The Gradidge Patch

shift happens…

MTN Zakhele Futhi: yay or nay?

The long awaited announcement of the new MTN BBBEE deal happened on 22 August. MTN and MTN Zakhele (MTNZ) both announced that MTN Zakhele Futhi (MTNZF) would replace MTNZ deal post the unwinding of MTNZ in November 2016. The black public is invited to apply for shares in MTNZF while MTNZ shareholders have an option to convert all or a portion of the MTNZ shares to MTNZF shares.

Administration issues

The prospectus became available on 12 September 2016, and investors have until 21 October 2016 to submit their application forms and deposit their funds. Investors can either download the prospectus from or pick one up at a participating Nedbank branch. Investors can also complete the application form online or contact 083 900 6863 if they need any assistance with the application process. It is important to note that investors must not sign the application form until they are requested to do so in a Nedbank branch. Nedbank will request FICA documents (copy of ID, proof of address, and proof of banking). Funds need to be paid across by 18 October 2016, while cash deposits (maximum amount of R24,999) need to be made by 21 October 2016.

Deal structure

The empowerment period is 8 years, with no trade possible in the first 3 years. Restricted trade between qualifying black investors will be possible in the last 5 years. The deal will not happen if less than R1.24bn is raised between the black public and MTNZ shareholders opting for the Re-investment offer.

The MTNZF deal is similar to the MTNZ deal in many ways especially with regard to transaction funding. The funding structure is summarised below:

Source of funding R’millions Weighting Per MTN share
Equity (from public and MTNZ Re-investment) 2,468.3 25.00% R32.12
Upfront costs and working capital (R39.4) (0.4%) (R0.51)
MTN discount (20%) 1,974.7 20.00% R25.70
MTNZF Preference Shares 2,418.5 24.50% R31.48
Notional Vendor Financing (NVF) from MTN 3,051.2 30.90% R39.71
Total 9,873.2 100.00% R128.50

Given the similarities between MTNZF and MTNZ in capital structure, perhaps there will be similarities in the returns achieved by both deals. MTNZ has delivered a return of over 200% since inception in 2010. The one key difference between the funding structure of MTNZF and MTNZ is that there is refinancing risk presented by the preference share funding. The preference share funding is for a period of 5 years, after which it will be either renegotiated with the incumbent preference shareholders, or with new funders. It presents both a risk and an opportunity, if the debt is refinanced on more attractive terms. This is not a deal breaker as the preference share funding comprises 24.5% of the deal. The debt covenants do not appear unreasonable, although a 25% drop in the MTN share price could pose a significant challenge in this regard.

MTNZF directors will have discretion from year 4 onwards to pay a dividend equal to a maximum of 20% of the dividend income they receive from the MTN shares in MTNZF. This is an improvement on the MTNZ deal which did not allow for dividends during the entire empowerment period. Many MTNZ shareholders complained about the lack of dividends from MTNZ.

MTN: The investment case

MTN finds itself in a tough place at the moment. For the six months ending 30 June 2016 it reported a headline loss per share of 271 cents, which was down from earnings of 654 cents in H1 2015. While the Nigerian fine was a significant factor, there were other issues surrounding joint ventures and touch economic conditions in key markets. The company experienced a 48 hour network outage in SA in February 2016. Major risks include increased competition in key markets, political risk in Nigeria in particular, the economic outlook for Nigeria given low oil prices, and reducing voice revenues.

On the positive side the company still has the largest footprint in Africa, which could make it a takeover target for one of the larger global networks. There is strong growth in wireless data and broadband, and capital expenditure is expected to slow going forward.

There is a new management team that will be taking up the challenge of driving the company forward. The market seems to be optimistic that they will deliver the needed turnaround strategy.


Investors have essentially been given a second bite at the proverbial cherry with this deal. MTNZ was a success despite the fact that the MTN share price is largely where it was when the MTNZ deal happened. This is testimony to the funding structure which proved resilient in the face of challenges. The MTNZF deal has a very similar structure.

