisor also needs to take his commission, often in the form of an upfront payment.

The lack of transparency with regard to these upfront fees often leaves investors unsure of what they’ll get in return for their lump sum investment or monthly contributions. Therefore, the first step to improving investment returns and the creation of long-term wealth is to understand the impact that differing upfront fees can have on fund value. This would enable investors to select advisors and investments based on performance and the associated costs to determine real returns.

As an example of how high upfront fees can impact investment returns, take two investors who both invest a lump sum of R100,000 at the same rate of return over a period of 10 years. Based on different upfront fee structures they would realise vastly different returns when the investment matures. Assuming an annual growth rate of 7%, the investor who was charged a lower upfront fee of 1% would realise a return of R194,747.98 after 10 years. Investor B, on the other hand, who was charged a 5% upfront fee, would only receive R186,879.38 over the same period.

In this example, investor B would only recoup his initial lump sum investment after 11 months following the upfront fee deductions. This means he spends almost the entire first year effectively paying his returns to the administrator. Conversely, investor A starts making positive returns in the second month having already recouped the fees. In addition, investor A will earn over 9% extra on his original investment because of the small upfront fee that barely affected his initial lump sum investment.

In the case where both investors choose to make a monthly contribution of R1,000 to a fund that delivers a 7% return per annum on investments that mature in 10 years, when investor A, who was charged an annual fee of just 1%, would receive R163,879.35. Investor B, who was charged a 5% annual fee, would get back only R132,719.66, a substantial difference of R31,159.69.

In this example, the higher upfront fees effectively eroded 31 months worth of contributions. In the context of retirement savings, this effectively means that investor B would need to work for almost an additional three years to continue making contributions to achieve the same outcome as investor A, just because he didn’t query or understand the upfront fees. Add additional monthly admin fees and other hidden charges and it’s easy to see how quickly fund value can be eroded further over time.

It therefore pays to take the time to understand and determine the impact that any upfront fees that an advisor, portfolio manager or investment provider may charge to ensure more of your money is invested over the longest possible period to benefit from the power of compound interest. Often, if it is too confusing to understand it probably means hidden fees which usually delivers lower returns over time. It is also worth finding an advisor who charges annuity-based fees for on-going interactions with you to better manage your investments over time.

Investing in your 20’s

+ 01.06.2016

Life in your twenties is generally filled with adventure and a sense of reckless abandon as you’ve been set free from the shackles of school life and are now paying your own way, says Walter van der Merwe, CEO, Fedgroup Life.

The freedom that a regular income brings can be intoxicating and many young people choose a life of care-free spending.

Few 20-somethings therefore give a thought to saving even just a small amount each month toward their retirement. It’s understandable given their circumstances, but if more young people adopted a basic approach to saving earlier in life they would set themselves up for a very comfortable future, cautions Van der Merwe.

This is largely due to the power of compound interest, which means a little saved over a long time can deliver big returns. Take, for example, someone who invests R15,000 at the age of 25 in an account paying 5.5% compound interest annually. Twenty five years later that amount would have grown to R57 200.89.

By contrast, if that person invested the same amount at the same interest rate at the age of 35, it would only have grown to R33,487.15 by the time they reached the age of 50.

“Granted, most 20-somethings don’t have a lump sum to invest into a retirement savings plan, but it is a simple example that illustrates that the longer you allow compound interest to work, the more money it will make for you,” he says.

With that in mind, a small monthly contribution of just a few hundred rand invested each month from the day you start earning an income would be the best place to start. Obviously the smaller the amount with which you start, the longer you need to leave it invested to accumulate significant interest, but the basic principle applies.

Low minimum
Choose a savings plan that has a low monthly minimum contribution, but one that stops you from accessing your money immediately. This will ensure you don’t give in to life’s temptations, of which there can be many in your twenties, and withdraw the funds.

Avoid unnecessary risk
While conventional investing advice would advocate investing in higher risk funds and investments when you’re young and therefore have a longer investment horizon, it is always best to avoid unnecessary risk when it comes to investing for retirement.

Start investing in a stable fund that offers solid returns, and when you start earning more money or choose to invest more, start a discretionary investment fund that can be used for riskier options that yield higher returns.

Starting early
Investing in this manner in your twenties will also help develop good savings and retirement planning habits early on, which will prove invaluable as life’s expenses and financial commitments grow in unison with your monthly income the older you get.

