A financial planner should sit down with you and diagnose what is wrong with your finances and recommend treatment in the same way that a doctor diagnoses your health problems and writes a prescription, Gerald Mwandiambira, the chief executive of the Savings Institute of South Africa and a financial planner with Sugar Creek Wealth, an Old Mutual agency franchise, says.
The fact that the country is going through tough times and people are saving less does not mean financial planners have no work or their practices are no longer viable. In fact, there are many financial problems that need diagnosing and treating, and it does not matter how little people have to save, he says.
A doctor charges a fee for a professional service and so too should a financial planner.
Mwandiambira, who was speaking at the Financial Planning Institute’s conference in Sandton this week, says a professional financial planner should communicate the message of saving regardless of how little you have to save. Wealth begins with R1 and is a long journey. It does not start only when you already have R1 million, he says.
Mwandiambira says that to gauge the value a financial planner can add to your finances, it is useful to look at last year’s Old Mutual Savings & Investments Monitor, which shows the financial products held by households in which someone is employed (see “How South Africans save”, link below).
Mwandiambira says the 2015 survey shows that one of the leading “savings” products that South Africans use is funeral insurance: more than 70 percent of the respondents in the survey had one or more funeral policies.
He says many people have multiple funeral policies and pay premiums on these policies for years, despite the fact that you can claim cover only up to the value of the policy with the highest value.
Mwandiambira says many people mistakenly think their funeral policies are life cover that will protect their families if they die, but, in fact, only 30 percent of households with a breadwinner have cover against death and disability.
Many of these people are ignorant of the fact that they need to have a financial plan to ensure their family is properly protected if they die or suffer a tragedy, he says. The financial planning industry has the expertise and knowledge and it needs to reach these people.
Funeral policies are life assurers’ most profitable products, which indicates that people pay more in premiums than they get out in benefits.
When it comes to savings, the survey shows that a lot of money is sitting in bank accounts – some 50 percent of respondents in the survey are using bank accounts as savings vehicles despite the fact that these accounts rarely earn inflation-beating interest.
The survey also shows that only about 50 percent of households are contributing to a pension or provident fund, so there is a great need to encourage people to start long-term savings.
But the survey results do not show what is evident from other surveys: that many people who are saving are not saving enough for a comfortable retirement.
Mwandiambira says because employees want more take-home pay, some of them set their retirement savings as a percentage of their income as low as 2.5 percent and keep it this low for years without reviewing it.
He says the Old Mutual survey also indicates a high use of education policies from life assurers, but he is of the view that 98 percent of them are inappropriate for the policyholder’s needs.
When selling you an education policy, the broker typically asks how much you can afford. This is not the way advice should be given, Mwandiambira says. Instead, an adviser should determine how much savings you need for your children’s education.
Finally, the survey shows a lot of money sitting in informal savings such as stokvels: 60 to 70 percent of households have these savings, but they are, by their nature, often not wealth-generating vehicles.
What people need is a financial doctor to help them diagnose the problems they are having with saving, he says.
Many South Africans have no alternative but to live, work and die in this country regardless of the economic climate and it is time to stop worrying about our low savings rate and the weakness of the rand. Instead, make plans for your retirement and for what happens if you die or suffer a tragedy.
Financial planners have a duty to change how South Africans see themselves, how they treat money and how they can move forward, Mwandiambira says.