Why world's professionals often are bad investors

By Michael Hertz Time of article published Jan 24, 2020

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Professionals such as doctors, lawyers and accountants are generally high salary earners, but have often not been great investors, nor have they planned well for their retirement. This is for a number of reasons. First, while professionals may save, they tend to also have an expensive lifestyle, thus eating into possibly higher savings.

Second, professionals are extremely busy by nature, as their income is commensurate with the hours they work. As such, they often don’t have the time or inclination to investigate the investment universe properly and thus invest almost exclusively in property and retirement products.

Finally, professionals generally earn well during their working life but, unlike entrepreneurs, do not own a saleable asset at retirement. They are essentially the commodity themselves, and earn a share of the profits only while they are employed.

Professionals often lack a clear financial plan or strategy, and require a clearly defined financial road map to guide them to better plan for retirement. The benefit of starting the financial planning process as early as possible cannot be understated. It is disheartening to discover how many professionals we meet have reached retirement age and have unfortunately left it too late to build the wealth needed to generate sufficient income to meet their future expenses.

It is therefore crucial to seek the guidance of a well-educated, experienced and professional financial adviser in order to adopt a more disciplined approach to your financial future.

The first step is to develop a clear-cut financial and retirement plan, which incorporates cash flow analysis, fiduciary and financial planning, as well as risk management. This plan should also address the professional’s “firewall” which is the amount required to achieve financial independence.

One of the key purposes of a financial adviser that is often overlooked is their role in ensuring that a professional’s portfolio is properly diversified both locally and offshore.

Retirement funds are limited in terms of the amount that can be invested offshore in compliance with regulation 28 of the Pension Funds Act, and investments in physical properties can become burdensome when considering vacancies, unforeseen expenses and upkeep requirements. Diversification in terms of both asset class and geographic allocation therefore remains a priority.

Additionally, tax structuring and estate planning are absolutely critical in financial planning and are often overlooked by professionals.

A financial adviser would, for example, be able to advise on the most appropriate mechanism to protect a professional’s assets from creditors, or how to enhance the tax efficiency of their investments by splitting income between spouses, taking advantage of capital gains tax as opposed to income tax, and using endowments or offshore retirement vehicles and structures where appropriate. Additionally, a financial adviser is necessary to guide professionals in ensuring that their will is in line with latest legislation and that it remains up to date.

Michael Hertz is an advisory partner at Citadel.


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