In fact, starting early is ideal as you tend to have more expendable income available, before family commitments and mortgage repayments start to bite into your monthly budget. In this instance, saving becomes more about “not spending” than finding the money to actually invest.

Starting early will also ensure that you have more time at your disposal to correct any financial mistakes or shortfalls that occur.

The fact of the matter is that by missing the opportunity to start investing early on in life when you have the means and ability to do so comfortably, you’ll merely be holding back the potential of your retirement investments in the long run.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

A tale of two pension funds

+ 15.05.2016

In the collective context, pension funds consist of two seemingly similar product offerings. However, while the aim of each investment is ultimately the same – to provide fund members or beneficiaries with a form of income – pension funds and beneficiary funds are distinctly different.

The generic pension fund, for instance, is an investment vehicle for those saving for retirement. Whatever the age of the investor, they make contributions to a pension fund to invest money that will deliver a return and provide them with a form of income when they are no longer working.

The beneficiary fund, on the other hand, is a type of pension fund for minors. This fund aims to pay out money to a beneficiary to provide them with a form of income or livelihood to replace what is lost following the loss of a family’s primary breadwinner. This money is provided over a set period of time until the beneficiary reaches the age of majority.

The average term of a beneficiary fund is eight years which means it has a limited investment horizon. Pension funds are invested over a much longer period. In this context, a pension fund targets growth to fight inflation and deliver the desired return at a specified point in the future. Beneficiary funds also need to target growth but need the requisite liquidity required to meet the financial needs and obligations of the beneficiary too.

Accordingly, the investment strategies that need to be employed for each fund should be different. Why then are so many beneficiary funds managed in the same manner as pension funds? Why are so many beneficiary funds tied up in off-shore or long-term growth funds? Why does the legislation governing pension funds not adequately cater for the differences between these two funds? Why are so many beneficiary funds unnecessarily complex?

The fact of the matter is that, in its current state, the special requirements and elements of beneficiary funds are not entirely aligned with the Pension Funds Act. This is a concern that has previously been noted and acknowledged by industry commentators, who have stated that beneficiary funds require their own set of rules. Certainly, housing beneficiary fund regulations outside those of generic pension funds would simplify matters and the industry would be better equipped to meet the financial needs of beneficiaries and their guardians.

However, without these rules many beneficiary funds still adopt complicated policies, investment strategies, and apply terms and conditions that are more suitable to pension funds that cater to retirement.

A beneficiary fund, with its short investment horizon, cannot have these layers of complexity if it is to fulfil its primary social mandate – to ensure that minors or the aged do not become dependent on the state or destitute – because a balance between liquidity and adequate returns is required. Beneficiary fund management therefore needs to be simplified to remove the cost and complexity inherent in the industry, for the benefit of those who ultimately need it most, the beneficiaries.

Those entrusted with managing these funds in the best interests of the beneficiary – the trustees – need to understand that even though it looks and feels right because it is the industry norm, the prevailing approach to targeting investment growth is misplaced and needs to change.

Without change, beneficiaries and guardians who try to access money will continue to wait longer than is acceptable to receive funds, and will continue to pay the high costs and fees associated with investing and disinvesting from long-term asset classes. There are also additional admin requirements and the associated costs that accompany these complex processes.

Unfortunately, changes to legislation that govern how beneficiary funds are regulated within the ambit of the Pension Funds Act are some way off. However, there are ways in which fund providers and administrators can help to mitigate some of complexity now, to ultimately deliver greater value to the beneficiary.

The most important approach in this regard is to simplify the process of beneficiary fund management as far as possible. For example, simplifying the administrative requirements by using technology to automate processes and basic admin tasks can help keep the expensive human resource requirements to a minimum.

The same logic can be applied to the investment strategies adopted, especially when considered in the context of the target audience. When a beneficiary fund is chosen for a minor the customer is ultimately the board of trustees – they decide on which fund provider to appoint. However, the consumer – the beneficiary – is left out of the selection process.

Conversely, with regard to a pension fund, the customer and the consumer are the same. These individuals are able to choose their preferred fund allocation to chase a specified return or, for greater simplicity and cost savings, they can invest in a default portfolio that still meets their primary needs and requirements. Trustees are therefore tasked with thinking along the same lines when making decisions on behalf of the beneficiary.

While both types of funds are regulated in the same manner, they both need to deliver different outcomes and therefore cannot be approached in the same way. It is also easy for trustees to fall into the trap of chasing the highest possible returns in a genuine, albeit misguided attempt to deliver the most value to beneficiaries. However, in this instance the end does not justify the means and this approach tends to overcomplicate the process.

