Preserving one’s wealth for current and future generations is a constantly changing ballgame – particularly now as more and more global investment opportunities present themselves.
Derek Alton, Portfolio Manager at Old Mutual Wealth Private Client Securities, says it is more important than ever for high net wealth individuals to ensure they have strong legal structures and professional money managers in place to protect individual wealth assets.
“With the widening range of investment options and the improved speed of global communication, there has been a shift in the way capital is managed and transferred. It has always been necessary to have broad diversification, spread across all asset classes. But it has also become essential to view investments on a global basis to be able to take advantage of all opportunities in order to avoid economic and political pitfalls in any given geographic area.
“Savvy investment managers who best understand these issues have become essential to enable the investment process and change tack when required,” he says.
Alton says the question of how best to preserve and grow wealth, and leave a lasting legacy, is a vexing one, mired in potential pitfalls and there is not one formula which will suit all investors.
However, he says there are some mistakes which are common to many wealth preservation strategies and could wipe out some or all of their capital, including:
• Attempting a do-it-yourself investment solution, for which they are not qualified;
• Not creating an effective structure to protect the capital, like a trust or a living annuity;
• Allowing heirs access to the funds at an age when they aren’t able to take on the responsibility;
• Not understanding the relationship between risk and reward;
• Panicking and buying or selling equities at the wrong times;
• Not investing for the long term;
• Living beyond their means and having to dip into the capital too soon;
• Sinking retirement investments into new business ventures which might not work;
He says creating the legal structures to protect the assets from creditors and grow them in line with estate planning requirements is essential in preserving wealth. The most common route for high net wealth individuals is to create trusts and appoint their heirs as beneficiaries. Some investors create a number of trusts, each designed for the needs of a particular child or heir.
A Living Annuity is one of the great modern financial instruments which parents can use when handing down capital and income.
“Not only is the investment protected from creditors, but if the funds are well managed, it will look after the needs of future generations”. Such an annuity can be purchased with a pension fund or retirement annuity capital and be used to provide the retiree with an income, while the capital is linked to the growth of the market (see example below).
“Living Annuities are created as a wrapper for an underlying portfolio which would be spread across all asset classes. It would typically contain local and global equities, property, bonds, cash, as well as other investment options. The annuity’s investments are flexible enough to change with the investor’s lifestyle and can be adjusted according to the income required at any specific stage.”
He says Living Annuities are a perfect way to ensure effective wealth preservation in that it effectively ring fences the capital from pension funds, provident funds and retirement annuities.
“But, the funds need to be properly invested to ensure the net income it produces grows way ahead of inflation. The current economic conditions will undoubtedly affect investment returns, so it’s essential to take emotion out of the equation completely.
“Investors for wealthy entities understand the market forces and do not panic. It’s essential to create a long term investment strategy which caters for both the good and tough times. Building value through compound earnings growth, is one of the best methods to balance the risks.”
Example:
Preserving and growing your wealth:
“Mr X retires at 65 from his business and transfers the capital from his RA and pension fund into a Living Annuity. The capita sum is R 9,456,964. He has arranged his affairs so that he only needs to draw R31 323 per month from the annuity in year 1, which represents 4% of the capital. The fees to manage the annuity are an additional 1% per annum.
“The capital is invested into a high equity component portfolio, which creates a compound annual growth rate of 15% per annum, which is 10 % per annum after the annuity and fees. The table below shows the capital and income growth over the next 20 years.
“If Mr X were to die at age 85, his monthly income at death would have been R192 793 per month and he would leave a capital base of nearly R58 million for his children to continue drawing an income from. This capital would not attract any estate duty.
“This is one example of how wealth can be preserved and not left to the potential mismanagement and squandering by one’s children.”
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