Investment lifeline for pensioner

2013-07-24 15:34
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Only six million people in South Africa belong to a retirement fund. (Shutterstock)
Daryl Ducasse, an investment manager at Merkurius Capital Solutions, has some advice for a Fin24 user who believes she missed the pension savings boat:

After sharing her story on Fin24, the user wrote in a follow-up letter to Fin24's investment risk expert Daryl Ducasse, seeking further advice. She wrote:

I don’t know if you saw my letter on Fin24 as I did not address it to a particular person, but only after reading up I saw your name and details so I wonder if you could offer me some advice on this matter.

I went to see the financial person at my bank about my MM account and asked him where and what I could do with it, and where to transfer it because of the low interest rate in the MM fund at present: 4.9%.

He suggested I put it in the Absa Absolute Fund and gave me various reasons why, the low equity exposure, has a CPI of plus 4%, fund has performed well, etc.

As always there is a ‘catch’ and that was the fees up front to transfer into the AIMS which on an amount of R250 000 would be R8 550 (3.42% initial charge) and annual management fee 1.71%.

He didn't give me advice on what to do with the balance of the money left in the MM account!

I would have to take the R8 550 from the R250 000 and he said I should make this back in my account in a short period of time.

If this is the way to go, is there any other way of investing in this fund without consulting Absa and paying the fees?

As my MM account is growing slowly, I would think that by next year I would be liable for tax if my interest is over R32 000pa which could well be the case!

Your advice would be much appreciated.

Ducasse's response:

Firstly, a few boring legal and disclaimer issues:

1. We are not registered financial advisers or planners, thus, it is not our practice to give advice on investment planning;
2. We are investment risk advisers, meaning what we do is converse to what financial planners do; instead of trying to convince you to take up an investment, we are able to identify and point out the risks in that opportunity - from returns, legal structures, real rights, risk of failure, and such like;

Therefore, what I will be setting out below is opinion only, but we can assist in directing you to a registered financial planner if you still seek to take up what was offered to you.

Continuing on to your enquiry:

1. The money market account can only pay you what the bank is willing to pass on due to their margin squeeze – i.e. the difference between what they buy their capital at, and what they can make from lending it to customers;

2. As long as interest rates remain at or below their current levels, customers who attempt to save and grow their money by earning interest in any such account will be treading water at best, or in negative territory at worst – the costs and tax eat into the overall returns, leaving you with very little net growth;

3. I will leave my colleague Ken (Morison) to address any tax issues where necessary;

4. You have made reference to an amount of R250k, with some left over in the money market account:

a. What is the total quantum of funds currently in the money market account – R630k?
b. Are you considering putting R250k into the Absa Absolute Fund?

5. I have attached the fund fact sheet, from which you will note the following:

a. The fund is nevertheless vested to the extent of 46.76% of its funds in money market, equities and pref shares, so I’m not sure I understand the context of risk in relation to your statement below: "I cannot take any high risks with it so am unable to invest in the stock market….”

b. The funds declaration is that it is of a medium high risk over the rolling three-year period;

c. Please read this extract from the funds disclaimer (at the bottom of the page):

i.  “….The Absa Absolute Fund is a low to medium risk fund. No initial fee is charged but investments through intermediaries could require a commission of up to 3.42% (incl. VAT). An annual service charge of 1.71% (incl. VAT) against the assets of the fund will be calculated and accrued daily.

"Ongoing advice fees may be negotiated to a maximum of 1.14% (incl. VAT) per annum, charged by a way of unit reduction and paid to the Financial Adviser monthly in arrears. This annual advice fee is not part of the normal annual management fee…”

d. Although you will always have fees to pay in relation to investment opportunities, if I am correct in interpreting this, you can invest directly in the fund without going through the bank's intermediary and being charged the R8k? you will just be faced with an admin charge and the annual asset management fee;

e. The financial adviser at Absa has not declared (if he or she knew about it) the ongoing advice fee of 1.14% p a;

f. Try and contact them directly - 0860 111 456;

6. The total cost to you (year 1) to change into the fund would be R12 825 (excluding any early cancellation penalties you may have on your money market account);

7. Please ask the person at Absa to give you a spreadsheet illustrating just how you would make this money back “in a short space of time” – i.e. what will your first year return be net of costs?

8. The CPI + 4% is a benchmark – has the fund achieved this?

a. Extracts from link above:

i. “R1 000 invested on 30 Jun 2012 was worth R1 118.52 on 30 Jun 2013 (11.85% annual compound return)”;

ii. “R100 per month since 30 Jun 2012 was worth R1 245.27 on 30 Jun 2013 (6.82% annual return compounded monthly)”;

9. Preservation funds are unfortunately not always what they appear to be (‘preservation of capital’) – I have had this comment from many clients and friends. Depending on your answer to the questions in 4 a & b above, you may well consider putting this amount into the AAF? There are alternatives, but we will get to discussing those in time;

10. By all accounts, you appear to be in a good position with home and vehicle paid off, cash in hand, and the luxury of investment choices ahead of you – I guess the last part must be a little nerve-wracking?

11. The notion that you cannot afford professional advice is something I disagree with somewhat; on the one hand, I understand the sentiment and the risk – i.e. you pay for something upfront you’re not sure you’re eventually going to benefit from?

On the other, making choices yourself, and getting snippets from the odd person here and there, is not necessarily going to achieve better results.

12. Please digest my reply, make the call to Absa directly and enquire about a direct investment into the fund, and then let’s pick up the conversation again.

Just to follow up on this matter:

What I had suspected, I now have confirmation of - the annual compounded return is stated with income distributions reinvested, and is net of fees.

It does not make it bad – just read the fine print.

 - Fin24

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