By carefully considering the beneficiary fund provider selected, their approach and efficiency with regard to beneficiary management, and their fees, trustees can reduce complexity-driven costs and ensure the beneficiary ultimately benefits.

The common characteristics of pension funds – targeting higher returns – comes with greater costs and administrative requirements, and a lack of liquidity, which does not adequately cater to the requirements of a beneficiary fund, which, ultimately, is to meet the basic financial needs of the beneficiary.

A separate, simpler approach is definitely needed, whether it is mandated through regulatory guidelines or merely adopted as best practice by an industry that should always have the best interests of the beneficiary at heart.

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Constructing employee benefits for the SME

+ 01.05.2016

When structuring employee benefits for the small-to-medium enterprise (SME), there are certain principles that should be applied regardless of the size of company or the income of the staff and their socioeconomic circumstances. Foremost among these is the selection of an employee benefits provider and the cost implications thereof.

Advisors need to understand that, from a risk-rating perspective, group cover will be cheaper than individual policies due to cross subsidisation – males cross subsidise females, and the youth cross subsidise the mortality risk of older individuals. As such, underwriting is only required above a certain limit for some employees, whereas individual policies require underwriting from the first rand insured.

The cost of these benefits will then come off contributions to an umbrella fund, along with the provider’s administration costs. This is priced into the offering and included in the total contribution rate. Providers that levy additional admin fees against retirement savings erode value and nullify the cost benefits of umbrella funds. Therefore advisors need to be aware of cost structures before advising their clients on potential offerings.

They should also be weary of providers that undercut the price for group cover initially to secure business, only to implement double-digit escalations in subsequent years to cover the shortfall. Always remember, if it sounds too good to be true, it usually is.

With these principles in place, the information that then needs to be extracted from employees for the insurer to determine adequate cross subsidisation ratios and price the group benefits offered includes the gender, date of birth, occupation and income of employees.

While the occupation determines risk, income ultimately determines employee group benefits as a person’s basic financial requirements generally do not vary based on industry verticals.

Take, for example, a small manufacturing business with 20 employees, most of whom are semi-skilled or unskilled. They work with machinery and income levels are usually low. They generally support an extended family.

In this instance, an advisor should look at the basics, bearing in mind the cost of benefits because the higher the sum insured the more expensive the premium – the cost of the group cover is proportional to salary. The basic requirement would include life cover which should not exceed three times annual salary for management and no more than once annual salary for factory workers to remain affordable.

Funeral cover of at least R15,000 should be included as it’s a relatively cheap benefit in comparison to the rest and meets an important need for these socio-economic groups because the benefit extends to the entire family. To cover the potential risks of working on the factory floor, capital disability should be included. A lump sum benefit is preferable as it’s more cost effective than income protection.

Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the advisor should consider to categorise levels of cover between high and low earners.

As a starting point, the higher earners can consider life cover that equates to five times their annual salary to take advantage of the cheaper cover through the group scheme. The lower income earners can consider life cover of three times their annual package to keep it more affordable.

In this instance, income disability cover is more important than capital disability for higher earners to maintain their standard of living, and they can afford the premium. The lower earners should consider lump sum disability of three times their annual salary. Due to the low cost and the minimal impact it has on premiums, funeral cover is worth including for both groups as it pays out within 48 hours.

Additional cover for higher earners should include critical illness and education trust cover, which continues to pay for the education of their children should they pass away, as they can afford both benefits.

The industry standard for retirement savings is 10% of pre-tax income. Higher earners could go higher to take advantage of new tax structures. However, it’s wise to keep the all-inclusive premium – risk benefits and retirement – to no more than 15% of pre-tax earnings for lower income earners.

Finally, advisors need to understand that they should never negate their requirement for consultation, regardless of the degree of cover offered. While individual consultations may be the norm with high income earners, there is a need to meet with everyone before structuring employee benefits because all employees have a right to consultation regardless of the fees that will be charged. This can, of course, take the form of a group consultation for lower income earners.

The advisor should also engage in regular client engagements. This is an opportunity to provide updated info to employees and foster a stronger relationship. This could lead to opportunities to up-sell their clients or find other opportunities to sell financial products to make the whole transaction more viable, rather than relying solely on once off upfront commissions that don’t benefit anyone in the value chain in the long term.

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