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Blue Chip Issue 78 - Jan 2021

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Linking precision

Linking precision investment management to financial advice. For advisers. Investment Management by Design PortfolioMetrix Asset Management SA (Pty) Ltd is authorised and regulated financial services provider operating in South Africa, regulated under the Financial Advisory and Intermediary Services Act 37 of 2002 (FSP No: 42383).

CONTENTS 02 WHAT’S HAPPENING AT THE FPI? Message from the CEO 04 EDITOR’S NOTE By Alexis Knipe 05 ON THE MONEY Milestones, news and snippets 08 HESTER’S MONEY STORY Meet the FPI Financial Planner of the Year 2020, Hester van der Merwe CFP® 12 THE WISDOM OF WEALTH Blue Chip interviews Martin Riekert, Executive Head of Retail Investments at Momentum Investments 16 NEXT GENERATION LEADERS Kapil Joshi and Fareeya Adam from Momentum Investments 18 THE ROLE OF OFFSHORE INVESTMENTS FOR SA INVESTORS Column by Florbela Yates, Head of Momentum Investment Consulting 20 THE OFFSHORE OPPORTUNITY SET A tour of the offshore investment landscape 23 OFFSHORE 2020 Old Mutual Wealth offers a comprehensive guide to all the aspects of investing offshore 43 SLOWLY UNPACKING FINANCIAL EMIGRATION Should you take all your money out of South Africa? 46 WHAT HOLDS SOUTH AFRICANS BACK FROM INVESTING OFFSHORE? Your offshore investing questions answered 48 SHOOTING FOR THE NORTHSTAR Blue Chip speaks to Rory Spangenberg, CIO and Director of Global Equities at Northstar Asset Management 50 EMERGING MARKETS Why you should consider other emerging markets (EMs) when investing offshore 52 NEW HORIZONS The dominant asset management model in South Africa is set to change, by PortfolioMetrix 54 BEING SPOCK (AND NOT HOMER) How understanding investor switching behaviour can help improve your investment returns 56 3 ROLES OF THE FINANCIAL PLANNER Facilitating thoughts, choices and actions 58 HAVE YOU THOUGHT OF YOUR 2021 PLAN? Nonhlanla Nxele, CEO, Tokoloho Financial Services, tells us how to master our destiny 60 ARE YOU, THE FINANCIAL ADVISOR, STILL RELEVANT? Learn more about the Momentum Intemediary Coaching Programme 62 HOW CONFLICTED ARE PROFESSIONAL FINANCIAL PLANNERS? Appreciating the psychological factors that lie behind conflicts ISSUE 78 JANUARY 2021 Hester, congratulations! After a grue ling competition, you have been awarded the FP of the Year 2020. What does winning the award mean to you? Thank you! I want to give a l the honour and glory of winning the award to my Heavenly Father. For me, it represents such a growth opportunity – even the journey from entering up to just before the announcement had been amazing – a constant learning curve! For the practice, this is also a big deal since I am the third winner of the award from Ultima. Ge rit Viljoen won the award in 2003 and Jan-Carel Botha won in 2012 (he no longer works at Ultima). What was your motivation for entering the FP of the Year competition? American busine sman Max De Pree said: “We cannot become what we need to be by remaining what we are.” I believe you cannot grow in any role without pushing yourself out of your comfort zone. This competition certainly pushed me way out of my comfort zone and presented a steep learning curve. You studied law a the University of Pretoria and then you obtained your Post Graduate Diploma in Financial Planning as we l as Financial Planning and Services at the University of the Free State. Why did you change your field of studies? When I decided to study law, my objective was to become a prosecutor. I have always fel the need to be useful – to add value – and this career path seemed to offer that. As a student, I worked at a firm of a torneys in the debt co lection department and after graduating I migrated to the debt co lection department of a bank. I found th environment very harsh and did not enjoy the work. While raising a young family, we decided that I would work half-day and that resulted in me entering the financial industry as an admin a sistant. I was quite reluctant as I did not have a positive view of the industry at a l! However, I was fortunat enough to enter the industry alongside an amazing planner whose a tention to detail and close relationships with his clients made me change my mind completely and I grabbed the opportunity with both hands. To be ter understand the work he was doing, I enro led for the Post Graduate Diploma, with no intention of becoming a planner myself, but only to gain a be ter understanding of the inner workings of a financial plan (and to improve my Excel sheets). However, once the planning bug has bitten you, there is no turning back. So I persisted until I was able to write CFP® behind my name! You started your career trajectory as Head of Wealth Planners at FNB in 2012 and then as Financial Advisor at Ultima Financial Planners in 2015, where you cu rently are. Besides winning the FPI award, what has been the highlight of your career? Head of Wealth Planner sounds much more impre sive than it was. I headed up a very sma l but exce lent team of Certified Financial Planners®. There I discovered the beauty of a fixed salary as opposed to commission-driven advice. Our job description simply included making sure clients received the best advice without offering any products. Clients valued this unbiased advice and I was able to gain a lot of insigh that I can now apply when dealing with our clients at Ultima. Hence, that experience counts as a highlight for me. According to the FPI, you set yourself apart from the other competitors through your depth of knowledge, the immeasurable detail of your financial plans, as we l as your extraordinary commitmen to clients. How important is each one of these factors in the financial planning profession? I think they are a l equa ly important. Without a sound knowledge of the technical and legal aspects of financial planning, it wi l be impo sible to do a financial plan without endangering both the client and the good name of the profe sion. This goes for an a tention to detail HESTER’S MONEY STORY as we l. In financial planning, the adage “the devil is in the detail” is unquestionably applicable! The last is where my pa sion lies. The most rewarding facet of financial planning is the people we work with. A financial planner should have a heart for people. We need to be mindful of the fact that the work we do impacts directly on our clients’ lives and wellbeing. How were you able to rise above the economic and pandemic crises facing South Africa and the world, and sti l manage to maintain the level of exce lence required to win the coveted title? I would not have been able to accomplish this without a strong team behind me. At Ultima, we believe in building a diversified team where each player is a lowed to play to his or her strengths. This mean that we were able to cope with the cha lenges by making slight adjustments only and could continue to offer the same level of service to our clients throughou this difficult year. I, therefore, felt empowered to tackle the competition and give it my best shot. Amid the highly cha lenging circumstances of Covid-19, what was the biggest lesson for you? Has the pandemi changed your approach to financial planning? A tried and tested proce s is no guarantee that a super-fast about-turn is not lurking around the corner. Be forward-looking at a l times, identify possible threats and how to deal with them when the time comes. The pandemic did not change my approach to financial planning, since I have always been very client-focused. The heartfelt and enduring relationships we form when doing lifestyle financial planning is a the centre of my regard for the industry and this stayed true while dealing with the pandemic. What changes would you like to see in the industry? Change is inevitable as we a l know by now, and wi l be exponential. Now may be our only opportunity to secure the integrity of financial advice going forward and this is where my focus lies. We are extremely fortunate that our industry has had the opportunity to develop to where we are now – we are ski led profe sionals, subscribing to a carefu ly cultivated profe sional standard and practica ly apply the FPI code of ethics in our everyday dealings with the public. Development in AI and therefore fintech wi l undoubtedly change financial planning as we know it i revocably. We have to start asking questions such as: Is it po sible to instil the principles of our Code of Conduct into a Robo advisor? I think we need to stand together now more than ever before and ensure that our voice is heard during this time of exponential growth and development – that our principles and our very humanity do not get washed away by this tech-driven tsunami. As this year’s FPI ambassador, how wi l you use the platform to motivate change? I wi l encourage women from a l walks of life to put on their financial boots and climb the mountain they are facing. If I can encourage women to tackle their financial affairs, ask to be included in the decision-making proce s of the household or to become a Certified Financial Planner® that wi l be bri liant! I would also love to introduce people to their money stories. It is so important for everyone to understand that they have a unique money story, which has been wri ten almost since the day they were born. This personal story gives colour to the way we perceive money and creates our blind spots, opens certain doors for us and closes other doors. Once we understand this, it is po sible to rewrite our story and open up new possibilities. The cha lenge is that very few people even realise tha they have a money story, much le s understand the impact it may have on their lives! If I can accomplish this I wi l feel that my year has been turned to good account. What do you consider as the most important trait of an accomplished financial advisor? You must have a heart for people! The qualifications, experience and technical knowledge should be a given. What do you deem as the most critical component to financial success? Set sound long-term goals and work with a financial partner that can keep you accountable and help to magnetise your compa s when you lose your true north. Do you have any advice for women that are considering a financial career? Do not expect i to be easy, but do expect i to be the most rewarding journey you will ever undertake. Make sure you are 100% clear on your “why” and focus on that, even when the going gets tough. Please share a message of motivation for those that have considered competing for the FPI award in future. Do not hesitate! This is such a unique experience and wi l present you with a once in a lifetime opportunity to grow and become who you were meant to be! On another level, your practice wi l benefit immensely from this exercise. You are forced to consider a l aspects of your practice once again and view it from a different perspective while preparing for every stage of the competition. If you are in earnest, opportunities for improvement wi l present themselves regardle s of the outcome of the competition. Winning brings so many opportunities to you and your practice. Both existing and prospective clients wi l feel rea sured that their financial planning wi l be thorough and tailor-made. Trust is earned over time, bu this award wi l help clients to gain a measure of confidence in you and the practice. Investment philosophy? My philosophy is to be patient and never make emotional decisions. FOR FINANCIAL PLANNERS • Always be aware of the big picture: how wi l your actions impac the reputation of the industry? • You cannot be everything to everybody. If a client is not a good fit, walk away firmly but with kindness. • Work on your listening ski ls. This may be your most important action when dealing with clients. • Do not be afraid to show your vulnerability. • Always plan for the person, not the portfolio. FOR CLIENTS • Choose your financial planner carefu ly. This is a partnership that should last and you must feel secure in the relationship. • Adhering to the fundamentals wi l add more value in the long term, than trying to time the market. • Do not lose sight of your long-term goals. Even when it feels counterintuitive, stick to your plan. BLUE CHIP ADVICE FINANCIAL PLANNER OF THE YEAR FINANCIAL PLANNER OF THE YEAR Meet the 2020 Financial Planner of the Year, Hester van der Merwe CFP® from Ultima Financial Planners. The FPI Financial Planner of the Year award is the highest accolade bestowed on financial planners in South Africa as it represents the very pinnacle of the profession. It is so important for everyone to understand that they have a unique money story, which has been written almost since the day they were born. Hester van der Merwe CFP®, Ultima Financial Planners It is possible to rewrite our story and open up new possibilities. T hink of a country’s cu rency as it share price. When there’s negative sentiment about a country the local cu rency weakens and overseas cu rencies become more expensive. It seems an inopportune time to se l your rands and yet many investors do jus that: when the domestic cu rency loses values against peers, spooked investors tend to move their money abroad. Those investors who did this when the do lar was at R18 wi l be si ting with their heads in their hands now that it’s strengthened to R15-odd. In short, investors tend to chase performance in cu rencies as they do in stock markets and this can be a damaging strategy. Often investors pursue this route because it feels “safer” or less “scary”. As with a l investments, fear is never a great strategy. A sound, solid financial plan looking at a l aspects of your investment goals can help you stay the course and char the “unknown”. And if anything, this year has been a pre ty stark reminder of how li tle control we have over predicting the future. The level of comfort or te ror you derive from watching the rand move up or down in line with most foreign cu rencies is part of the emotional ro ler-coaster tha tends to fo low markets, and then investors. Investing offshore, like a l investment a locations, should be done in with a holistic view of your financial plan in mind. What should I invest offshore? How much you can invest offshore wi l depend very much on your financial circumstances, your risk profile and your investment horizon. Most importantly, you should consider how we l your a sets and liabilities match. Your a sets should, for the most part, be in the same cu rency as your expenses. It might be that you wan to send your children to an overseas university or perhaps that you want to retire abroad. To fund these expenses, it’s a good idea to own assets in the right cu rency to avoid being unnece sarily impacted by unfavourable movements in the exchange rate. That’s not to say that if you plan on staying in South Africa you don’t need to be taking your money offshore. It’s completely the opposite. Given the economic backdrop in South Africa, it may we l be prudent to move some of your a sets overseas from a diversification point of view. Economic theory is not a perfect science. It does make some suggestions on how to think about the level of offshore exposure you need in your portfolio. In comparison to most trading partners for South Africa (Inc), we have higher inflation numbers (even at these low levels), which means we could expect our cu rency to depreciate over time. The fact that we’ l be importing goods in our shopping baskets at a weak or weakening cu rency, wi l over time increase inflation and the cost of living. Common advice suggests tha the first rule to wealth creation is wealth preservation – or the ability to protect the purchasing power of your money in the future. This is a more noble goal than it receives credit for – a common goal that applies to a l investors. When should I invest offshore? The wrong time to invest offshore is when the rand is weak because one unit of foreign cu rency is going to cost more rands than it did before the cu rency weakened. Trying to time the movement of the rand, like trying to time the markets, has proven to many to be a futile undertaking. Sure you can make an educated gue s, but it’s far better to