Investing is about taking risk, and the risk that investors could lose their entire investment remains. It is a risk that I am willing to take for myself, my wife and my kids, but I will not be betting the farm on this one.


What it truly means to take a long term perspective

In 1974, sociologist Dr. Edward Banfield of Harvard University wrote a book entitled, “The Unheavenly City.” He described one of the most profound studies on success and priority setting ever conducted. Banfield’s goal was to find out how and why some people became financially independent during the course of their working lifetimes.

He finally concluded that the major reason for success in life was a particular attitude of mind. Banfield called this attitude “long time perspective.”  Time perspective referred to how far you projected into the future when you decided what you were going to do or not do in the present.

One example given in the book was the decision facing many school leavers – get a job or study further? Having a short time perspective would point to getting a job because you start ‘making money’ sooner than studying. However, research has shown that over the duration of a career, the average skilled or qualified person can earn more than double that of the average unskilled worker, despite starting to earn an income a few years later.

This attitude of a long time perspective is often found in successful entrepreneurs and executive managers in large corporations. This ability to take a long time perspective sometimes leads to decision-making that does not make sense for outside observers, who often have a short time perspective when judging such decisions. I sit in wonder when I listen to people complaining about the traffic jams being caused by the road works on the M1 South. “We’ve got to deal with this traffic for another 2 years!” is the usual refrain. Having driven that road for the past 20 years, 2 years seems insignificant. Over the long-term it is a good thing, over the short-term I’ve adjusted my routing and I actively avoid the M1 South.

A long time perspective for investors needing income

I read an article where a number of financial advisers were asked for their opinions on where investors could invest for income. A ‘highly rated’ adviser suggested a product with an investment term of less than 3 years because it was currently offering a high yield. My immediate thought was “what happens when the product matures in less than 3 years time?” My faith in my profession was restored when another lesser known adviser recommended a combination of asset classes including a chunk in equities.

Consider for a moment two retirees who were facing the decision of where to invest their R1m pension on 1 January 1999. Income funds are yielding over 13% and equities are yielding about 5% at the time. Pensioner A has a short time perspective and chooses the Income fund yielding 13%. Pensioner B has a long time perspective and invests in the equity fund yielding 5%. Pensioner A earns a higher rate of income until 2003 when income growth (and a bit of luck) kicks in for Pensioner B. B then earns more than A from then on, earning as much as 3x more income in some years than A. Cumulatively, A earns more than B until 2006 as a result of the large gap in the beginning. However, come end December 2010 – A has earned approximately R1.7m income and his capital is worth R1.07m. Pensioner B on the other hand has earned over R3.6m income and his capital is worth north of R8m.

linechart 349

(It is never wise for any investor to only invest in one fund or one asset class – the best solution for most pensioners would probably be a combination of both funds, and other funds such as property and offshore).

The difference between income funds and equity funds is that the yields from income funds are based on largely on the interest rate cycle. The yield from equities comes from dividends paid by companies. The thing with the interest rate cycle is that it varies around an average over time. Interest rates go up, then they come down, then they go up again. Dividends on the other hand start at a point and grow from there. The growth rate in dividends varies over time, and can be negative at times, but generally maintains pace with inflation. At some point the effect of compounding kicks in – and the income from equities outstrips that of fixed interest alternatives. Property income also shares this trait with equities – growth compounding over time leading to a higher income over time.

Why are more investors invested in cash and bonds then?

One possible reason is that equities and property are volatile over the short-term from a capital perspective. This deters a lot of investors, and retirees / pensioners in particular are put off by volatility. It is a very uncomfortable thing seeing one’s investment down by double-digit percentages, and then still drawing income from such investments. See the capital performance of the two funds referred to in the graph above. There are numerous periods where the capital value falls more than 20%. Many income investors are unnerved by this. They still equate the capital value of an asset to wealth, and ignore the ability of the asset to generate income over the long-term.

linechart 350

Another reason income investors favour bonds and cash over property and equities is that many retire without having saved enough for retirement, and are then forced into a short term mentality where they have to invest where the highest yields currently are. A third possible reason, as mentioned earlier, even ‘reputable’ market commentators are sometimes prone to a short term mentality.

