Category Archives: Finance

Marriage of institutional muscle and youthful intellect

Two years ago then Sanlam Personal Finance CEO Hubert Brody recognised that its clients were aging alongside its salesforce, and if the financial services company wanted to attract millennials it had better do something differently.

Brody has since left and been replaced by Jurie Strydom, but the thinking remains the same. “Product development within the conventional frameworks is unlikely to ever challenge the status-quo,” says the head of Sanlam’s Strategic Business Development, Ahmed Banderker. “New developments can get stuck for a year just because we are trying to ensure the client experience remains the same.”

The thinking is that by moving a team out of Sanlam and giving them wings to fly, innovators can take a more agile approach to product development. “They are funded and supported by Sanlam but they are 100{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} independent which means they can act fast and fail fast without damaging the brand,” he says.

One result, among other developments, is Indie and it looks set to help rather than hinder the Sanlam brand.

The start-up financial services business has launched its first product set – life insurance – which has been designed from the ground up, specifically for the digital generation. “We have not reinvented the insurance model itself – there is nothing wrong it, like there is nothing wrong with banking,” says Peter Castleden, former head of Sanlam’s Actuarial Product Management and now CEO of Indie. “The problem is the user experience.”

Thus Indie takes the tedium out of the application process, turning a lengthy paper-based process into a six-minute, online affair.

It also introduces a concept called Bounty, which in one step removes the two biggest problems facing life insurers: the notion that insurance is a grudge purchase and churn, which can see even established insurers losing up to 30{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of its customers in a year.

Bounty is a financial reward that is delivered once a customer has signed up, whether via the broker platform, or direct via the web or mobile interface. It is real money that is invested in a fund of the client’s choosing (it defaults to a money market fund) to generate wealth for them over time. The initial amount is related to their age and premium – a 30 year old signing on for a R500 life insurance policy can receive a R50 000 bounty. This will remain invested until the client reaches the age of 70. The full bounty and interest earned is then paid out.

Recognising the need for instant gratification, a portion of these funds – up to 5{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of the initial value – can be drawn every five years with ‘CashDrops’, should all premiums be paid during this time.

“We’ve been able to offer this value-add by using technology to drastically reduce the cost of acquisition and the administration of legacy life insurance,” says Castleden. “It does not add to the cost of the product – in fact it actually reduces the cost over the duration of the policy.

“We believe that this is a game-changing value proposition that will gain the traction we want in this market, as clients are literally paid to be insured,” he adds.

It was in the development of this product that the value of Indie’s ties with Sanlam became apparent. “We used their compliance team; their pricing actuaries to stress-test our models; and we drew from their 100-years of data.” For instance Indie asks prospective clients whether they ride a motorbike – it’s the only insurer to do so. “Sanlam’s data shows clearly that motorbike riders are as likely to claim as smokers,” he says.

Saving system is more effective than many realise

More than two decades after the end of apartheid and we are still living in a deeply divided society, which has given rise to two very different financial systems. These are the unregulated informal financial sector that has developed in response to past disenfranchisement, and the modern formal financial institutions some of us access through conventional banks.

We are led to believe that the formal sector is incredibly efficient and that it is being dragged down by the unregulated, unstructured informal sector. However, after doing much research into the dynamics of the informal sector, it seems that it is a booming and efficient ecosystem of its own that the formal sector could learn a lot from. This informal financial sector developed from stokvels.

Stokvels are part of a traditional saving system and have been used for generations to pool money in order to buy high-value items. They are often overlooked by the formal sector as outdated and highly inefficient. However, the stokvel industry is worth R45 billion and is made up of 11 million South Africans. It has been borne out of necessity. The formal sector tends to view stokvels as vehicles that generate no interest, are cash-based and are fraught with crime and theft. This is not true. What if I told you that the average stokvel generates returns in excess of 40{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} per year and that people in rural/peri-urban areas are more likely to take a loan from a stokvel at 30{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} interest a month than a formal loan from the bank?

In our research in Khayelitsha, Cape Town, we dug deep into the dynamics of the local stokvels. What we’ve found is that the majority of community members will always approach a stokvel first to obtain a loan before approaching the formal sector and that the default rate on loans given out by stokvels is generally lower than the default rate on loans given out by the formal sector. This is because stokvels generate an extraordinary amount of social capital – non-financial benefits that include community pressure, social respect, social education and social interaction. These factors are viewed as more important in the capacity building of members of a community than the financial returns a bank could ever give them.

Additionally, if social capital is used and managed effectively, it can result in an incredible amount of trust and understanding that pushes default rates down and allows for returns in excess of 100{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} to be generated.

The stokvel sector has not only allowed people to buy groceries during the festive season or to access burial insurance, but stokvels themselves have single-handedly empowered single mothers to build homes, put their children through tertiary education and have even allowed people to start businesses.

