Blue Chip Issue 78 - Jan 2021

christoffscholtz

Issue 78January 2021

www.bluechipdigital.co.za

The Official Publication of the FPI

OUTCOME-BASED

INVESTING

Martin Riekert of Momentum

Investments on placing the

client’s goals at the centre

of the plan

A HEART FOR

THE PEOPLE

Meet Hester van der Merwe,

2020 FPI Financial Planner of the Year

THOUGHTS, CHOICES, ACTIONS

The 3 roles of the financial planner

SPECIAL EDITION: INVESTING OFFSHORE


Linking precision investment

management to financial advice.

For advisers.

Investment Management by Design

portfoliometrix.com

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?

www.bluechipdigital.co.za

46 www.bluechipdigital.co.za 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 www.bluechipdigital.co.za 55

www.bluechipdigital.co.za

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

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We need to allocate more time

to working on the business

than working in the business.

of your

FINANCIAL PLANNING

FINANCIAL PLANNING

58 www.bluechipdigital.co.za

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

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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 www.bluechipjournal.co.z

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.

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INTERVIEW

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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$60 000. 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


FOREWORD

Lelané Bezuidenhout CFP®, CEO,

Financial Planning Institute of

Southern Africa

What’s happening

at the FPI?

At the end of a year like no other, the FPI celebrates

many memorable firsts… Not least successfully hosting

the first-ever digital FPI Professionals Convention

and running its first-ever online exam session.

Wow! Can you believe 2020 is almost behind us?

While the year has had its challenges, with the

benefit of hindsight I can honestly say that it’s

been a positive time for the FPI.

Not only have we seriously upped our technology game

(necessity is the mother of all invention), but – with the

support of our incredible members – we’ve also continued to

enhance the reputation of the financial planning profession

in the eyes of all South Africans.

Read on for a rundown of some of the highlights of Q4, as

well as details of a few upcoming dates to diarise…

Our first digital FPI Professionals Convention was a

great success

One of the biggest challenges posed by the pandemic was

when, how and whether to host our convention. Deciding to

go digital was a massive leap of faith… But judging by the

feedback we’ve received from everyone who attended, it’s

one which has paid off. In many ways, going digital made it

easier for members to attend the convention and learn from

our excellent speakers.

While we’re not planning on going digital for all future

conventions, it’s great to have a new trick up our sleeves.

The gift that keeps on giving

One of the biggest benefits of hosting a digital convention is

that attendees can go back and watch the talks again and/or

catch up on sessions that they missed the first time around.

Attending the convention qualifies you for 11.5 CPD

hours. Remember that you only earn CPD points for

sessions that you watched. All of the recordings and

materials from the live convention will be available on the

Asset TV site until March 2021.

Better yet, even people who didn’t attend the convention

“live”, will still be able to register for the convention – please

contact events@fpi.co.za for more info on how to register.

Online exam session

2020 also saw us run our first-ever online exam session, and

this too went very well. In 2021, we will run three different

exam sessions to give candidates more opportunities to pass

the PCE. The first sitting – which will remain online – has

been moved from February to March to give our educational

providers enough time to wrap up the hectic 2020 year.

Contact certification@fpi.co.za for information on

the format of the exam going forward.

Other events to watch out for

While 2020 has taught us how much video conferencing

has to offer, I think you’ll all agree that nothing can ever

completely replace face-to-face interaction with real

colleagues. Which is why we’re thrilled to announce that our

annual refreshers in the last week of January will – depending

on government regulations – be in-person affairs.

This fantastic one-day event doesn’t just provide you

with the technical updates you need to stay ahead of the

competition, it also earns you much needed technical

verifiable CPD hours.

Watch out for our ever-popular tax update sessions in

February 2021 – dates for these will soon be confirmed on

our CPD site.

Please visit www.fpicpd.co.za for more information.

2 www.bluechipdigital.co.za


Being a member of the FPI doesn’t

just strengthen our collective

bargaining power and heighten our

professional profile, it also comes with

considerable individual benefits.

Don’t forget to renew your membership

now to lock in 2020 prices

In a year of such unremitting financial

pressure, you will be pleased to know that

members who renew their membership

before 31 December will pay 2020 rates

for the 2021 year. From 1 January 2021, a

4% increase will be applied to all membership

categories.

And remember: being a member of the

FPI doesn’t just strengthen our collective

bargaining power and heighten our

professional profile, it also comes with

considerable individual benefits, not

least discounted rates on our excellent

events and CPD offerings and access to

an incredible pool of knowledge, which is

always only a phone call away.

Thank you! Thank you! Thank you!

Of course, none of this would have

been possible without the unflinching

support of our wonderful members who

– despite the challenges of a global pandemic

– continued to give of their time,

their energies and their support to our

collective cause.

A big thank you goes out to every single

one of you… You know who you are.

Now all that remains is for me to wish

each and every one of you a restful and

blessed festive season. I hope you manage

to find the time to truly unwind with your

nearest and dearest. I think we’ve all earned

a proper holiday this year!

