Help your clients financially prepare for the best and plan for the worst

29 September 2020 Momentum

Stats SA’s recent GDP Q2 results reported South Africa’s worst GDP in over a century with a drop of 51%. Finance minister Tito Mboweni says that South Africa’s second-quarter contraction in gross domestic product (GDP) is larger than expected by both the National Treasury and the Reserve Bank.

These findings are consistent with the Q2 2020 Momentum/Unisa Consumer Financial Vulnerability Index (CFVI), which also revealed the largest ever quarterly decrease since the index started in 2009.

As a direct result of the COVID-19 pandemic and ensuing national lockdown, the findings indicate that consumer finances are in such a bad state that people are simply not able to cope and urgently need to reassess their financial plans. This makes the need for financial advisers all the more urgent.

This is according to Johann van Tonder, researcher and economist at Momentum who explains that the study essentially looks at four sub-components that consumers, on average feel are causing stress to their cash flow positions – those being income, expenditure, savings and debt servicing capabilities. Van Tonder says that each one of these four areas decreased substantially over the second quarter, meaning consumers are so financially vulnerable that they cannot cope.

In the income category, the largest quarterly decline of 13.1 points (from 47.7 points to 34.6 points) was recorded in the Income category. “This was to be expected given that the lockdown contributed to company closures and millions of consumers unable to earn an income or the same income. This had a huge knock-on effect on already strained financial commitments,” says Van Tonder.

A portion of the study is also based on responses from “key informants” - people in relevant industries such as banks, insurers, other credit industry institutions, retailers, municipalities and consumer researchers. “Worryingly, they highlighted that it appeared as if a larger number of consumers were more worried about their finances than staying safe against the virus. This demonstrates the immense pressure people are under,” said Van Tonder.

According to Bertie Nel, Head of Financial Planning and Advice at Momentum Consult, while wealth investors will be relatively shielded in the short term – the downstream impact of a depressed consumer environment will play out for everyone – and advisers need a step change in terms of the guidance we offer these clients. “The pandemic has impacted every single individual in some way big or small, and the reality is that it will get worse before it gets better. For financial advisers, this is the time to prepare your clients for the realities of a shrinking economy and help them plan accordingly.”

Nel urges advisers to prepare prudently for tough times ahead and provides four things that need to consider when speaking to their clients.

Understand the emotion behind investing
Speaking about a new partnership between Momentum Investments, the prestigious Oxford Risk in the UK and The Financial Planning Institute of Southern Africa (FPI), head of technical marketing and behavioural finance at Momentum Investments Paul Nixon shed some light on inconsistencies in the advice process.

He says, “Humans are prone to ‘noisy’ errors – unduly influenced by irrelevant factors, such as their current mood, the time since their last meal, and the weather. This chance variability of decisions is called ‘noise’. Noise is negative both from an advice and an investment management perspective – particularly when you are focused on delivering the best possible solution for clients’ needs.”

According to Nel, Momentum Consult are working closely with Nixon and his team on this research to understand and then limit the ‘noisy errors’, or inconsistencies, in the advice process. “What this highlights is the need for financial advisers to identify the noisy errors that creep through in their own advice,” says Nel.

At the same time, clients should be made aware of the noisy errors they are prone to make in their own lives, and have even made in the past, says Nel.

“When challenges arise, clients can get understandably nervous and could disinvest or cancel investments. This is particularly devastating when those investments are earmarked for critical life events like retirement, education and emergencies,” he explains.

Instead of telling them to simply ‘stay calm and stay invested’, Nel says to rather help them revisit their investment portfolio and align the composition of portfolio with the need and goal of investment. “You can’t stop your clients from panicking but you can help them stay focused on the bigger picture and empower them to be informed and make financially informed decisions during tough times,” he says.

It’s not just about investments
Advisers need to revisit their clients’ financial plans and strategies holistically. Nel says, “

In uncertain periods like these, he also recommends taking the opportunity to revisit your client’s investment portfolio – particularly around the outcomes they are trying to achieve. “From an outcomes based investing perspective, while the intended goal may not change, the journey and timelines to achieve it might, and this needs to communicated and explained to the client,” says Nel.

Prepare them to leave a legacy
As COVID-19 continues to tighten its grip on South Africa and the rest of the world, many South Africans are unfortunately going to be faced with the death of a loved one. “This has made us all starkly aware of our possible demise and the legacy we are going to leave the ones we love. It is notoriously complicated to wind up an estate, especially where clients have offshore assets or tricky generational wealth vehicles such as trusts. So it’s best to ensure you have a conversation around an end of life plan as soon as possible,” says Nel.

Make budgeting personal
“We recommend that our clients compile a list of assets and liabilities, and refrain from incurring debt in these times,” says Nel. Make it personal by compiling a list of asset and liabilities and demonstrate the difference even the smallest change can make – good and bad. A small increase on an overdraft today can have a compounded effect on your finances in a year’s time. Set small, attainable goals for them and check in periodically to see how well they fared. How many abandoned budget template spreadsheets do you think your clients have lurking in the dark corners of their computer? Budget templates are a great tool but clients need a personal connection with their budget that goes beyond numbers and graphs. Chat with your clients about what it really means to manage income and expenses.

“In the end, the right advice will help your clients prepare, remain calm and make informed decisions that benefit them, and ultimately, helps you navigate them through troubled waters,” Nel concludes.

Quick Polls


South Africa’s Financial Sector Conduct Authority (FSCA) has the power to raise revenues by issuing administrative penalties and fines against non-compliant financial services providers, with this money flowing back to the Treasury… Does this, in your view, create a regulatory / government conflict of interest?


Absolutely, as conflicted as it gets
Maybe, I’m on the fence on this
No, the FSCA can do no wrong
The guilty must pay
fanews magazine
FAnews August 2021 Get the latest issue of FAnews

This month's headlines

Why it’s an amazing time to be an adviser and broker...
Power of the pack… In the company of women
POPIA pandemic - Tick tock goes the POPIA clock!
The unimaginable imaginable risk
How global cities could benefit from green dividends
Are life insurance products too complex?
Subscribe now