Many of the single mothers we spoke to said that when they moved to Harare in Khayelitsha in the mid-90s, their government grants only allowed for building a concrete slab. They were then responsible for funding the balance needed to build a house. So how did they do this? They formed groups of about 20 single mothers who all needed to build houses. They then came together and all applied for loans from formal banks. The banks would generally only grant five out of the 20 women the required money and so they would form a stokvel to pool together enough money to fund the remainder. They would first help the five women granted loans by the banks. They would repay their loans quickly by pooling money and recording how much each of the five women were helped. Once the money that had been pooled had paid off the intitial five loans, these same five women would take out additional loans to help the remaining 15 women build their homes. This was done in stages based on the need of each of the women, because they would only be able to get five loans at a time.

Tips to get your personal finance in order

  • Prepare an itemised list of all your expenses and divide the expenses into Group A, being fixed expenses, such as car repayments, other debts and payments you are contractually bound to pay monthly. Other discretionary expenses you are able to reduce or even cancel without suffering any negative legal or financial consequences such as entertainment, clothing, cable TV should be included in a Group B.Select certain Group B expenses you wish to reduce or stop [that gym subscription?), do so and allocate extra payments to shorten the outstanding payment periods (and reduce the interest payable) of Group A expenses or start a small rainy day account for those unexpected financial surprises. Which expenses should be reduced and in what order of priority will depend upon circumstances such as interest rates, tax deductibility, outstanding payment periods and so on. Always a good idea to consult a professional to assist you in making the correct decision.
  • Make an appointment with your financial planner to verify whether your life, disability, dread disease and accident benefits are adequate or surplus to your needs and whether recent product developments have resulted in more cost efficient and/or comprehensive cover being available at the same or at a cheaper cost to you. Planners are, today, required to provide you with comprehensive comparative information to provide you with the peace of mind that you are making a decision that is in your best interest.
  • Create a filing system (whether it be a lever arch file or a folder on your desktop for emailed documentation) for all your financial records such bank or credit card statements, accounts and invoices. This will save an enormous amount of time when a payment is in dispute. If you have other important legal documents, why not also save these using a similar format?
  • Request your short term broker to review your insurance to ensure that your house, car and other property is sufficiently insured against damage or loss.
  • You will have, in all probability, already made a decision as to your medical aid plan for 2017. Speak to the medical aid consultant about so-called Gap cover to meet any possible shortfalls you may experience in the event of a medical emergency. These plans are relatively inexpensive and worth consideration.
  • Harass your banker for a better deal around your banking options. Is it really worth all those bank charges to have a Rolls Royce cheque account and credit card if you are not making use of all the benefits they offer? Consider a down grade of the banking package, at the risk of losing benefits you don’t use anyway but in so doing your bank charges may very well be substantially reduced.

Faced with heap of property syndication complaints

The Office of the Ombud for Financial Services Providers (Fais) is still struggling with a backlog of 1 378 cases related to property syndication schemes.

A lot of these complaints have been on its books for several years, as it faced legal challenges about its jurisdiction and had to suspend complaints about property syndication matters at one stage.

The Fais Ombud received a record number of new complaints in the year through March 2017, with total complaints rising by almost 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} to 10 846. The 2016/17 financial year marks the first time the office received in excess of 10 000 complaints. Of these, 5 630 fell within its ambit, compared to 4 263 the year before, a rise of 32{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}.

The backlog of property syndication matters relates to complaints it previously received and is not included in the 2016/17 numbers.

The property syndication matters were one of the challenges the office faced during the past financial year, team resolution manager Marc Alves told Moneyweb on Friday.

He did not want to be drawn on the number of cases that specifically related to the failed Sharemax property syndication scheme.

Asked how long it took to resolve a property syndication matter, Alves said the matters had been delayed over the years because of legal challenges on whether it had jurisdiction, which had resulted in a backlog.

“It is hard to put a timeframe on it. It is just because of all these delays that we’ve had to go through that these specifically have been held up that long. Otherwise they would have moved [through the system] like any other complaints and [would have been] assessed, evaluated and determined just like any other complaints.”

General complaints

According to the Fais Ombud, Noluntu Bam’s annual report, her office faced its “fair share of challenges” over the past financial year.

Apart from the property syndication matters, the main challenges were the increasing number of complaints it received and the complexity of the complaints, Alves said. The office received a lot more complaints related to investments and retirement planning which put strain on its capacity.

Alves attributed the sharp rise in the number of complaints to a greater awareness about the existence of their office and the service it provided.

The majority of complaints related to short-term insurance.

