How to spot a bad financial product (#184)

Explicit content warning

01/26/20 • 63 min

The financial world is filled with dreadful products. Avoiding them all is a tempting strategy, but not feasible for most people. In our first full episode of the year, Simon and I dedicate some time to help you spot a bad product.

Below is a checklist of red flags you should watch out for before investing in these products/

Debt

Interest
Balloon payments
Revolving loans
Fees

Savings

TFSA in cash
Disclosure - 13% compound vs simple
Fees
Products that are tied to other products

Insurance and medical aid

Requirements
Complexity

Investments

Promises of above-market reruns
Non-diversified/concentration risk
Fees
Lock-ins
Is it tied to an insurance product
Derivative products
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Win of the week: Tafadzwa

I stay in Namibia. Last month I discovered your show. I’ve been teaching myself FI by reading various blogs for 3 to 4 years. I recently turned 41 and your podcast was just the kick up the behind I needed to DO something about my finances.

I am restructuring my life from top to bottom (or vice versa). I reduced my bank charges from 450 to 213 just because I went and raised hell. Guess what, there was a bundled package which suited me to a t. Thanks guys for the proverbial butt kick.

I am working on reducing my debt. Bye-bye to my clothing account in 5 months. Good riddance.

My car loan is much more difficult. The prime rate was reduced from 10.75% +1 to 10.25%+1 in April this year. My installment was not reduced appropriately as was implied in the contract with the bank. I have 18 months left to clear the loan. Is the debt set in stone or can it be reduced through setting early? I need a hack please.

I decided to start investing in ETFs on the NSX. Satrix listed the MSCI World, Nasdaq, Emerging Markets, S&P 500 on the NSX in April 2019. Previously, only commodity ETFs where listed.

There seems to be little awareness about ETFs and possibly very little liquidity in that sector. I am aware that these are global ETFs. Will the lack of liquidity affect me in any way? Easy Equities implied that I can open a USD account. Is it a good option?

I am learning financial literacy with my wife and kids via YouTube and this podcast etc. Am working on my emergency fund (been start - stop) for years.

How viable is it for a contract worker to invest long term for retirement if there is no access to pension, RAs, tax breaks etc.

Jon-Luke

Many moons ago I bought some Choppies shares and some time later I sold with a bit of profit. But I did not sell everything a decided to hold a few thousand shares (they were dirt cheap) on the off chance that the company might turn around.

Now with the company having been suspended for over a year I’m wondering what will happen if it gets delisted. What will the process be? If they delist do they have to pay share holders a nominal amount or do the shares “disappear” and does the value disappear too

I saw a SENS for Choppies saying that they were possibly accepting a sale of all the South African operations... What does this mean for shareholders? Wouldn’t the shareholders usually be asked to vote on a decision like this even if the shares are suspended? (They are not delisted yet). Or is that perhaps the next step in the process?

Stephnie

What if the very nice family member gave the very lucky family member R500K immediately as an interest free loan (payable in full at the end of - say - 5 years, with no monthly payment required), and then every year for the next 5 years reduced the outstanding loan amount by the R100K tax-free 'gift/donation' threshold. This would allow for the immediate transfer of R500K with no tax implication for either party. The risk of course is if the very nice family member passes away in the next five years, the outstanding loan amount would be owed to the deceased estate.

Tax Elf De Wet responds:

SARS would view this as a simulated loan (i.e. actual donation) on the day the loan is made and would levy donations tax on the remaining R400,000.

Below is a checklist of red flags you should watch out for before investing in these products/

Debt

Interest
Balloon payments
Revolving loans
Fees

Savings

TFSA in cash
Disclosure - 13% compound vs simple
Fees
Products that are tied to other products

Insurance and medical aid

Requirements
Complexity

Investments

Promises of above-market reruns
Non-diversified/concentration risk
Fees
Lock-ins
Is it tied to an insurance product
Derivative products
Subscribe to our RSS feed here.
Subscribe or rate us in iTunes.

Win of the week: Tafadzwa

I am working on reducing my debt. Bye-bye to my clothing account in 5 months. Good riddance.

I decided to start investing in ETFs on the NSX. Satrix listed the MSCI World, Nasdaq, Emerging Markets, S&P 500 on the NSX in April 2019. Previously, only commodity ETFs where listed.

I am learning financial literacy with my wife and kids via YouTube and this podcast etc. Am working on my emergency fund (been start - stop) for years.