consistently move your money over time. This way your gains from exchanging at a good rate, and your lo ses from exchanging at a bad rate, should balance each other out. The principle remains that it’s the long-term effects that ma ter most and these are the most deserving of your focus and planning. How should I invest offshore? It can be quite overwhelming deciding where to start offshore investing, but it needn't be. Broadly speaking, there are two approaches: the direct offshore investment using your investment a lowance, or investing indirectly by accessing a fund manager’s institutional a lowance. Direct. You can convert your rands into foreign cu rency by physica ly moving your money from a South African bank account into an offshore account if you are over the age of 18 and a taxpayer in good standing. This is most suitable for investors who are happy to leave assets offshore for the long term, perhaps because they plan on a lot of international travel or they expect to incur expenses overseas. The South African Reserve Bank (SARB) a lows individuals to take up to R1-mi lion out of the country a year withou tax clearance. A further R10-mi lion can be moved offshore each year with the approval of the SARB and a tax clearance certificate. These funds can then be used to invest directly in offshore assets of your choosing. There’s a lot of flexibility associated with this approach and you can choose the cu rency you receive your proceeds in. Indirect. The alternative is to invest in rands through: • A loca ly-administered unit trus that is mandated to invest a portion of the fund in international markets. Local funds can invest up to 30% of their a sets overseas and an additional 10% across the African continent. • A foreign-administrated rand-denominated local unit trust that invests entirely offshore. These are known as “feeder funds”. Both structures can give you acce s to international markets without physica ly moving your money abroad and you are not restricted by how much you can invest in the uni trust (it doesn’t count as part of your personal R11-mi lion offshore a lowance). This can be a straightforward option if you are happy that the proceeds from any divestment are paid to you in local currency again. And importantly, this route can be the most acce sible way to acce s offshore markets as investors could start saving with R500 a month via debit order in some of these funds. A l investors should be sure to understand the tax considerations and differentiations involved with these routes, as we l as the estate planning consequences for owning a sets abroad. While it is potentia ly simpler then you thought, we would suggest you su round yourself with trusted professionals and sound advice when drafting a financial plan, or any investment strategy. Where should I invest offshore? Investors can be faced with a daunting choice of offshore options. Do you look to the we l-known developed markets, where companies are potentia ly be te recognised and understood but economic growth is subdued (with consequences for earnings potential)? Or do you look to the emerging East, where companies are perhaps less familiar but economic growth is be ter and earnings prospects may be brighter? How do you genuinely a se s the merits of any international market from as far away as South Africa? The best way to navigate these cha lenges is to partner with a seasoned international fund manager that has local presence and in-depth knowledge of the intricacies and idiosyncrasies of most global markets. There is an increasing number of global asset managers with funds on offer in the South African market so it’s becoming easier every day for investors to invest offshore. As with most things in life, be sure you do so with the right objectives and rational reasoning. Emotions are powerful motivators, but often no the long-term investment partners you can count on. The views and opinions contained herein are those of the author. Local funds can invest up to 30% of their assets overseas and an additional 10% across the African continent. How do you genuinely assess the merits of any international market from as far away as South Africa? Your offshore investing questions answered Ebeth van Heerden, Head of Intermediary South Africa, Schroders What holds South Africans back from investing offshore? 46 47 OFFSHORE INVESTMENTS OFFSHORE INVESTMENTS 1 “Nixon, P.P., Barnard, M., Bornman, R., and Louw, D.J.D. 2019. The South African investor behaviour tax and helping investors count what counts. Momentum Investments. 2 See Kahneman and Tversky, 1979, and Tversky and Kahneman, 1992. 3 Sitkin, S.B. and Pablo, A.L. 1992. Reconceptualizing the determinants of risk behavior. Academy Of Management Review, 17(1), pp.9-38. 54 55 INVESTOR BEHAVIOUR Being Spock (AND NOT BEING HOMER) risk that Nobel Laureate Daniel Kahneman developed with Amos Tversky 2 . CPT highlights firstly, the importance of a reference point for individuals when they make decisions – they hate lo ses more than they like gains; and secondly, decision-makers’ inability to co rectly a se s probabilities – they overweight extreme outcomes. Sitkin and Pablo 3 extend this work by proposing that while investors each have a “risk preference” or character trait of being a tracted o repe led by risk, this preference is mediated by our “risk perceptions” or asse sment of risk in any given situation and our “risk propensity” to take risk, which is a function of recent experience in thi space. In short, humans are particularly poor at assessing risks and can easily be fooled by something as simple as the way a given situation is framed. Investors typically underestimate risk when experiencing lo ses and often look for excess risk at the opportunity of negating such painfu lo ses. Moreover, our propensity to a sume risk is significantly affected by prior outcomes (recent succe ses or failures). These insights guided our choice of the explanatory variable for what is a first for South Africa: a segmentation of South African investors based on a risk-based analysis of the switching of their holdings in discretionary unit trusts. Switches were grouped based on the relative historical performance of the funds being switched out of and those being switched into; the relative risk profiles of these funds and fina ly, the average number of switches and their frequency. The use of the Hierarchical Clustering technique showed tha there are five clearly defined groups (or archetypes) of switching behaviour inside this large sample of investors: 1) Risk Avoiders. These switches are made by investors who tend to have a low-risk appetite and rather avoid risk altogether. They therefore stick to a more conservative a set allocation and do not switch often. Keeping with avoiding risk and avoiding change, they are likely to remain in funds with similar (low) risk. They are relatively likely to chase past performance when cu rent performance is below inflection. This behaviour seems to be more common in older investors and slightly more common with females compared to other archetypes. 2) Contrarians. As the name suggests, these switches are made by investors who are seemingly showing the opposite behaviour than that of the other archetypes. They have a seemingly high risk preference and a high tolerance for downside risk. Whether performance is high or low, these investors rarely chase past performance: they are more likely to switch to funds with worse past performance. Keeping with the title of this archetype, this was the only cluster which realised a positive behaviour tax. 3) Market Timers. The main driver here is switch frequency since marke timers constantly move between funds in an attemp to beat the market and maximise returns. These investors show a mix o fear and greed driving switches. We see that such behaviour leads to high behaviour tax during periods of crisis and periods of fluctuating markets. 