Take care, and see you in 2021.

Lelané

CONGRATULATIONS

HESTER

Hester van der Merwe CFP ®

claimed the coveted FPI

Financial Planner of the Year

award 2020

The Financial Planning Institute

of Southern Africa would like to

congratulate Hester van der Merwe

CFP ® . Don't miss the interview

with Hester on page 8.

www.bluechipdigital.co.za

3


EDITOR'S NOTE

Is offshore

the way to go?

As Florbela Yates, Momentum Investment Consulting, says on page 18, in an

economy that is struggling to deliver economic growth and low returns from

the majority of South African asset classes, an increasing number of South

African investors are looking for opportunities offshore in a bid to maximise

their investment returns. This edition of Blue Chip focuses on offshore investing, with a

great collection of articles to make it easier to identify which portfolios are most suited for

your clients for an appropriate blend of local and offshore assets. The comprehensive Old

Mutual Wealth Offshore special feature on page 23 guides you through the complexities

of investing offshore in today’s economic climate.

The recent sharp reversal in both the rand and local shares questions the wisdom

of having a binary view on local vs offshore, as well as highlighting the dangers of

disconnecting an investor’s portfolio from the underlying investment objective it is trying

to achieve says Ian Jones, Fundhouse. On page 20, he takes us through what it means to

be invested offshore by looking at the actual opportunities we are investing in, and the

new risks we are exposed to in the search for returns.

Even though many South Africans are losing faith in the government, interestingly

many clients have no intention of leaving, either because they cannot afford it or they

realise this is a fantastic place to live. In Slowly unpacking financial emigration (page 43)

Barry O’Mahony, Veritas Wealth Management, suggests that once you know your client

has enough assets in South Africa you should slowly build up surplus savings in offshore

assets over time.

Given the economic backdrop in South Africa, it may well be prudent to move some of

your assets overseas from a diversification point of view. On page 46, Ebeth van Heerden,

Schroders, warns us that investors tend to chase performance in currencies as they do in

stock markets, which can be a damaging strategy. She also cautions that the wrong time

to invest offshore is when the rand is weak because one unit of foreign currency is going

to cost more rands than it did before the currency weakened.

Multiple studies have demonstrated that investors’ decision-making is dominated by

their emotions and these emotions are usually counterproductive from the point of view of

their investment returns (page 54). Often there is much emotion that underpins a choice,

whether it be fear, desire or excitement. As a financial planner, you help clients make and

implement key decisions about their life and money. Rob Macdonald, Fundhouse, tells us

that there are usually three ingredients that go into making a decision: thought, choice

and action, and that the role of the financial planner is to facilitate these (page 56).

One financial planner who simplified thought, choice and action – hers and her clients

– into a winning strategy in 2020 was Hester van der Merwe CFP®, who won the illustrious

FPI Financial Planner of Year award last year. Meet her on page 8.

May 2021 be a prosperous year for you.

Alexis Knipe, Editor

blue-chip-journal

Blue Chip Journal – The official publication of FPI

Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial

Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes

contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.

A total of 10 000 copies of the publication are distributed directly to every CERTIFIED FINANCIAL PLANNER® (CFP®)

in the country, while the Blue Chip Digital e-newsletter reaches the full FPI membership base. FPI members are able

to earn one non-verifiable Continuous Professional Development (CPD) hour per edition of

the print journal (four per year) under the category of Professional Reading.

Special advertising packages in Blue Chip are available to FPI Corporate Partners, FPI

Recognised Education Providers and FPI Approved Professional Practices.

ISSUE 78 | JAN 2021

Publisher: Chris Whales

Editor: Alexis Knipe

Online editor: Christoff Scholtz

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No portion of this book may be reproduced without written consent of the

copyright owner. The opinions expressed are not necessarily those of Blue Chip,

nor the publisher, none of whom accept liability of any nature arising out of,

or in connection with, the contents of this book. The publishers would like to

express thanks to those who support this publication by their submission of

articles and with their advertising. All rights reserved.


On the money

Making waves this quarter

Tax-free savings accounts or retirement annuities?

A significant aspect of financial

planning is finding a combination

of products in the market that

match your circumstances and

needs, including tax efficiency, fund

availability, value for money, cost

structures, and access to funds. Two

longer-term savings products in

South Africa that could benefit you

are retirement annuities and tax-free

savings accounts.

A retirement annuity (RA) is an investment product that allows

you to make one-off and monthly contributions to bolster your

retirement savings. RAs offer tax efficiency for both income tax and

tax on investment returns. An RA works similar to a company pension

fund. Benefits include:

Income tax: Contributions to retirement annuities are taxdeductible,

up to a limit of 27.5% of your income capped at

R350 000 a year, which includes all contributions made across all

your company retirement funds and retirement annuities. This

benefit becomes more important the higher your current and

future expected tax rates are.

