Capital Gain

Bank or insurance company: Which is best to preserve your provident fund?

Published: in FINANCE by .

Dear Reader,

Thank you for asking this question. It is a very valid question in these times where a lot of people are losing their employment and must make a decision regarding their provident or pension funds.

You should get the answer to your question, and be making an informed decision regarding the company or institution as well as the financial planner you will be entrusting your funds to, by running through a few important questions.

At least three questions should be answered:

  1. Who will be the financial planner?
  2. Which company will you be investing in?
  3. How will the funds be invested?

When choosing a financial planner, it is in your best interest to find an independent certified financial planner. Certified financial planners have done extensive tertiary education up to the level of a Postgraduate Diploma in Financial Planning. This qualification entitles them to use the designation Certified Financial Planner® after they have written and passed their professional exam. Some of the planners have even gone further and done an Advanced Postgraduate Diploma in Financial Planning.

Representatives working for an insurance company or a bank are tied agents and have to promote the company they are employed by.

Remember that the financial planner you choose. and not necessarily the bank or an insurance company, is the most important choice you will have to take.

You should at least obtain the following information from your financial planner before you decide to make use of their services.

  • Their level of education and qualifications.
  • What is their level of experience?
  • Are they independent or employed by a company?
  • If they are employed by a company, is there a conflict of interest when they advise you on products and funds?
  • Do they have funds from different companies available to them and do they have a free choice of which funds they can use?
  • What will the relationship be between you and them?
  • What will their remuneration be?
  • What will your service level agreement be going forward?

A preservation fund is an extension of your pension or provident fund. The investment can take the form of a policy or a linked investment investing in unit trusts. Due to the fact that a preservation fund is governed by the Pension Funds Act, the investment of the funds is governed by Regulation 28 of the Pension Funds Act. Regulation 28 prescribes the asset classes in which the funds may be invested. You need a very knowledgeable planner to put the correct fund combinations together for you so that you can obtain the maximum growth under Regulation 28.

Many advisors only choose one or two funds that are already Regulation 28 compliant and this can be detrimental to your investment.

When you choose a company, seek a company that has a wide variety of funds available. In fact, nearly all the funds in the country, from different investment companies and fund managers, in one product. This will allow your financial planner to obtain the best possible combination of funds.

Regulation 28 requires that the funds in a pension product have the maximum exposure to certain asset classes. The most important ones are equities 75%, listed property 25% (local and offshore), Africa 10% (excluding South Africa) and offshore investments 30%. These categories then have subcategories as well and this is where it becomes complicated. There has been a lot of criticism about Regulation 28 recently and it takes a lot of skill, from your financial planner, to make it work to your advantage.

It takes the most knowledgeable financial planner to put together a set of funds for you in your preservation fund that can provide you with excellent growth and to reach your ultimate goal. It is important that this set of funds can be changed as the economy, circumstances in the country and globally or even your own circumstances change – so the investment must be flexible.

At this time, you should be asking your financial planner the following:

  • What is your investment philosophy?
  • What asset allocation will you use?
  • What investment benchmarks do you use?

Before you see the financial planner you have an appointment with, prepare yourself well for the meeting. Decide what your ultimate goal is, read up about what is important about an investment in a preservation fund and ask the questions as specified above.

In closing, the company is not as important as the financial planner who is going to manage your funds for you. The company or institution only accepts your funds and administers them, but the financial planner is there daily to look after your investment and manage it so that the best possible outcome can be obtained for you.

Last, but not least, do you feel comfortable with the financial planner you have decided on? Remember, you might have a lifelong relationship with the person you choose.

Good luck in your endeavours and I hope that this information has helped you to make an informed decision about the way forward.

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