4) Anxious. Investors with this type of switching behaviour seem to have a low risk appetite; however, they do not avoid risk altogether. These investors are very sensitive to downside risk and are likely to act out of fear when underperformance looms. They are very likely to down-risk and chase past performance when cu rent funds are performing below inflection. Such behaviour led to high behaviour tax, especially during periods of growth where they would be “mi sing out” on performance. 5) Assertives. Investors with this type of switching behaviour are more risk-tolerant and set on chasing past performance. When chasing past performance, it is mostly between funds with similar risk profiles. We expec these investors to be overconfident and to fo low their ways and not be influenced as much by advisors. The distribution of the occu rence of these switches through time is presented in the graph (above). As expected, the “Anxious” and “Risk Avoiders” switches dominate in times of crisis and poor market returns. The “Market Timer” switches peak after the crisis period. Why is this segmentation important? A better understanding of the compromising nature of myopic risk behaviour (which places too much emphasis on the transient present and its related emotions) is key to understanding your behaviour, and, if you’re an advisor, your clients’ behaviour. More importantly, it can provide a proper basis for intervening at the righ time to avoid the a sociated negative implications of these behaviours. Ultimately, the point is to help a l investors avoid the harmful outcomes of them “being Homer”. These empirical insights are key to achieving this outcome. * This article is a summary of a white paper: “Understanding the great forces that rule the world. A study on South African investor behaviour” wri ten by Paul Nixon, Evan Gilbert and Dirk Louw of Momentum Investments in October 2020. How understanding investor switching behaviour can help you improve your investment returns W hen we make decisions, we would a l like to think that we are more like Mr Spock from Star Trek (who uses relentle s, emotionle s logic) than Homer from The Simpsons (who doesn’t). Unfortunately, it is sad, bu true, tha the opposite is usually co rect. Multiple studies have demonstrated that investors’ decisionmaking is dominated by their emotions and these emotions are usua ly counterproductive from the point of view of their investment returns. These studies a l clearly show tha there is a “behaviour tax” acro s the world that makes investors’ experiences of their investments far worse (from a returns perspective) than they could have been if they had simply sat on their hands. A recent study 1 of the South African experience confirmed these results over the period 2006 – 2018. To help understand what behaviour lies behind thi self-destructive behaviour and thus what we can do to help ourselves (and our clients) a study of 44 815 switches conducted by 23 390 clients on the Momentum Wealth Linked Investment Services Platform (LISP) was recently conducted for the period January 2006 – December 2017. The theoretical basis for this study started with Cumulative Prospect Theory (CPT) – the theory of decision-making under Humans are particularly poor at assessing risks and can easily be fooled by something as simple as the way a given situation is framed. Professor Evan Gilbert INVESTOR BEHAVIOUR W e a l know that 2020 was a difficult year in a l aspects of our lives. It was even worse for financial advisors who did not build an annuity income for their businesses or practices. It is abou time that we start doing things differently, the same way we tell our clients to review their financial planning yearly. We need to apply the same principles and change the way we do things so we can see different results in 2021. You will need to start by reviewing your value proposition to your clients. Le them know what you stand for and what makes you unique. There are so many financial advisors ou there, but your clients work with you for a particular reason. Do you know wha that reason is? Do you know why they trust and understand you compared to your other co leagues? If you don’t know that reason, send a select group of clients questionnaires that wi l give you a clea reason why they work with you and if it defines you. Find a mentor or coach that can help you avoid mistakes and guide you when you feel lost and wan to discu s ideas that wi l help grow your business. You must look for a mentor or a coach who is on a higher level than you, so they can be able to share their wisdom with you. You need a person who you can share your problems with, and they wi l be able to give you tools to resolve your problems. They must be able to guide on both personal and busine s aspects to help you balance your life. I was privileged to have had a mentor on this path and he managed to show me my weak and strong points in the business and how I can work on these to help me grow my business. I was taugh the difference between working in the busine s and working on the busine s. Working in the busine s means going out and seeing clients fu l-time and working on the busine s is working on growing your busine s by a tending se sions and workshops tha talk about business development. We need to a locate more time to working on the busine s than working in the busine s. Restructure your busine s by reviewing your client base, your products, sales and review strategy. This wi l help you find your specialised area that you can focus on and be the best at it. When you review your client base, you wi l be able to segment your clients so you know how your book looks and also if you are still on track working with your target market. When we are building our busine ses we end up losing focus on our target market as we take any clients that come our way, which is understandable, but wi l it grow your busine ses at the pace that we want it to grow? Work on tha target market and stick to it. Let us learn to do things differently this year. Start ca ling a l your existing clients and touch base with them to understand their cu rent financial goal. This wi l help them rethink their lives and their financial goals. Ca ling your clients for a check-in wi l make them even happier about your services. If the conversation persists, propose a Zoom meeting so you can guide them further. Remember, clients are looking for more of a financial coach than a financial advisor. If they receive great service and advice, they wi l pay for it. Lastly, get a supporting team such as an administrator and a paraplanner because you cannot handle a l the paperwork by yourself. You wi l need to delegate activities that are not directly linked to affecting you results. I know most of us cannot afford to pay them bu there are programmes in the industry that help with funding. You can partner with TVET (Technical and Vocational Education and Training) co leges that need to place learners for 18 months to a sist with administration or apply for interns with INSETA (Insurance Sector Education and Training Authority). INSETA can also help with paraplanners. Use the resources that are available to us. With everything you do in 2021, do not forget to digitise your busine s. Remember, we are the masters of our destiny, therefore by taking these first steps you are building a business that can self-sustain and survive the next pandemic, regardless of what it is. The above-mentioned points ar essential and wi l redefine your perspective towards the future. Happy planning for your succe sful 2021! 