A long time perspective and investing for growth

Financial and investment articles published in December and January in particular often contribute to short-termism by growth investors. This year they may have read articles like “where to invest in 2016” or “the A – Z of investing in 2016” or “stock picks for 2016”. Investors’ language often betray this short-term perspective. I often get asked “where is the best place to put my money at the moment” or “what’s doing well now”? Investor behaviour also tends to show up this short-term thinking – consider unit trust sales data which show the highest inflows to equities, property, and offshore assets after the respective markets have delivered strong returns.

While these assets are volatile in the short-term, this volatility fades in the long-term, with long term equity returns around the 13 – 15% p.a. level over time. A major threat to an investor’s wealth is inflation. Inflation is a long-term phenomenon which does not impact investors meaningfully over the short-term. By the time it does become an issue for investors, it is often too late for them to do anything about it. Equities and property have both outperformed inflation significantly over the long-term, with cash and bonds marginally outperforming over time, and often under performing over the short term. Once tax has been factored in, cash and bonds struggle to beat inflation.


Taking a truly long-term perspective is about understanding what the best course of action to take now that will lead to the best outcome over time. It is not simply investing in something for a long period of time and hoping for the best. It is an attitude that needs to be developed in all spheres of life, which would make it easier to apply to investment decisions.

The original version of this article appeared on Moneyweb ( on 27 February 2012 and was written by myself. This version has been edited and updated.

MTN Zakhele Futhi: too soon to judge!

The long awaited announcement of the new MTN BBBEE deal happened this past Monday 22 August. MTN and MTN Zakhele (MTNZ) both announced that MTN Zakhele Futhi (MTNZF) would replace MTNZ deal post the unwinding of MTNZ in November 2016. The black public is invited to apply for shares in MTNZF and MTNZ shareholders have an option to convert all or a portion of the MTNZ shares to MTNZF shares.

There seemed to be a lot of excitement in the market following the announcement, which is surprising as the prospectus will only be available early September. I have read articles complaining about the 8 year term attached to MTNZF, while others have complained about the 20% discount, and others have complained about both. I do not believe that there is sufficient information available at this stage to make a judgement call on the deal before the prospectus is released.

However, there is some useful information available from the announcement and this is what we know at this stage;

  • The offer will open on or around 12 September and will close on or around 21 October
  • The empowerment period is 8 years, with no trade possible in the first 3 years. Restricted trade between qualifying black investors will be possible in the last 5 years
  • The deal is being structured similarly to the MTNZ deal in terms of funding (discussed in more detail below)
  • The deal will not happen if less than R1.24bn is raised between the black public and MTNZ shareholders opting for the Re-investment offer

The MTNZF deal is similar to the MTNZ deal in many ways especially with regard to transaction funding. The funding structure is summarised below and compared to the MTNZ deal in 2010:

Source of funding R’millions Weighting MTNZ weighting
Equity (from public and MTNZ Re-investment) 2,468.3 24.90% 19.5%
MTN discount (20%) 1,974.7 19.92% 15.6%
MTNZF Preference Shares 2,418.5 24.40% 26.1%
Notional Vendor Financing (NVF) from MTN 3,051.2 30.78% 38.8%
Total 9,912.7 100.00% 100.00%


The key difference between the deals is that MTNZF has an 8 year maturity compared to MTNZ at 6 years. I do not believe that the extra two years is significant, in fact it could add meaningfully to MTNZF shareholders as it could result in more debt being settled and a higher conversion ratio of MTNZF to MTN shares at the end of the period. Imagine if MTNZ had another 2 years to go, it is possible that all of the debt in MTNZ would have been settled and investors would have ended very close to a 1:1 conversion of MTNZ to MTN if the dividends from MTN remained largely the same as the past two years.