How viable is it for a contract worker to invest long term for retirement if there is no access to pension, RAs, tax breaks etc.

Jon-Luke

Stephnie

Tax Elf De Wet responds:

SARS would view this as a simulated loan (i.e. actual donation) on the day the loan is made and would levy donations tax on the remaining R400,000.

Previous Episode

The fee revolution (#183)

The world changed for the better this week. You may have missed it, but OUTvest launched a retirement annuity (RA) product whose fees will hopefully change the way we think about fees forever.

With Simon recovering from a vicious flu, this week’s episode sees OUTvest head Grant Locke explain his revolutionary new product.

We return to our regular programming next week, unless Simon succumbs.

Next Episode

Financial crisis management (#185)

Life has this dreadful habit of happening. Almost always these goings on require money to solve. The financial foundation we advocate is designed to help you cope with financial crises when they happen. When you have no debt, sufficient short-term insurance, an emergency fund, medical aid and dread and disability cover, you have some tools in your time of need.

Unfortunately life doesn’t sit around waiting for us to have our ducks in a row before causing drama. Sometimes you have to do the best with what you’ve got. In this episode we offer some ideas about what to do when life happens before you’re ready to cope with it. We talk about dealing with emergencies when you have debt and no emergency fund.

We have no elegant solutions, but hopefully a few of the strategies can help you navigate a tricky time with grace.

Good luck!

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Subscribe or rate us in iTunes.

Keith

According to the national credit act (NCA), debt should be repayable at any moment by a borrower without any penalties. If a loan at the outset has a, say, 16% interest rate over its life, then the lender is not allowed to capitalize the entire life of interest over the life of loan so that early repayment penalizes you.

As far as I can tell, that is illegal.

NCA gives the borrower the power to ask for the full and final settlement account at any moment. Hence, if you are 2 years into a 10 year loan, they cannot go and add 8 years of interest into the loan’s capital amount. This would, surely, be illegal.

Gregg

I was listening to a program on TV where the panelist said we need to be aware when buying equities through Easy Equities, they are on the balance sheet of the brokerage. If the brokerage goes under, you are not guaranteed of getting all your funds back.

Can you explain what this means? Perhaps explain using an example. If I buy Satrix 40 ETF – does it mean if I sell them that EasyEquities may not give me my money and that I have no direct claim from Satrix itself because the ETFs I bought are lying on EasyEquities balance sheet?

This sounds like a risk. Is it one worth being nervous about? I would assume that as an Easy Equities user yourself, you’ve done your homework?

I am considering buying through them directly onto the US Market, which is one of their offerings. I want to make sure that I can quite comfortably do this at almost zero risk.

Dario

Could you guys please talk about how EasyEquities functions as a platform i.e how they are able to provide fractional shares and are there any other good alternatives?

I am asking this because I bought some STXNDQ without looking at the buying price. before logging off I decided to have a look and quickly cancelled the order as there was a 9% difference between the delayed price and buying price.

Mariette

My parents are 78 and 72 years old. My dad gets R14,500 pm from pension, so a lot of the extras fall on myself and one of my 4 sisters.

I took out life cover on my dad's life (after not such great advice from a 'financial advisor') which costs me a pretty penny every month. The idea is that if something should happen to him, my mom can use that amount (R500k) to offset the 50% loss in income from my dad's pension fund.

My dad had all his investments with Old Mutual and after all those years had a measly 2% growth.

He immediately took that money (about R450k) and put it in a 7-day notice account with FNB (6.3% repo related interest). He is dependent on the interest from that investment to cover expenses that are not covered by his pension. He doesn’t want to take any risks, especially with big institutions.

My mom has a buy-to-let property she bought with some inheritance money and try to save R1000 pm from the income. This can be done in a TFSA, but not sure if it will make such a big difference at their age.

What would you suggest they do to stretch their savings a bit?

My first suggestion was to move from FNB to Capitec, take R370k and put it in a fixed deposit (8.55% interest) and the rest as an emergency fund with Thyme Bank (10% interest).

Also to try and reinvest as much as he can and not make use of the full R1000 extra from the increased interest rate. I'm not sure if my dad will go for an income-generating ETF, it's too unknown and too big a risk for him.

Paul

Here’s a list of his spreadsheets: The spreadsheets list my investments; their TER; their individual holdings (i.e. Naspers, BHP, Apple, etc.); how much (%) each investment is of my total value; to tracking what they have been doing on a monthly basis; my monthly expenses; SA inflation, my monthly savings (+-40%); reti...