2021 PLAN? Nonhlanhla Nxele, CEO, Tokoloho Financial Services Have you thought 59 59 We need to allocate more time to working on the business than working in the business. of your FINANCIAL PLANNING FINANCIAL PLANNING 58 Master your destiny SLOWLY UNPACKING FINANCIAL EMIGRATION South African financial planners are regularly presented by clients with the same conundrum: should I leave South Africa… or take a l of my money out of the country? W e are members of the Vulintaba Association, a group of lifestyle financial planners a l of whom are CFP® Profe sionals. We work together to see how we can serve our clients by doing financial planning be ter and also how we can run world-cla s busine ses. Before lockdown, a number of us were debating the concept of financial emigration. If you are reading this publication you are in the financial services industry, but let me be clear from the outset: we at Veritas Wealth believe that the financial planning proce s comes first, and then when this planning proce s is finished, and then and only then, we look to implemen the plan and use financial products. This distinction is critical because financial emigration is the implementation of a financial plan. If you just jump straigh to financial emigration, you are, as they say, pu ting the cart before the horse. The genesis of financial emigration is based on fear. As financial planners, our job is no to decide how or where people should live. Our ski l is to show them the consequences of the lifestyle decisions tha they have come to discu s with you, their trusted advisor. A l our advisors recently completed a behavioural coaching programme. During the course, one starts to pick up that as financial planners we a l enter conversations with clients with our personal biases and blinds spots. It is critical to recognise these and also to try to keep them, as best as po sible, out of the conversation. Never forget, the meeting is abou the client, not about you and your opinions. Our job is to help the client unpack the issue of financial emigration for them and from a family perspective. Our ski l and value add is in the questions we ask rather than in the answers we give. Our clients have the answers themselves; we can only show them the likely consequences of the decisions they make. Cu rently, many South Africans are losing faith in the government and the country. There is a real sense of fear but, interestingly, many clients have no intention of leaving, either because they cannot afford to leave or they realise this is a wonderful place to live. RULE 1 | Fear se ls If you want to se l a product or an idea, then fear is a powerful tool. If you want people to take money offshore so that you can earn offshore income, then hi the fear bu ton. It wi l se l the product or service very succe sfu ly. The media regularly use bad news and fear to capture our a tention, so product houses and advisors are now too pushing this bu ton more regularly. The issue is that more clients are saying tha they do not want to make contributions to retirement annuities (RA) this year. They also wan to cash in on their pensions and take wha they can offshore. Some even wan to se l their homes. You hear the comments around the braai or at sma l gatherings. Prescribed a sets, sovereign downgrades, tax morality and state capture add to the long list of othe reasons to get your money out of here. Your job as a planner is to slow this down and go through the numbers. Your client must understand the consequences. Also ask them, if they have considered the fac tha they may be wrong. RULE 2 | The power of compound interest We a sume you pay tax at 41% marginal rate. This was to February 2020. The money is invested in a RA pre-tax. When you retire, your tax rate is lower, probably 25- 30% marginal when you start drawing a pension. A common conversation is about ge ting as much money offshore as you can get your hands on. Should you contribute to you retirement fund? Here are the numbers: Do not use RA Use RA Income earned pre-tax R350 000 R350 000 Contribution to RA R0 R350 000 Income tax payable 2020 @ 41% (R143 500) R0 Amount available for investment R206 500 R350 000 Our skill and value add is in the questions we ask rather than in the answers we give. 0 Old Mutual Wealth (OMW) is an elite service o fering brough to you by severa licensed Financial Services Providers in the Old Mutual Group. This document is for information purposes only and does not constitute financial advice in any way or form. It is importan to consult a financial planner to receive financial advice before acting on any information contained herein. OMW, the Old Mutual Group and its directors, officers and employee sha l not be responsible and disclaim a liability for any lo s, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be su fered as a result of, or which may be a tributable, directly or indirectly, to the use of, o reliance upon any information contained in this document. OFFSHORE INVESTMENTS 43 FINANCIAL PLANNING 33 for the client to answer. As Albert Einstein said (or attributed to have said), “If I had one hour to solve and my life depended on the solution, I would spend minutes trying to find the right question to ask, and minutes determining the answer.” For the Robo-advi risk is Garbage In, Garbage Out. In working with a person directly, the human adviso to find the right questions to ask. Questions that he to think through their circumstances, situation, dilem goals and dreams. A conversation is a fluid process w think together. The Robo-advisor may think up to a client. But it will need to be pre-programmed with of options to help each client think through their ow coming up with appropriate answers for whatev their life is being examined. People in general don’t always have the insight into their own lives. We don’t know wh know. We have blind spots. We have hidden un talents. We may even have hidden or repr desires, dreams. The Robo-advisor as client knows what they want. You a advisor cannot assume that. As a thinking partner, yo clients think about their lives. To understand their co relationships with themselves, their relationships with the world. Having developed that understanding, yo clients explore their potential choices to deal with the m in which they find themselves. Choice architect My father could’ve instructed his crew to stay with th It was what he believed was the best course of action case of life or death, he had to allow each man to mak decision and live or die with it. If your clients don’ decisions, you rather than they become accountab decisions. The waters of the future are always murky. In helping clients make choices, financial planne role of the choice architect. But anyone who has wor architect will know, it is not simply a matter of the arch you what to do. The client always has opinions, wis and wants. Often there is much emotion that underp – whether it be fear, desire or even excitement. And un it seems that when it comes to working with clients’ m often choices are made in fearful response to the perceived dangers or threats. Most often the story we focus on is the story of t is the way we are wired. Our brains are continually threats. That’s how we have survived as a species. Iden and avoid them. It is no surprise that the most com tool to help with client investment decision-making is profile. It’s not called an opportunity profile or a ret it’s called a risk profile. And we use such a profile wh investment decisions because we as human beings make rational decisions. We are not always rational. M y father was a pilot in the Second World War. He flew Wellington bombers for the RAF. Their job was to fly at night and bomb strategic enemy positions. On one mission my father’s plane had mechanical difficulties over the Red Sea. They managed to crash-land into the sea. Although the plane broke apart on impact, three of the crew survived the crash and managed to hold onto pieces of the fuselage. It became apparent that there were sharks in the water, circling them. I’m not sure how the conversation went at that stage, but their dilemma was whether to hang onto the pieces of wreckage and hope for the best or swim, hoping to get away from the sharks. My father was the only one who decided to stay put. The other two crewmen felt they had more chance of survival by swimming away from the danger lurking in the water. They were never seen again. The next morning my father washed up onto the Arabian coast. He was not in a great state. But fortuitously some Arabian soldiers, who had been alerted to the crash, were searching the coastline for any survivors. Miraculously they found my father lying on the beach. Despite being a bit of wreck himself he had to endure a two-day journey on the back of a camel to get to the nearest hospital. For many people, such a journey