Does compensation determine the type of service we deliver?

01 February 2012 Wessel Oosthuizen, University of the Free State

One of the big debates in the financial services industry centres on appropriate remuneration structures for intermediaries. Before we debate the merits of upfront versus ‘as and when’ commission we should investigate the link between payment and performance.

Do you consider your client’s home when drawing up a detailed financial plan? Studies show that few financial planners consider real estate at the planning stage. And the problem is not unique to South Africa. It seems Europe is one of the few regions where real estate planning is part of the overall financial planning process.

A hated financial planning task

A job analysis survey conducted by the Financial Planning Standards Board lends support to these findings. The survey – which drew responses from 11 countries, including South Africa – identified real estate as the second least important financial planning task. It also featured under the 10 financial planning tasks least frequently done by certified financial planning professionals.

Are you among the readers responding: So what? The importance of giving advice on our client’s real estate assets lies in the fact that the primary residence is often the largest asset on the average South African’s balance sheet. By failing to advise on this asset you are not fulfilling your duty of care in terms of the General Code of Conduct to the Financial Advisory and Intermediary Services (FAIS) Act. Not giving advice on your clients’ houses is not in their best interest.

Six financial planning musts

The international Financial Planning Standards Board recognises six financial planning components as part of holistic financial planning. These include financial management, investment planning (asset management), risk planning, taxation planning, retirement planning and estate planning. A brief discussion of each of these components highlights the importance of incorporating your client’s primary residence at advice stage.

The financial management component requires that you complete a cash flow analysis. This analysis will tell you whether your client can afford your recommendations and must include mortgage repayments, if any. You can help your client by calculating how much to spend on a house, what type of mortgage to take out and – at a later stage – how to refinance, downsize or dispose of the asset.

Squeezing housing assets

Many clients believe their house to be part of their investment portfolio. This view is incorrect because the primary residence does not generate income, while proceeds from its disposal are almost always used to purchase another residence. You can instead advise your client on how to use their primary residence as leverage for acquiring further property, which would then form part of their overall portfolio.

The house is important when assessing your client’s risk. By considering the possibility of damage to the property you can make recommendations on the client’s short-term insurance needs… And life cover can be motivated based on the outstanding mortgage bond.

The impact of taxation

Taxation should also be considered when advising on property. Levies and property taxes have a major effect on your client’s cash flows. Income tax comes into play when your client is earning an extra income from a flat at the primary residence. And you can never discount the impact of capital gains tax on the sale of property assets either. Aside from capital gains tax there are estate duty implications when the surviving spouse does not inherit the home.

A client’s retirement plan should include a timetable for paying off the mortgage on his / her primary residence as well as whether the house can be used as a source for retirement income. A succession plan for the house should also be considered under the estate planning heading.

Issuing the challenge

You cannot sidestep giving advice on your client’s primary residence. The challenge to local financial intermediaries is to include residential assets at the planning stage, whether there’s "money in mortgages” or not!

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