Tax-free returns: Any return earned within the retirement annuity

is tax-free. Over the longer term, this will have a significant benefit

to your savings.

Access only after 55: For many people, having a nest egg without

access is of great value as they may be tempted to pay in-themoment

expenses if they have access, thus sacrificing the longterm

goal.

On retirement from your RA, you can take up to a third in cash

after-tax: the first R500 000 lifetime allowance is tax-free and the rest

is taxed on a sliding scale. The remaining money in the retirement

annuity must provide you with a pension (income for life). This pension

will then attract income tax.

Tax-free savings accounts have grown in popularity since they

were introduced in 2015. Government has provided a strong incentive

within this product: tax-free returns. Over time, this has a significant

benefit on your savings. There are limits to the amount you can

contribute to a tax-free savings account every year and over your

lifetime. These limits are at a reasonable level and cover most people’s

needs. You benefit from the intended longer-term investment growth.

• |Michael Kirkpatrick, head of individual consulting best practice,

Alexander Forbes

Environmental Social and Governance (ESG) integration into the

investment process is one of the preeminent trends in the investment

management industry. Aeon Investment Management, one of the

leading advocates of ESG incorporation, chats with Blue Chip magazine.

What does ESG mean to you?

ESG is investing in companies with the awareness of factors, excluding

financial metrics, that have a significant impact on the valuation of

a stock. Investors should consider how their investments are helping to shape

discussions, actions, and other future investments.

Tinyiko Mabunda

Research Analyst at Aeon

Investment Management

“Integrity is doing the right thing, even when

no-one is watching.” – C.S. Lewis

How do you integrate ESG into your current role?

I research current and potential ESG issues affecting an industry and factor

these risks by the application of an ESG risk premium to the valuation of a

company that is currently being researched.

What ESG trends do you think investors should be considering?

There has been an increasing request for the disclosure of climate-related

risks, and carbon emission reporting from companies that utilise fossil fuels.

Yes, these are important issues; however, we should not forget the “S” in

ESG. Greater focus needs to be placed on socio-economic factors such as the

inequality gap and the gender pay gap in ensuring progress within ESG.


On the money

Making waves this quarter

What’s next for the economy? • Maarten Ackerman, chief economist and advisory partner, Citadel

There is a clear disconnect between market

cheer and the economic situation on the ground,

because many remain under pressure while the

global economic recovery slowly grinds forward.

Unemployment levels have risen worldwide,

placing pressure on consumer income, which

impacts businesses and corporate profitability.

Many companies and consumers will come

under intensified pressure following a second

wave of lockdowns, as seen locally, in Europe,

and the UK.

All is not doom and gloom. Monetary

and fiscal stimulus continue to underpin

markets, buoying sentiment,

and valuations. Joe Biden’s

presidential win has been a

market positive, particularly in

terms of global trade relations.

The speed with which Covid-19

vaccines have been developed

and are being rolled out

represents a significant

psychological victory over the

virus. While the vaccines are

not an immediate cure for the global economy,

their availability has boosted hope for a swifterthan-expected

return to normality.

Will SA finally face its fiscal demons?

Foreign investor support from the local bond

market together with the IMF’s loan has kept

the country from feeling the worst effects of the

pandemic’s devastation. But, government will

need to tighten its belt significantly at the end

of the three-year fiscal framework, or towards

the end 2022/early 2023 period – especially as

its first IMF loan repayment will come due.

If we are to avoid a sovereign debt crisis or

the risk of defaulting on our loans, government

urgently needs to implement long-awaited

structural economic reforms. Markets will be

watching for evidence of action rather than

simply more talk over the next year.

Where can investors turn?

Despite the many headwinds still facing

markets, investors must remember that with the

economic trough behind us, the Covid-19 reset

means that we are now entering the upswing of

a new business cycle. This is positive for global

equity markets, as companies usually only make

sustainable losses during extended recessions

or depressions.

Biden is expected to borrow heavily to

extend support for the US’s social programmes,

resulting in a softer dollar, which should support

riskier assets. And with interest rates and the

discount rate pushed to historic lows, cash and

bonds hold little attraction for investors seeking

growth, thus stimulating further demand and

adding support to equity markets.

Given the amount of debt currently in the

financial system, it is highly unlikely that central

banks will normalise rates over 2021. They are

more likely to keep manipulating the short-end

of yield curves, or to keep interest rates below

inflation or close to 0%, to afford the debt

generated by unprecedented fiscal stimulus.

Investors need to consider investments that

offer some protection while still providing cashbeating

returns. The Swiss franc and Japanese

yen represent some attractive options, as do

gold and potentially cryptocurrencies. Having

a core allocation in global equity markets still

makes sense at current valuations to achieve

portfolio growth above inflation.

SA slow-going as it speeds to the cliff

Locally, it’s important to recognise that South

Africa is currently lagging behind its peer group

economically, and once the risk-on rally has

faded and markets look past global drivers, our

looming fiscal cliff and debt issues are likely to

be reflected in our asset classes.