It will be interesting to see how MTNZF deals with the issue of dividend payments to MTNZF shareholders during the 8 years. My hope is that the prospectus gives directors some discretion on this important issue. Many MTNZ shareholders complained about the lack of dividends from MTNZ.

Given the similarities between MTNZF and MTNZ in capital structure, perhaps there will be similarities in the returns achieved by both deals. We need to wait and see the details around the cost of the debt, the debt covenants, etc. but I expect that they will be largely similar to those of MTNZ, in which case MTNZF could possibly end up being more lucrative for investors patient enough to participate in the deal until maturity.

MTN is arguably in a tougher spot today than it was in 2010 when the MTNZ deal came to market. This may in fact work in MTNZF shareholders favour as they are buying in with the prospect of a recovery in the coming years. MTNZF is buying MTN shares at R102 versus the R107 MTNZ paid, but they are also putting up more equity this time, but MTN is offering a bigger discount this time too. All in all it is pointless comparing the relative prospects; MTNZF looks a compelling offer at this stage.

Important: MTNZ shareholders have to make a decision regarding the Re-investment Offer by 19 October. They can either default to a cash payment, choose to receive MTNZF shares to the value of the MTNZ shares (a minimum of 50 MTNZ shares needed for this option), or opt for ordinary MTN shares (a minimum of 200 MTNZ shares needed for this option). If they have enough shares they could opt for a combination of the above options. MTNZ shareholders that do not make an option will receive the default option of a cash payment provided that their bank details are up to date.

I hope my kids will like their Christmas present this year. They will both be getting MTNZF shares. My daughter will be a teenager when the scheme matures so at least we both have something to look forward too now!

(A shortened version of this article is expected to appear in the City Press on Sunday 28 August 2016)

Want to grow your money? Find yourself an airhostess…

I remember clearly the first time I flew on an aeroplane. It was October 1997 and the trip was from Johannesburg International to Louis Botha (Durban). The flight down was largely uneventful, but the return flight I remember quite vividly, and for a number of reasons.

The first reason I remember that flight is because I sat next to rugby legend, Naas Botha. There was an aisle separating us, and I recall how the manne sitting close by were hanging onto his every word. With the Currie Cup final looming, they were talking rugby the whole time, and from what I could gather there were no Sharks supporters in that conversation. As a die-hard Sharks fan I found the conversation quite amusing at times. (The Sharks were the reigning Currie Cup champions then).

The second, and probably the most important, reason I remembered that flight is because of the extreme turbulence we experienced for most of the flight. The captain instructed the airhostesses not to serve hot drinks as they were expecting some turbulence. A little later he instructed them not to serve food either. The turbulence was incredible, especially for me as a first time flyer. Naas and the boys stopped talking rugby about 10 minutes into the flight. I was to hear the phrase “jirre fok” for the first time in my life, repeated over the next 30 minutes. At one point I remember thinking to myself, if this plane crashes tonight the only thing people were going to be talking about was Naas Botha’s career. The other 200 anonymous passengers would simply make up the numbers in a national tragedy.

The third reason I remember that flight was because of one of my colleagues that was sitting in the row in front of me, about three people to the right. His name was Graham, and he was an old Englishman that had been living in South Africa for about 15 / 20 years. While everyone else I could see, including Naas, was looking distressed and visibly shaken by the persistent turbulence, Graham seemed largely unfazed. He read his magazine and occasionally looked forward down the aisle. His calm demeanour helped me a lot to deal with this frightening and unfamiliar situation.