is a bucket-list activity. I don’t think he enjoyed it much. But he survived. And after his recovery was able to return to action. Many factors led to my father surviving what should have been a fatal crash. Floating wreckage; the direction of the current; soldiers remarkably finding him. But before any of those factors could come into play, he had to make a decision, amidst uncertainty, and in the face of immediate danger. His crew decided that to act and swim for safety was the right decision. My father, despite the obvious dangers, decided that to hang onto some wreckage and let the ocean take control was the best option for him. They were faced with a tough choice, in murky water, in the dark, with immediate danger present. What relevance does this story have to financial planning? When a financial planner sits with a client, the context may be different but similar challenges are present. The future is uncertain. The waters are murky. There are often visible and invisible dangers or threats to consider. And invariably a financial planning meeting involves difficult decision-making. Whether it be a decision to do something or not, it is still a decision. Often with life-changing implications. To save or not. To spend less or more. To take out life insurance. To prepare a will. As a financial planner, you help clients make and implement key decisions about their life and money. If one considers what goes into making a decision, there are usually three ingredients: thought, choice and action. Thinking partner In the immediate aftermath of their crash, my father and his crew had to think about what to do. When clients come to you, they may not know it, but the first thing they need is help to think about their situation, their dilemmas. As human beings, we have the unique ability to think together. To share thoughts. To share how we see ourselves, others and the world. We do this through communicating, written and verbal. Conversation. Books. Media. A Robo-advisor can prompt a client to answer questions which will follow a decision tree pattern that will lead to a solution for the client. But those questions are not necessarily the right questions 3 ROLES ROLES 56 Facilitating thoughts, choices and actions no surprise, then, that Ricardo Semler, a highly successful, innovative industrialist and entrepreneur from Brazil, wrote a book entitled The Seven Day Weekend. He encourages employers to think differently about how they manage their people, and more importantly, how to get the best out of people. He argues that technology that was supposed to make life easier such as laptops, cellphones and email, has actually encroached on people’s free time. But as he says, this can be a good thing if you have the autonomy to get your work done on your own terms and to blend your work life and personal life. He suggests that innovative employers will eventually realise that people may be more productive if they have the flexibility to decide for themselves when to work and play, rather than the employer deciding. Rather than time in, employers ideally should focus on value out. The importance of value was highlighted for me recently when I met with a financial planner who related how they helped a potential client resolve a dilemma about their future retirement. They helped the client assess retirement options in a more rigorous and creative way than if the client had simply tried to do it on their own. No doubt the experience and thinking that this planner had done over many years made this meeting very impactful. When it came to discussing the financial planning fee, the planner mentioned that the upfront financial planning fee was 44 PRACTICE MANAGEMENT of the financial planner A World War II Wellington bomber Please tell us about your academic path. Past and present. I completed my BSc Actuarial and Financial Mathematics degree at the University of Pretoria, and after that completed a Post Graduate Diploma in Actuarial Science at the University of Cape Town. Like most actuaries, I started with my actuarial board examinations directly after university and completed these late in 2009 – that made me a Fellow of the Actuarial Society of South Africa. What are the defining highlights of your career? My career in product development gave me incredible opportunities for exposure to the wider investments business, and all these experiences contributed to my career path to date. It not only gave me technical exposure on the products and solutions – the ins and outs of financial products – but it also allowed me to gain exposure to a wide range of disciplines – pricing, finance, consumer behaviour, information technology, marketing, distribution and service and operations. The most significant contributors to my career at this point have been the leaders who have influenced and mentored me into the person and professional that I became. I truly value the potential and impact of leadership – I have seen it first-hand in my career. What do you deem to be the most critical component of financial success? Momentum has done extensive research on financial wellness and the journey to financial success. A common characteristic of individuals who have achieved financial success is the presence of a financial plan. This might sound over-simplistic, but it certainly makes sense – to achieve financial success, you need to know where you are heading, as well as the journey that will get you there – hence a plan! It is in this context that we, at Momentum Investments, really believe in the value of financial advice. The financial advice process helps you to identify the goals that you and your family want to set The wisdom of wealth Martin Riekert, Executive Head of Retail Investments at Momentum Investments, started his career at Momentum early in 2008. During his first years, he was responsible for the technical and actuarial function in Momentum Wealth, where he learned the finer details of the Wealth offering and product suite. He fulfilled various product development roles in Momentum Wealth, which gave him great exposure across the wider business preparing him to step into his current role. Blue Chip speaks to Martin about his success and the success that follows him. for yourself so that you can articulate a clear and implementable plan to achieve these goals. I want to add that it is quite important to commit to sticking to the plan. We often see that clients have the best of intentions when starting the investment journey but deviating from the plan often results in sub-optimal outcomes. Please tell us about the industry benchmarks that Momentum Investments has fashioned. Many investment solutions in the market provide benchmarks or targets that are not always aligned with the needs of clients or the way that financial advisers give advice. We believe that our approach of outcome-based investing can address this gap directly. Our core range, therefore, has inflation-related targets – something we believe fits into the financial advice process, and helps financial advisers to manage the expectations with their clients. Although these targets are not guaranteed, our outcomebased investing approach attempts to maximise the chances of reaching these targets and the relevant risk metrics that are associated with each solution. Outcome-based investing is about placing the client’s goals at the centre of the investment process. Our approach is more than an investing philosophy – it’s a belief system defining the way we manage and grow our clients’ investments. We never take shortcuts with short-term solutions for their long-term goals, and we help to show them that future goals cannot be achieved by relying on past performance. Momentum offers various solutions that cater to different clients’ needs, such as growth, protection and income. Please provide an overview of the products that Momentum Investments offers in this regard. We recognise that clients have different investment needs throughout their lifecycle. We often think of ‘capital growth’ as the only investment outcome that advisers and clients need to solve for – and our