The majority of earnings produced by

JSE-listed companies is generated outside of

South Africa. However, headwinds in the global

environment could filter through to the local

exchange as well, while a deteriorating fiscal

situation and structural economic issues could

hamper the prospects of those companies which

operate only in South Africa. Investors need to

look for exposure to those companies that offer

some immunity against the local environment.

Investors should also bear in mind that, in

the past, the JSE has acted as a useful proxy

for emerging markets, and as more and more

emerging markets become Asia-Pacific focused,

they should consider adding other emerging

market exposure to achieve true diversification.

While the local bond market is one of the few

in the world that may generate positive returns

for investors in 2021, this should be treated

with caution. Bond yields were trading around

9% in March 2020 and, following the Moody’s

downgrade, these yields exploded to 13% to

compensate investors for the higher risk of

government default.

Since then, yields have returned to 9%,

seemingly indifferent to the fact that our fiscal

situation has deteriorated due to the pandemic,

and that our budget deficit will be twice the size

anticipated at the start of 2020.

Prospects for the rand

The fact that the rand is trading below R15/$

reflects international factors such as the US

election outcome, vaccine developments, and

an abundance of liquidity. The first bump in

the road will be the February Budget Speech,

which will remind investors of our poor local

economic fundamentals. As investors wake to

South Africa’s economic reality, the rand will

come under some pressure again. So, while the

rand is currently enjoying the benefit of global

tailwinds, it is likely to weaken during the course

of the year. The extent of this weakening will

ultimately depend on government’s progress

on fiscal reforms, without which we could see

the local currency head north of R18/$.

6 www.bluechipdigital.co.za


VIR I UAL

EVENTS

Conceptulisation, Design, Design, Creation

Registration:

• •• Domain registration.

• •• Registration platform with with invitation mailers, mailers, confirmation

mailers mailers and and general general informative mailers. mailers. Post Post event

event

certificates and and thank thank you you mailers.

mailers.

• •• Registration portal portal compatible with with various various payment

portals portals e.g e.g e.g Paygate.

• •• Full Full registration analytical information.

Event Event Platform:

• •• Security login login - restricted - - / unrestricted // access.

access.

• •• Branding - Scrolling - - banners, logo, logo, sponsorhip area,

area,

exhibition area area and branded lounges.

• •• Networking capabilities - meetings, - - lounges, chats, chats, social

social

feeds.

feeds.

• •• Reception area area - All - - All All featured sessions and and introduction

to to event. to event.

• •• Agenda - Customised - - to to different to time time zones zones by by delegates. by Full Full viewing viewing of of scheduled of sessions, rating rating systems,

downloadable presentations. Recorded / live // live session

session

viewing.

• •• Sponsorship profiles profiles and and exhibitor profiles profiles with with contact

contact

details, details, CTA’s CTA’s (call (call to to action), to action), company information,

videos, videos, banner banner and and logo.

logo.

• •• Video Video interactive meetings and and chats.

chats.

• •• Limitless number of of attendees. of Technical Support, Analytical Feedback

Technical Support:

• •• Pre, Pre, during during and and post post event event support.

• •• Support staff staff allocated to to email to email and and telephone

attendee support.

• •• Troubleshooting during during and and post post event.

event.

• •• Maintenace of of registration of site site and and event event platform.

• •• Branded user user guide guide for for for each each event event with with details details of of all of all all

available functionality.

• •• Speaker briefings, including advice advice of of camera of camera and and mic

mic

positioning.

• •• Working documents, including; action action plan, plan, agenda,

production schedule, contact contact information, system

system

requirements and and checklists.

Analytical Feedback:

• •• Users: Users: Total Total number of of logged of logged in in users, in users, number of of likes of likes and

and

comments on on on event event feed, feed, total total business cards cards dropped,

number of of interactions, of breakdown of of client of client requested

positions, designations, interests and and industries.

• •• Sessions / Agenda: // Total Total viewers viewers per per session session along

along

with with their their sign sign in in and in and out out times, times, total total likes likes per per session,

session,

star star rating rating of of sessions of and and number of of presentation

of downloads per per session.

session.

• •• Sponsors and and Exhibitors: Star Star ratings, ratings, number of of CTA of CTA

link link clicks, clicks, number of of requests of for for for contacts.

• •• Speakers: Star Star ratings, ratings, number of of presentation of downloads

and and views.

views.

info@thecollaborative.co.za | 082 | | 082 568 568 1795 1795 | www.thecollaborative.co.za

| | www.bluechipdigital.co.za

7


FINANCIAL PLANNER OF THE YEAR

HESTER’S

MONEY STORY

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.

Hester, congratulations! After a gruelling 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 all 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. Gerrit 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 businessman 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 at the University of Pretoria

and then you obtained your Post Graduate

Diploma in Financial Planning as well 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 felt 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 attorneys in the debt collection

department and after graduating I migrated to the

debt collection department of a bank. I found

the 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

assistant. I was quite reluctant as

I did not have a positive view of

the industry at all! However, I was

fortunate enough to enter the

industry alongside an amazing planner whose attention to detail

and close relationships with his clients made me change my mind

completely and I grabbed the opportunity with both hands.