About 10 minutes before touch down the turbulence subsided and the chirps started flowing. The manne seemed to find their voice again. When the plane touched down a large number of passengers clapped hands and cheered. I was a bit too rattled by the whole experience to join in, and I had one mission over the next 15 minutes; I had to talk to Graham to find out why he was so damn calm. I managed to get next to him in the walk to the luggage carousel. “Gray…how is it that you were so calm on that flight?” I asked. He laughed. “Were you scared you were going to die there young man?” he asked rather mockingly. “Damn right! But seriously, what is your secret?” I asked. I needed to get an answer if I was ever going to fly again after that flight. “Just look at the airhostesses – you only panic if they panic” he explained. Airhostesses can do a number of short haul flights in a day he explained. They know when it is just turbulence and when there is a real problem. “I look at them, and if they are calm then I am calm. If they look concerned, then I worry.”

I was a bit disappointed by his answer at first. I wasn’t expecting that. I spent most of the flight down looking at the airhostesses, but for other reasons. However, I would get to use Graham’s approach on a number of occasions. I was unfortunate enough to be on a flight where I saw real panic in the eyes of all the airhostesses around me. I remember adopting the brace position and saying to myself “jirre fok” – it was an Air France flight, there was a fire in the hydraulics somewhere and the pilots decided to abandon take off at the very last second. Very unpleasant.

So what does all this have to do with investing and growing your money?

A lot it would seem. The thing about investing to grow your capital or to create wealth is that you have to be prepared to take on the risk of capital loss. Growth assets such as shares, property and offshore assets come with volatility. Sometimes the volatility can last for an extended period, and result in low, no or negative returns over that period. This volatility can be likened to turbulence, which is an accepted feature of air travel. Empirical evidence has shown that many investors seem unable to cope with this volatility, often making poor decisions regarding their investment strategy. The famous Dalbar research has had the same finding for pretty much all of the last 20 years. They have found that investors have earned much lower returns than those delivered by the markets, largely due to their decision making in times of market volatility, more particularly in falling markets.

It is at times like these that investors need to be more like Graham than like the rugby manne. Graham understood that turbulence was part of the package when it comes to flying, but he also understood that he needed a coping mechanism to help him deal with it. His method was to look at the airhostesses in order to determine a suitable response, not to his fellow passengers. It was a simple technique but one that made a lot of sense. I remember landing in Johannesburg in the middle of a summer thunderstorm. The plane was all over the place and the turbulence quite unsettling. The poor lady next to me seemed close to having a heart attack. I looked at her and said “relax, I just look at the airhostesses. I panic when they panic!” It seemed to work for her as well.

One of the key roles of a financial adviser is to identify investor behaviours that could derail a well thought out investment strategy. We see the main part of our job after structuring a portfolio is to manage the client, and ensure optimal decision making as far as possible. It is especially difficult when you are dealing with forceful, alpha male type personalities. It is natural to doubt yourself and the strategy at those times as well. However, it is important to keep a calm demeanour and to focus on the facts.

It is at these times that clients are looking at us and deciding if they should panic or not. We need to look them square in the eyes and say “chicken or beef?”

Beware the unconsciously incompetent financial adviser

Investors need to be protected from a number of market participants; expensive product providers, salesmen posing as financial advisers, investment scams, and even themselves sometimes. It is often easy to identify these types of market participants by examining their pricing, their advice processes, or their promises of high guaranteed returns. It requires the investor to simply interrogate the information that they are being given, or ask for help if they are not sure how to interrogate the product, the provider or the adviser.

One of the most difficult things for an investor to do however, is to spot one of the most dangerous species out there; the unconsciously incompetent adviser. An unconsciously incompetent adviser is one that genuinely has his client’s interests at heart, but simply lacks the ability to be a good adviser. The best way to think of this person is to watch Idols during the first few episodes of a new season. Every year you will see contestants that are genuinely shocked when Randall tells them that they cannot sing. This year you would have witnessed one such contestant fainting upon receiving the news. I always blame the parents and the family of those contestants. It is one thing to encourage someone to try their best; it is something completely different to tell the person that they have a talent or ability when they clearly do not.

