PSG’s guide to build generational wealth in South Africa

PSG Wealth’s Haydn Johns said creating generational wealth is possible if you take a step-by-step approach.

Johns is the head of PSG Life and PSG Invest at PSG Wealth and said creating lasting wealth to pass down for generations can seem overwhelming. 

This is especially true in South Africa, where conflict and political uncertainty have made the global economy unstable and difficult to predict.

In a blog earlier this year, Nedbank explained that South Africans face a unique mixture of challenges.

This includes the country’s high unemployment rate, a heavy tax burden, and urgent improvements needed in basic education, infrastructure, power supply and access to safe water sources.

“It’s harder to build wealth when times are tough, but if you develop a plan to do so, you’ll have more flexibility to maintain an optimum strategy when there’s an economic upturn,” Nedbank said. 

“Inflation rates can erode your savings if they aren’t invested wisely, currency fluctuations affect your buying power and investment opportunities, and higher interest rates can make borrowing and debt more expensive.”

However, even amid rising interest rates and declining economic opportunities, some strategies can help individuals build their wealth, which Nedbank outlined.

A similar point was made by Citadel chief economist and advisory partner Maarten Ackerman earlier this year.

Ackerman said the 2024 investment landscape has been marked by high interest rates, elections and geopolitical risks.

He said a cautious investor should consider risk and reward, diversifying their portfolio across asset classes and geographies.

Ackerman explained that the prudent investor recognises the imperative of fortifying their wealth against a risk premium. 

“As markets surge and fluctuate, the need for astute wealth management strategies becomes ever more important – particularly for South Africans who need to measure and manage their wealth in global terms,” Ackerman said.

Johns reiterated this point and said that taking a step-by-step approach to understand and plan for the various considerations holistically helps to make building generational wealth achievable.

Therefore, he outlined all the steps South Africans can take to create wealth that could span generations.

Start with a plan

Johns said creating lasting, intergenerational wealth starts with a thorough and robust financial plan. 

This includes – but is not limited to – the following:

• Asset allocation planning. Ensuring that your asset classes and allocations match your risk tolerance and long-term goals is crucial to creating long-term wealth.
• Retirement income planning. You will need to build up a sufficient asset base from which you can draw an income in your retirement years. Being able to receive this income in a tax-efficient way is a crucial consideration.
• Estate planning. Contemplate how your assets are protected and how they will be passed down to your beneficiaries in a way that minimises estate costs and tax liabilities.
• Tax efficiency. Understand how to use tax legislation to your advantage and minimise your tax liability. In South Africa, there are several ways to cut back on your debt to the taxman. 

Choosing the right products

After establishing a financial plan that includes the vital elements discussed above, Johns said matching these objectives with the correct product and service offering is essential. 

Below are some key considerations to weigh up when choosing a provider to help you implement your financial plan.

Investment options

Johns advised South Africans to consider whether their provider offers a range of investment funds that will offer consistent performance and help them realise their savings goals.

He said it is important that these options consider how your needs may change over time.

A range of traditional single-manager unit trusts is a useful starting point, but as these funds are managed by a single fund manager or management team, they may have shortcomings. 

He explained that funds of funds are different in that they invest in a variety of single-manager unit trust funds. As a result, investing in a fund of funds offers the following benefits:

• Greater diversification across asset classes, regions and investment styles
• Reduced risk because of this diversification
• A bigger team of dedicated asset allocation experts managing your funds
• Access to a broader investment universe

Fees

Johns said that it is tempting to simply look for the provider that offers the lowest fees. However, there are other factors to consider. 

“For example, some platforms may offer fee structures that can be beneficial if you invest in multiple products,” he said. 

“Some may have a fee offering which supports holistic family planning by offering fees based on the collective value of your family’s assets, which may result in reduced administrative fees.”

Product range

Johns explained that every investor may have different priorities and strategies for how to invest, and these may change over time.

“You may wish to add to your product portfolio over time or consider investing in a variety of different products immediately,” he said. 

“Check to see whether your provider has a robust enough product offering to cater to your needs as they change over time.”

For example, you may want to consider an investment vehicle that can function as an alternative to banking investments if you are just starting your savings journey. 

However, as time passes, you may also need to invest in a retirement fund and, later still, a living annuity. 

“You may also want to consider whether the provider you choose offers tax-efficient wrappers to limit your tax liability, particularly if you have a high marginal tax rate,” he said.

Flexibility

Johns acknowledged that many providers may offer similar products but noted that something often overlooked is the flexibility of offshore asset allocations allowed within those products. 

He urged South Africans to investigate whether there are limits to offshore asset allocations within products they are considering. 

“While such limits may not be a problem in the short term, markets go through cycles where sentiment towards local and offshore asset allocations change,” he explained. 

“Limits on offshore asset allocation can reduce an investor’s flexibility to move between local and offshore asset allocations over the long term, which can be important as part of a long-term plan to create intergenerational wealth.”

Reach out to a financial adviser

Johns said that creating a financial plan that will meet the objective of generating lasting, intergenerational wealth involves many variables and is specific to an individual’s unique circumstances and needs. 

“A financial adviser is best positioned to help you construct such a plan and, more importantly, to stick to it,” he said.