inflation-targeted range of solutions discussed earlier will certainly address this capital growth need. But often clients also need to solve for income needs or are looking for investment opportunities that also provide some capital protection. Our outcome-based investment range, therefore, includes additional solutions that also address these needs of clients. In addition to our market-linked solutions described above, we also offer a range of guaranteed solutions that can also be utilised to address these needs of capital protection and income needs – all of these are also outcome-based, as it directly solves for the client’s investment outcomes. In the current economic landscape, uncertainty is the only certainty – that and the assurances Momentum’s guaranteed solutions offer. Considering the uncertainty around Covid-19, please expand on Momentum’s guaranteed solutions range and the assurances that your products offer. For many clients, the world of investments can be daunting, especially if their capacity for risk does not allow them to deal with the uncertainty of markets. And during uncertain times – of which Covid-19 pandemic is undoubtedly one example – we see that these unknowns are affecting investment behaviour and often result in an increase in demand for guaranteed solutions. Our guaranteed solutions offer a range of solutions that either provide a guaranteed return over a fixed period or a guaranteed level of income. Giving a client exposure to these solutions – even if it is just a portion of their investment portfolio – helps them to introduce stability in terms of what the client can expect. This can provide peace of mind to clients as they know that their money is safe, even if the markets are volatile or provide unfavourable returns. What advice would you give advisers about how to manage their clients who are currently going through a difficult time? I believe that financial advisers are becoming so much more than only individuals who give their clients financial advice. They will increasingly start to become ‘financial wellness’ to their clients, and therefore play a meaningful role not only in giving advice but also in coaching and guiding clients through an everchanging environment. At Momentum Investments, our outcome-based investing philosophy is anchored in a belief of ‘staying invested’, as we have seen that clients often destroy value by reacting too quickly when markets are volatile. I will therefore encourage financial advisers to continuously engage with their clients through volatile and uncertain times – not to review and react to the markets, but to give clients comfort that their original financial plans are still relevant and that there are benefits in sticking to this plan. Your brand proposition is ‘With us, it’s personal’. How so? Most people who invest do so for a personal purpose. In some cases, it is to be able to afford an income during retirement. In other cases, it’s for a dream of sorts or for leaving a legacy. Regardless of the why, this is a personal journey, and it matters deeply to each individual. We want to help people and their financial advisers on that journey to financial success. One thing that stands out for me in my career at Momentum is that collaboration is part of our DNA. We have a proud history of partnerships with financial advisers, and more recently, we started A common characteristic of individuals who have achieved financial success is the presence of a financial plan. 12 13 INTERVIEW 12 INTERVIEW 6 * As at 30 June 2019 Source: Old Mutual Limited. KEY CONSIDERATIONS WHEN INVESTING OFFSHORE T he cu rent political and economic landscape in South Africa has led to a surge in interest in offshore investment from local investors. The decision to invest o fshore is predominantly influenced by the search for superio returns, in addition to stability and security of assets. However, when planning on moving money abroad, there are a few other crucial considerations to keep in mind, including mechanisms to invest offshore, various tax implications of these investment vehicles, and cu rency fluctuation factors as a key part of the initial planning process. DIRECT VS INDIRECT INVESTMENT In most cases, investor send discretionary money o fshore while their investments in South Africa satisfy their income needs on local soil. The question is, when it comes to o fshore investment vehicles, should you invest directly or through an indirect vehicle, such as an asset swop or feeder fund? Essentially, direct investing involves the converting of rands to foreign cu rency and investing it abroad in hard cash. In these cases, an investor wi l have an o fshore bank account they would use to transfer money to and from the investment vehicle of their choice. In other words, investing directly into, say, funds or shares abroad. One of the key reasons for direct investing is to have money available in these specific jurisdictions, whether it is for use when trave ling or to finance your children’s tuition overseas, as we l as any situation when having money abroad for immediate use make sense. Other reasons to invest directly are to hedge against local political instability in a country of residence and for immigration. By Wayne Sorour, Head of Old Mutual International: Sales & Distribution When you decide to invest o fshore indirectly, you need a mechanism to ge this money abroad, which is referred to as an asset swop, which is essentia ly an investment manager’s offshore allowance. DON’T GET TRIPPED UP BY TAX There are a myriad of tax considerations that investors often don’t factor in before taking their assets o fshore. For example, the US and the UK, and most other countries, require that non-residents pay inheritance tax on assets, including property and direct shares. If you own shares on the NY Stock Exchange, for example, your heirs are liable for a 40% offshore inheritance tax on all investments above US 000. These jurisdictions also clamp down heavily on estate duty taxes. Tax complications can at least be curtailed by handing ove responsibility to an investment manager that can place their o fshore investments in a wrapper, an investment platform that lega ly entrusts the investment manager to handle a l tax affairs of the investments therein. CURRENCY FLUCTUATION Preoccupation with the short-term volatility of the rand and the conversion rate in question when planning to invest abroad is prevalent among local investors. What they don’ take into account is that while the rand strengthens, global markets tend to co rect a the same time, voiding the strong showing of the rand. It seldom happens that the rand strengthens while the markets go down. Therefore, while you wait for the rand to improve by 10% to send money offshore, the market can also move by 10%, resulting in zero gain. Investors would do be ter to phase in these investments over a set period to account for these cu rency fluctuations. The question we are often asked is if you only need the money in 10 years, why invest now when the rand is weak, but if you believe the rand is going to KEY CONSIDERATIONS WHEN INVESTING OFFSHORE devalue further, the bes time to star taking money offshore is now. WHERE TO INVEST? While the South African investment environment is relatively limited, o fshore investing has the added complexity of a choice of thousands of companies and funds to invest in. This is where intimate knowledge and expertise of the o fshore investment space plays a crucial role. If an investor is risk-averse, lumping all their money into risky o fshore equity markets is futile. An investor risk and needs analysis must be conducted by investment managers first and foremos to decide on the various asset classes to invest in abroad. This involves keeping in mind that money invested o fshore should be based on medium-to longterm horizons and often forms part of investors’ discretionary investments. There is also the added complexity of geographical exposure to equity markets in the US, UK, EU or emerging markets, among many others. It is thus highly advisable that a client’s investments be reviewed by an