The unconsciously incompetent adviser is a lot like those tone deaf Idols contestants.
I recently found myself attending a presentation of a product provider that was bringing some innovative investment products to market. There was quite a bit of complexity involved in the products. At no point did the presenter explain the fee structure, nor the all-important terms and conditions. However, I noticed a number of my contemporaries in the audience that seemed impressed with what they were being told. There was a lot of nodding approvals and note taking. How is it that they were somehow able to determine that this was a better option for clients without doing a proper analysis? The job of the adviser is not to simply take the message of the product provider at face value, but rather to interrogate it and ask the difficult questions. This is one area where the duty to act with skill and due care comes in. We are still analysing this new product offering, and we’re being told that the products are “selling like hot cakes”

The real danger of an unconsciously incompetent adviser is that the critical shortcomings in their advice are often hard to detect until the damage has been done. A few years ago I competed against one such adviser for a sizeable retirement investment. The client wanted a fairly high income drawdown from their capital. After completing the analysis we presented our findings to the client, at which point she produced the advice offered by the other adviser. We had offered funds with similar risk characteristics, but our analysis was based on an income drawdown of around 6% at most. Our competition told the client that the funds he offered had delivered a return of over 13% per annum for the 5 years before that, and that she would be fine with a 10% drawdown. The client was keen to go with us as we explained fees clearly, which the other adviser hadn’t, but she was decided on his advice as the income was a lot higher there. It sounds reasonable to draw 10% from a fund that has delivered 13% over the longer term, it takes skill and understanding to ignore those historic returns and understand that the long term return experience of that portfolio will be a lot lower, and understand the impact on a client’s retirement plan.

As with singing some advisers simply lack the required skill to be good advisers. But, they are often really nice people, genuinely nice people. And they genuinely care about their clients and have their interests at heart. Our business is still quite young as we have been in operation for just over 7 years now. Over this time we have taken over a number of clients from other advisers. In some instances it is an easy decision for the client to make; their incumbent adviser has never seen them again since writing up the business, or the product/s they were offered were entirely unsuitable for their needs, etc. However, in other instances it was a fairly traumatic decision for clients to make. The adviser has given good service, done regular reviews, and has dealt with them in a really good manner. But upon closer interrogation it is clear that the advice they have given is just not up to scratch, or the products that they have put their clients into were entirely inappropriate.

How to spot an unconsciously incompetent?

The unconsciously incompetent adviser often starts out as a tied agent for a large organisation such as a bank, a life insurer or an employee benefits company. Here they are taught sales skills and product features. When a client encounters such an adviser they get a sense of comfort from his product understanding, the sales pitch, and the trust inherent in dealing with a large organisation. (It is important to stress here that not all tied agents are incompetent). It is this sales based training, coupled with badly designed and expensive products that contribute to poor outcomes for clients.

They walk among us

I have worked with advisers since May 2000 in various capacities and at various companies, before becoming an adviser myself in December 2008. Since becoming an adviser I have found myself in many situations where I get to listen to fellow advisers, and get their opinions on various issues. The thing about the unconsciously incompetent adviser is that they really do not have anyone that will say to them “dude, you really shouldn’t enter Idols, you cannot sing!”. The product providers that they support are all too happy to get their business and will not jeopardise the relationship. Their clients have come to them for advice and are often unable to tell that this person is really not able to give proper advice. Their fellow advisers are the wrong people to point this out for reasons of professional courtesy and sour grapes, etc. And given that there is a high degree of randomness in fund returns, the unconsciously incompetent could actually do very well for a long time with an inappropriately structured and expensive portfolio.