To better understand the work he was doing, I enrolled for the

Post Graduate Diploma, with no intention of becoming a planner

myself, but only to gain a better 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 currently are. Besides winning

the FPI award, what has been the highlight of your career?

Head of Wealth Planners sounds much more impressive than it

was. I headed up a very small but excellent team of Certified

Financial Planners®. There I discovered the beauty of a fixed salary

as opposed to commission-driven advice. Our job description

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.

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 insight 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 well as your

extraordinary commitment to clients. How important is each

one of these factors in the financial planning profession? I think

they are all equally important. Without a sound knowledge of the

technical and legal aspects of financial planning, it will be impossible

to do a financial plan without endangering both the client and the

good name of the profession. This goes for an attention to detail

Hester van der Merwe CFP®, Ultima Financial Planners


FINANCIAL PLANNER OF THE YEAR

as well. In financial planning, the adage “the devil is in the detail” is

unquestionably applicable! The last is where my passion 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 still manage to

maintain the level of excellence 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 allowed to play to his or her strengths. This

meant that we were able to cope with the challenges by making

slight adjustments only and could continue to offer the same level

of service to our clients throughout this difficult year. I, therefore,

felt empowered to tackle the competition and give it my best shot.

It is possible to rewrite our story

and open up new possibilities.

Amid the highly challenging circumstances of Covid-19, what

was the biggest lesson for you? Has the pandemic changed

your approach to financial planning? A tried and tested process

is no guarantee that a super-fast about-turn is not lurking around

the corner. Be forward-looking at all 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 at 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 all know by now, and will 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 skilled professionals, subscribing to

a carefully cultivated professional standard and practically apply

the FPI code of ethics in our everyday dealings with the public.

Development in AI and therefore fintech will undoubtedly change

financial planning as we know it irrevocably.

We have to start asking questions such as: Is it possible 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.

BLUE CHIP ADVICE

FOR FINANCIAL PLANNERS

• Always be aware of the big picture: how will your

actions impact 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 skills. 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.

As this year’s FPI ambassador, how will you use the platform

to motivate change? I will encourage women from all 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 process of the household or

to become a Certified Financial Planner® that will be brilliant!

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 written 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 possible to rewrite

our story and open up new possibilities. The challenge is that very

few people even realise that they have a money story, much less

understand the impact it may have on their lives! If I can accomplish

this I will 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

compass when you lose your true north.

Do you have any advice for women that are considering a

financial career? Do not expect it to be easy, but do expect it 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 will present you with

a once in a lifetime opportunity to grow and become who you were

meant to be!

On another level, your practice will benefit immensely from this

exercise. You are forced to consider all 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 will present themselves regardless of the outcome

of the competition.

Winning brings so many opportunities to you and your practice.

Both existing and prospective clients will feel reassured that their

financial planning will be thorough and tailor-made. Trust is earned

over time, but this award will 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 CLIENTS

• Choose your financial planner carefully. This is a

partnership that should last and you must feel

secure in the relationship.

• Adhering to the fundamentals will 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.


INTERVIEW

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.

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

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INTERVIEW

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 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 be utilised

to address these needs of capital protection and income – 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.

A common

characteristic of

individuals who

have achieved

financial

success is the

presence of a

financial plan.

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

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13


INTERVIEW

partnerships with financial advisers, and more recently, we started

to go back to these roots. And the people who work at Momentum

Investments demonstrate this in how we engage with advisers and

their clients. By building these lasting relationships with financial

advisers, we can improve our understanding of the needs of both

advisers and their clients. This enables us to enhance our services

and solutions to truly address their personal needs.

By building these lasting

relationships with financial

advisers, we can improve our

understanding of the needs of

both advisers and their clients.

What would be the typical profile of a client considering a

guaranteed product?

There is no typical profile as it can differ vastly given the

circumstances of the client – as it is personal. This is exactly where

individual financial advice is valuable as it considers each client’s

unique circumstances.

However, guaranteed products typically resonate with clients

who are on the lower end of the spectrum of risk tolerance or

risk appetite. These clients often prefer investment solutions that

provide more defined or predictable returns or proceeds.

This does not mean that only risk-averse clients should be

interested in guaranteed products. We believe that guaranteed

income products like life annuities should form part of most

retirees’ investment portfolio as it provides a portion of

guaranteed income. This guaranteed portion can potentially

be earmarked for the minimum income required during retirement

for living expenses. This portion of a retiree’s income can

therefore be secured with a life annuity, which will then be

unaffected by changes in the markets or interest rates.

Other types of guaranteed products can be used to diversify

a client’s investment portfolio and give a different return profile.

The important thing is to consider it in the context of a specific

client’s needs and circumstances, which again brings us back to

the necessity of individual financial advice.