“Despite the importance that short-term insurance plays in an individual’s financial planning, financial service providers (FSPs) who operate in the short-term insurance space still violate provisions of the Fais Act and the Code,” Bam wrote.

Alves said short-term insurance was often still sold based on the premium rather than appropriateness.

“Because of that there appears to be this – for want of a better word – reckless replacement of policies. Policies are replaced because they are cheaper than another product and not because maybe they are more appropriate than another product.”

In a lot of cases, there was also a failure to gather relevant and available information from clients to ensure that the policy was appropriate for the clients’ needs and not just the cheapest. In certain instances, there was also a failure to maintain an adequate form of recordkeeping, he added.

While some commentators have warned that decisions by the Ombud’s office and the Appeal Board could result in financial advisors defaulting to conservative portfolios for investors that are over the age of 55, Alves said all financial planning recommendations related to retirement had to be made after the FSP had obtained all relevant and available information to ensure the client could make an informed decision and that the recommendation was appropriate to the person’s specific needs.

“Merely defaulting to a conservative portfolio because an FSP is afraid of a complaint being laid with this office – is that serving the interest of the client or the interest of the FSP? I mean it must be borne in mind that should the advice have been appropriate and the client was placed in a position to make an informed decision, this office is unable to investigate complaints that refer solely to investment performance.”

guide to Black Friday spending

South Africans are embracing the opportunities that come with Black Friday specials. In the past three years, online shopping and e-commerce have been picking up, especially with retailers promoting specials days before the big day. But traditional retailers remain jam-packed.

Certified customer experience professional (CCXP), Julia Ahlfeldt said such promotional days certainly stimulate spending activity, and boost economies.

“It can be very beneficial in terms of catalysing spending for consumers who can maximise discounts.”

With the purchasing frenzy in the air with Black Friday, Cyber Monday and the festive season approaching, many shoppers give in to the temptation of every good deal.

Marketing manager of Budget Insurance, Susan Steward advised that shoppers must rather ensure that they budget for their needs before splashing on all the things they want.

“Don’t feel pressured to take advantage of every deal you see,” she added.

Budget Insurance offers 10 tips on how to control your spending this Black Friday.

RunwaySale CEO, Karl Hammerschmidt says consumers are becoming more comfortable with buying online.

“The fact is South Africans love to bargain hunt. Online is just so much easier. With a click of a button you can buy a high-end pair of shoes/dress/bag at up to 80{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} off, delivered to your door! No fighting the crowds.  It’s about shopping in the comfort of your own home, at any time of day, while saving money.”

However, Ahlfeldt said there’s place for both in-store and online shopping experiences. Some items are best bought over the counter while others delivered to either your home or office.

  1. Curb you credit card enthusiasm –  For last minute temptation buys, don’t simply reach for your credit card. Think about how you would want to start the New Year – with a clean financial slate or looking at debt management and debt consolidation options?
  2. Give your wish list a reality check – manage your kids’ expectations when it comes to their wish lists. A survey done by US asset company, T Rowe, showed that many parents dipped into their retirement or emergency funds after overspending on their kids’ gifts. At least 53{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of respondents agreed that they would get everything on their kids’ list, no matter the cost.
  3. Opt for a gift card – A gift card is a quick and easy way of gifting someone. Most retailers, whether online or traditionally offer gift vouchers. A gift card offers more choice to the person, compared to buying them something like clothes or shoes. A survey done by shopping site Splender, showed that these were items most likely to be returned.
  4. Secret Santa can be super – adapting the Secret Santa tradition can drastically reduce your gifting budget. Each person chooses one member of the family to buy a gift for, instead of buying for each person. Everyone agrees to spend the same amount of money.
  5. An expensive month is around the corner – December is the most popular spending month. While January is an expensive month. It requires new spending, especially for parents who need to pay for school uniforms and school fees. Consider the coming months, and save accordingly.
  6. Be safe – Online shopping is a growing sector, if you are shopping online, ensure you are buying from a reputable retailer with a credible payment service. It is high-tide for phishing and financial fraud, be wary of your purchases.

Seeing specials and promotions all around is enticing and to further guide shoppers, John Manyike, head of financial education at Old Mutual said to avoid a financial hangover at the end of the spree, shoppers should certainly shop consciously. He advises:

  • Don’t be an emotional spender;
  • Don’t buy on credit;
  • Don’t increase your credit card limit for the Black Friday frenzy;
  • Save from the beginning of the year for Black Friday specials, so you are in a better financial position to spend during this time;
  • Remember being emotionally committed to your finances will serve you in the end. Don’t justify every purchase;
  • If you are going to buy items on the Black Friday sale, remember how much you budgeted for and keep to it. Keep your calculator close to you to punch in purchases to make sure you are still within your budget;
  • Know when to stop.