Admittedly it is getting a lot more difficult for such advisers to join the industry with the introduction of FAIS (Financial Advisory and Intermediary Services) legislation, and the need for advisers to pass regulatory tests. However, this is not completely fool proof. The easiest way for clients to avoid such advisers is to query their academic backgrounds, and look out specifically for mathematical or legal qualifications, depending on the adviser’s area of speciality. The Postgraduate Diploma in Financial Planning is an entirely appropriate qualification, and one held by fewer than 5% of advisers out there. The PDIP Fin Planning qualification is a requirement for the adviser to receive the CERTIFIED FINANCIAL PLANNER® designation from the Financial Planning Institute of Southern Africa. Again, this is not entirely fool proof, but it significantly reduces the probability of ending up with an unconsciously incompetent adviser.

Is financial advice worth it?

Below is a reader’s question sent to Moneyweb which was featured in an article entitled “Is financial advice worth it?” Naturally it got my attention as this is a question I have had to answer to prospective clients.

Q: I will be going on pension at the end of this year at the age of 65. I have no debt and my home is paid for.

I have been involved with four different financial advisors, but cannot get away from the exorbitant costs that are involved. I have my pension and a separate retirement annuity (RA) and about R2 million in cash which they all would love to invest for me. I am left with the impression that they could invest my money to earn about 1.5% per annum more than I could, but since their fees will be 1%, it hardly makes it worth my while.

I now seem to think that my best option is to take my R500 000 tax-free allowance from my pension and draw down the minimum of 2.5% on the rest. If I subsidise myself from my cash reserves, I can survive for the first six years of my retirement while still leaving the rest of my pension to grow. I would not even have touched my RA yet.

However I’m still wondering if I  would be better off investing the cash amount through a financial advisor?

You can read the entire article here:

As expected, the response was sanitised, and designed to offend as few readers as possible. However, after reading the question a few times and pondering on the issues raised, I thought it I’d share my thoughts.

The first thing to note is the reader’s proposed solution to his retirement conundrum. What is clear is that the reader is applying a form of mental accounting. Investopedia defines mental accounting as “the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the funds and intent for each account” As a financial planning practitioner, I need to be alert to investor behaviors as those often have the greatest impact on investment success or lack thereof.

What this reader has clearly done is separate the various pools of monies he has, and ‘solved’ his retirement planning conundrum by supposedly taking a low drawdown from one pool, while leaving the other pool/s to grow. This would leave him with much bigger pools of funds after the initial 6 year period. At least he hopes.

What this reader has not seemed to consider is the variables that will impact his retirement over the long term. These include; income growth, portfolio returns in the early years, tax implications of his portfolio structure, portfolio risk and overall portfolio cost.

What he needs to do is maximise after tax income, while protecting capital and generating the required returns net of fees on a consistent basis. Applying mental accounting effectively takes him away from this as he no longer has a consolidated view of his total portfolio. It creates a disjointed approach which effectively derisks the short to medium term in his mind, and does not even consider the real long term risks.

Another observation; he notes that the four advisers / brokers he spoke to would charge an annual advice fee of 1%. That is an extremely high fee. Even if the adviser takes 0% initial fees, a 1% annual fee is guaranteed to place significant strain on an income portfolio. Once administration fees (0.25% to 0.60%) and asset management fees (0.30% to 2.50%) are added, the portfolio could have total fees of maximum 4.10% per annum. So a return assumption of 9% p.a. net required the portfolio to deliver 13.10% p.a. before fees. This is an incredibly high return for a usually conservative income portfolio. By way of benchmark we structure income portfolios for clients with a maximum total annual fee of between 1.40% and 1.60% p.a. (including advice, administration and asset management fees).

Back to the very important question raised by the article; is financial advice worth it? In my biased opinion; it can certainly be. However, the client needs to distinguish between cost and value. It seems that the advisers he spoke to charged commission only. He needed to look for advisers that would offer him the option of a consulting fee instead. This could have reduced the cost significantly. The value of advice, if done properly, would have come through in the form of a sound long term plan with clear and reasonable assumptions about the future, a budget, a cash flow forecast and analysis, a well priced portfolio, a well structured portfolio, tax structuring and proper implementation.

Good luck to him though. I hope he ends up with a proper retirement plan.

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