Historically, guaranteed products have often been regarded

as somewhat opaque. How are your guaranteed products

structured and what is guaranteed?

The main purpose of structured products is to provide certainty

in terms of benefits or investment returns. It attempts to ‘hide the

wires’ of investment complexity, and it should provide simple and

easy-to-understand investment proceeds. The investment outcomes

of these products should therefore be transparent and clear.

Our guaranteed products aim to deliver on exactly this – simple

and predictable investment outcomes that provide more certainty

to clients. The guarantee offered can either be in the form of a

capital guarantee or a minimum return over a predetermined

investment horizon. Alternatively, a life annuity – also a form

of a structured product – can provide certainty on the level

of income that a client can expect over the remainder of the

client’s lifetime.

Do you offer different types of guaranteed products, and if

so, what would the different types be, and their benefits?

There is a wide range of products, but I will focus here on two types

of products. The one category is where the proceeds of the product

are fully guaranteed and predictable. Examples of these solutions

include guaranteed endowments and life annuities. Both products

provide certainty on the benefits and proceeds that are provided

to the invester – either a guaranteed capital return after a five-year

period or a predetermined level of income that is payable for life.

The second category is where a portion of the benefits are

guaranteed, but the client can potentially still benefit from

positive market movements over the lifetime of the investment.

An example of this is Momentum’s Enhanced Growth Option

product where we offer a minimum guaranteed return over a

five-year period, even if markets do not perform over this period.

A client can also potentially receive enhanced returns if markets

do perform well over the investment period. These are therefore

structured products that offer the best of both worlds – a minimum

capital guarantee if markets perform poorly, but also potentially an

improved positive return if markets do provide favourable returns.

There is no such thing as a ‘free lunch’, so what are the

additional charges that a client has to pay in a guaranteed

product versus a conventional market-linked investment

like a balanced unit trust?

There are typically three types of fees on investment products –

administration fees, advice fees and investment management fees.

These are equally relevant for structured products and unit trusts.

We believe in transparency of fee disclosures as it allows advisers

and their clients to make informed decisions. We support the

introduction of the Effective Annual Cost (EAC) disclosure in the

industry as it requires product providers to illustrate the fees on

investment products in the three categories explained above.

I’m sure that you would agree that a financial adviser should

never advise on something that they don’t understand. How

do you ensure that financial advisers who put clients into your

guaranteed products understand them fully?

I fully support that advisers and clients should make informed

decisions – including the choice of investment products. At

Momentum, we conduct product-specific training that is a

requirement before advisers can support the relevant product

range. And because Momentum Investments believes in

partnerships, we also make sure that our consultants and product

specialists are always available to financial advisers should they

need any support on specific aspects of our solutions – whether

it is on our guaranteed product range, or any other solution that

we offer.

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INTERVIEW

A diverse group of friends (and colleagues) always results in

such a rich experience and environment. – Martin Riekert

What time do you like to be at your desk in the morning? I prefer

to gym or run early in the morning, which means I am seldom

the first one in the office. I do, however, prefer to be in the office

at least 30 to 45 minutes before my first meeting as this allows

me to connect with team members before the day gets too busy.

What is your management style? The principles and approaches

as described by Nancy Kline in Time to Think really resonate with

me – not only how I want to engage on a personal level, but also

how I engage with colleagues and team members. Concepts like

diversity, active listening and empowering the people around me

feature highly in my management style.

is developing young talent in our organisation and playing a

positive role in people’s growth. I truly enjoy influencing the

careers and personal development of members of our team and

seeing the impact that leaders can have on others.

How has your career created value in your life? I essentially have

two careers – my professional career at Momentum and lecturing

at the University of Pretoria’s Actuarial Department. My career in

the financial industry allows us to enable our clients to achieve

their investment goals and dreams. And my lecturing career

allows me to grow young talent – something which is very close

to my heart.

The man

behind

Martin

Riekert

Do you want to be liked or respected? I am sure everyone enjoys to

be liked, but being respected for me means there is substance and

depth behind the relationship. My preference would therefore

be respect.

Do you read management books? I don’t read many management

books. If a colleague has a strong recommendation on a specific

book, then I will read the book, but it is seldom my first preference

when I look for a new read.

What would your key management advice be? Build a strong

team – a strong and competent team with aligned values and

attitude is an unstoppable force. And make sure this team

is diverse in skills and views – diversity truly enables better

decision-making.

Personal best achievement? Completing a full marathon in five

minutes less than my personal target!

Professional best achievement? This is a difficult one as there

are many ups (and downs!) in a professional environment. But

one aspect that often leaves me with a sense of accomplishment

What do you love doing the most when you are not at work? I am

a big supporter of the arts, so you will often find me in a theatre

or at an arts festival. And few things allow me to relax as much as

when I am reading a book.

What book are you currently reading? Despite my earlier comment

on business books, I am currently reading a couple of books on

business coaching. And I recently started to systematically read

through a number of the literary classics, including 1984 by

George Orwell and The Grapes of Wrath by John Steinbeck.