investment manager who can structure a discretionary portfolio according to the investor’s risk profile. Preoccupation with the short-term volatility of the rand and the conversion rate in question when planning to invest abroad is prevalent among local investors. ” Rest of world developed equities Around 35% of listed equity then sits within Europe, UK and Japan. This is a more diversified pool of investments compared with the US, given the geographical spread of companies and the fact that multiple governments play a role in impacting the prospects of each market. Europe i sti l rather old-world (consumer goods, financial services and a l the oil companies – Total, BP, She l). The UK is largely a global market, with a minority of revenue sourced domestica ly, and many of its listings based on commodity companies, much like South Africa. Japan was the equity powerhouse in the ’80s with the advent of the personal computer and consumer electronics but has faded over time. Today it gives us motor manufacturing (Toyota, Mitsubishi and Honda) and Sony among others. Emerging markets These are markets defined as “developing” ie where there are reasonable infrastructure and governance to support growth and where the standard of living is in ascendance, cu rently holding around 15% of world equity exposure. These are genera ly seen as high-growth sources of return as the underlying economies are developing at a higher rate than more mature markets like the US. While this is the theory, the reality has been somewhat more mixed in many cases. With political volatility and variou social conflicts, emerging markets are not always a one-way bet. They are also beholden to the demand created by the developed markets. China, for instance, could be refe red to as the manufacturer of the Western world. Looking ahead le so, but certainly looking backwards. Countries include BRICS (Brazil, Ru sia, India, China and South Africa) as we l as South Korea, Taiwan and Mexico. Emerging markets are increasingly dominated by the rise of China, which now accounts for over 30% of a l listed emerging market equity. And within this, a huge bias towards technology via Tencent (the source of Naspers’ succe s), Baidu and Alibaba – the Chines equivalent of Facebook, Google and Amazon respectively. It is becoming difficult to avoid a Chinese tech bias inside an emerging markets portfolio. Other sectors providing opportunity in emerging markets include commodity producers, large growing consumer services based on growing middle cla ses, and the financial services needed to fund this growth. Many a set managers avoid investing in emerging markets given the complexity as we l as the need to resource significan teams to cover this disparate universe of shares. This is one of the biases we consider when looking at client portfolios. Frontier markets A recently termed market refe ring to lesser developed, prospective emerging markets. Current exposure is concentrated acro s Argentina, Kuwait, Vietnam and Nigeria where 60% of a l listed shares are either in financial services or telecommunications – the frontier markets provide high-growth opportunities because they sti l have much to achieve so returns to investors need to be commensurately high to offset the investment risks of politics, liquidity and governance. Sma ler companies Some companies are sma l for a reason and wi l stay that way, but others are the “large caps of the future”. These shares are your typical high-growth companies because they tend to be ro ling out new, disruptive services to the market. Many of the cu rent-day disruptors are technology-based, bu this can cover any industry globa ly. This is another market often underinvested by a set managers due to the different mindset required and additional resources required. This a set cla s also tends to be quite US-heavy due to the focus on innovation which enjoys substantial support in that market. Listed property Unlike loca ly, where property tends to be quite homogenous – meaning that most of our investment options are bundled property companies acro s commercial, retail and industrial options – global counterparts are considerably more specialised. Companies can have a specific focus (eg data centres fast replacing retail shops due t online shopping), or a regional focus (for instance, a property share that only invests in B-grade London commercial property). This provide substantial diversification opportunity for investors compared to history. A l of this results in tens of thousands of listed shares in which to invest globa ly. In the main markets, this is na rowed down to around 2 500 to 3 000 shares, once liquidity has been factored in. This range of diversification is the primary benefit to local investors – not being overexposed to a few shares, singular governments, local cu rency or othe risk such as te rorism, corporate fraud or the decline of an industry. For equity investin going forward, it pays to think globa ly as part of a client’s portfolio, and while there ar equivalent risks globa ly to those which we face in South Africa, we are le s exposed to any individual event permanently impacting our portfolios and the achievement of longerterm objectives. advisor’s business. The advisor has the ability to consistently and e ficiently implement their investment advice acro s their client base by using a range of portfolios through a Discretionary Category I licence, either that of the DFM, or their own. A fourth benefit of outsourcing to a DFM is one of governance and compliance. The DFM should be able to ensure that similar clients are treated consistently (and therefore reduce TCF concerns), that the advisor has a documented investment process, and that comprehensive due diligence is provided on the funds used. The RDR discussion paper led to many claims that independent financial advisors (IFAs) would struggle to survive and thrive once RDR is implemented, and that IFAs would need to either se l their busine s to a corporate or outsource to a DFM. We do not agree with that a sertion. We believe that the majority of investment IFAs do not have to make material changes in their busine s to comply with RDR, and we do not believe tha thi should be the reason for using a DFM. It is an added benefit but should not be the key driver. In summary, the services of a quality DFM can benefit a financial advisor in the following ways: • An evidence-based investment philosophy and proce s that aligns with the business’s advice framework • A sustainable investment range that is able to cater to different client needs • Consistently managed portfolio solutions acro s the client base • Acce s to a dedicated team of investment specialists • Consistent and cost-e fective implementation across di ferent investment platforms • Constant compliance with the various regulatory requirements. A l DFMs are not created equal Advisors are clearly spoilt for choice given a l the DFMs now operating in South Africa. However, because they are sti l a relatively new concept to many advisors, choosing a DFM can be overwhelming. The right DFM has the potential to be a transformative, long-term busine s partner to an advisory busine s. We believe that the two most important factors that advisors need to consider when choosing a DFM are: • Understand the unique value proposition of the DFM given how different the various DFMs’ offerings are, and how this value proposition complements the advice proce s. • Make sure tha there is a good culture and philosophy fit between the advisor and the DFM. Meeting these considerations wi l decrease the probability of “buyer’s remorse” from an advisor who is ge ting something different from what they expected, and ensures that when differences of opinion emerge, there is common ground and respect between the parties to a low for a compromise that does not disadvantage the client. Key factors to investigate when ca rying out your due diligence on the DFM options include: • Whether the DFM is independent and how important independence is to the advisor. • The investment p

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