Life statement? “Diversity creates a better view of reality”.

Embrace diversity and diverse views – not only in the work

environment but also in your personal life. A diverse group of

friends (and colleagues) always results in such a rich experience

and environment.

Blue Chip advice? Continuously engage with clients when markets

are volatile and give clients comfort that their original financial

plans are still relevant and that they should stick to this plan if

their personal circumstances haven’t changed.

www.bluechipdigital.co.za

15


MEET MOMENTUM’S

NEXT GENERATION LEADERS

FAREEYA ADAM, HEAD OF

RETAIL PRODUCT SOLUTIONS

Fareeya, you have been with Momentum since 1999. Please tell

us about your journey with the company.

I joined Momentum straight out of university and have been here

ever since. I spent a few years in the actuarial valuations team

where I did lots of technical work, but most of my experience has

been in product development and product management. Over

the years, I progressed from being a specialist to managing the

discretionary and retirement solutions team to my current role as

head of retail investment product solutions.

From the outset what I loved most about Momentum was the

culture and the feeling that your colleagues are more than just

people you work with. Rather, they become friends that you trust

and share your journey with.

The underlying resilience and attitude of always doing the right

thing have resonated with me.

Please share with us your academic history.

I did both my undergraduate degree and my honours in actuarial

science at the University of Pretoria. In 2005, I completed all the

exams necessary to become a Fellow of both the Institute of

Actuaries and the Actuarial Society of South Africa.

What does your job as head of retail product solutions entail?

My role, and that of my team, is to help put together solutions for

the clients’ investment needs. This includes discretionary savings

and saving for retirement. At retirement, there are different

income products, both linked and guaranteed. There are also

structured and guaranteed products.

We need to consider solutions from many different angles,

including investment wrappers with the various tax implications,

types of underlying investments, regulation and rules. We also

need to think about how the adviser and client experience a

solution, how we explain and illustrate technical concepts in an

easy-to-understand way, to ensure that advisers and clients can

make appropriate decisions for their circumstances. Lastly, we

balance the needs of business and clients by ensuring that the

fees charged are fair and well disclosed.

How is it possible for a client to achieve high-risk returns in the

current global economy?

Some of our investment professionals say that “time in the market

is more important than timing the market”. I think that this is very

relevant. Also, clients must discuss their circumstances and risk

tolerance with a financial adviser. There are opportunities in the

market, but the best way to find the balance between risk and

reward is to partner with experts and to be able to follow through

with the plan.

How can clients maintain a degree of certainty despite the state

of uncertainty facing the world today – with the US elections,

Covid-19 and the economic slowdown?

One of Momentum’s strengths is the comprehensiveness of our

offering, which includes a range of guaranteed solutions. These

go a long way towards removing uncertainty. In the guaranteed

annuity space, clients will be assured of always receiving a predetermined

income, regardless of how markets perform or how

long they live. In the structured products space, some solutions

offer different return profiles that are secure and predictable. This

allows clients to diversify their portfolio in ways that suit their

individual needs.

Blue Chip advice?

Choose partners who are experts and who you can trust.

Time in the market is more important than timing the market.


KAPIL JOSHI, HEAD OF MOMENTUM

COLLECTIVE INVESTMENTS

Kapil, please tell us about the decade that you have spent with

Momentum. Momentum is the only business I have ever worked

for, and what an amazing journey it has been. As you enter the

corporate arena, you enter with this belief of what your first job in

a big company means and what it will be like. This includes several

things such as meeting new people, the nerves associated with

trying to prove yourself (not just being a number), and I can safely

say Momentum flipped this on its head. In those initial days, I felt

incredibly welcome, almost like I belonged to the family. This did

not change for the ten years I have been here. Think about it, ten

years at on average 12 hours a day (yes we don’t just abide by

contract hours), would need to carry some additional meaning

than just being a job.

I have been fortunate enough to be presented with some

noteworthy career opportunities, from product development

to investment distribution and now more recently, as head of

Momentum Collective Investments (MCI), looking after the unit

trust business, and it has been filled with great memories. But

these great memories also come with tough and open debate,

it comes with hard work, and it certainly comes with sharing a

common purpose and vision. And in this regard, I can say the

people in our business are fiercely competitive, and that has been

something wonderful to witness.

Momentum is a place that you are afforded opportunities to

grow, that accepts challenges and people that challenge the norm,

it is a place that truly cares for its people and I am incredibly proud

of calling it my work-home. We have done some great things over

the last decade, but all of that has just created the foundation for

the legacy we are busy building.

What are the defining highlights of your career?

The first one is the offer I received to join Momentum on 3 May

2010. Fresh on the job market, you hope to get the ball rolling in

your next chapter of starting a career. I joined Momentum Wealth

in the structured product and annuities team where we were a part

of creating some really exciting structured solutions for the South

African retail investments market. These kinds of opportunities

rarely arrive at the door of an inexperienced individual who is fresh

out of university. I spent six years of my career in this environment

in various product development capacities.

Another highlight would be that I got to work with some of

the extraordinary leaders and mentors whom I can also call

friends. We were a part of a team that brought some of the first

innovative protected solutions to the South African market, we

had record sales with some of our products and at the same time,

we had phenomenal personal opportunities for growth with really

outstanding management programmes.

On the personal side, going through two management

programmes and winning cohort business improvement projects

for both is also something I am incredibly proud of.

Please tell us about Momentum Collective Investments.

Momentum Collective Investments is the unit trust

provider to the group's asset management capabilities. It wraps

solutions and single asset capabilities in collective investment

schemes (or unit trusts). But more importantly, it takes our

investing philosophy called outcome-based investing and

packages this in vehicles that the retail and institutional market

can access. We are incredibly proud of our heritage and legacy at

MCI because through our history we still have one of the oldest

registered funds. It is on this foundation that we are now looking

to enhance our proposition and the visibility of our proposition

to established and new market players.

We currently have just under R90-billion assets under

management across our capabilities (at the time of writing in

December 2020). These capabilities include fixed income, smart

beta, property and multi-asset solutions.

Blue Chip advice?

I have seen some market cycles in my time at Momentum. It is

fair to say that I have also seen the trends associated with these

market cycles and particularly investor behaviours. If there is one

thing we know for certain, it is that trying to time the markets

due to pure performance is the worst thing one can do. A sound

investing philosophy that is met with a solution/fund to back it

up in partnership with robust and thorough financial advice can

make for clients truly staying the course to their investment or

savings goals. Forget about the day-to-day comings and goings

in investment markets and rather focus on your goals.

"We are incredibly proud of our heritage and legacy at

MCI because through our history we still have one of

the oldest registered funds."


COLUMN

The role of offshore investments

for South African investors

Sound advice by Florbela Yates, Head of Momentum Investment Consulting

In an economy that is already struggling

to deliver economic growth and low

returns from the majority of South

African asset classes, it is no surprise that

more and more South African investors

are looking for investment opportunities

offshore in a bid to maximise their

investment returns.

At Momentum Investment Consulting,

we believe in building diversified portfolios

across both local and global asset classes

that deliver on our outcome-based

investing philosophy. With this approach

our clients can invest in portfolios that are

best aligned to their personal goals. By

articulating the desired goal, as well as a

relevant time horizon, we believe it’s easier

for clients to remain invested and prevents

them from panicking when markets fall

and making short-term decisions that

could have dire consequences for their

long-term wealth.

Partnering with a reputable financial

adviser with a full overview of their assets,

goals and tax status, allows clients to

determine what their short-, medium- and

longer-term needs are. This, in turn, makes it

easier to identify which portfolios are most

suited to them, including the appropriate

blend of local and offshore assets.

The starting point in our investment

process is to determine the appropriate

allocation to each asset class, which then

allows us to determine the appropriate

allocation to local and offshore investments.

The local and London-based teams

then select the investment managers,

depending on whether the assets are

managed via asset swap (but invested

locally) or true hard-currency portfolios

domiciled elsewhere. This process allows

us to identify and employ specialist asset

managers around the globe, resulting in

globally diversified portfolios with better

investment outcomes for all our clients.

While 2020 was a uniquely challenging

year, we have remained steadfast in our

focus on managing clients’ capital. As

Ferdi van Heerden, CEO of our Momentum

Global Investment Management business

explained: “Where opportunities have

presented themselves, we have sought

to take them. This not only applies to the

client portfolios we manage but also in

our own business. Our recently announced

acquisition in the UK of Seneca Investment

Managers demonstrates our commitment

to expanding our global investment

capabilities. This is indicative of our

investing approach: we take a long-term

view and look through periods of intense

uncertainty to the opportunities, in the best

interests of our clients. We are committed

to delivering on our clients’ investment

goals, and with this acquisition, we now

have an even stronger team to back it up.”

Florbela Yates, Head of Momentum

Investment Consulting

2020 serves as a reminder of the

difficulties in forecasting. We continuously

spend time revaluating our expectations

for the future, rather than doing so as part

of a once-off exercise in December each

year. Still, we are also realistic about the

accuracy of those views, and hence we

build resilience into our portfolios.

Valuations across many asset classes

are high today, but clients need to look

through the current period of depressed

earnings to the prospects for companies

in the future.

As things stand, 2021 promises to be a

year of strong recovery around the world.

While markets have gone some way

towards discounting that already, there’s

considerably more upside potential if we

see a successful vaccine rollout. Clients

should ensure they have enough exposure

to the related ‘value’ stocks, rather than

being overly concentrated in the winners

of the pandemic and the last few years,

namely the US mega-cap tech stocks.

We expect more of the same responses

from policymakers in providing liquidity

and financial support in 2021, twinned with

a gradual reopening of economies and

the businesses that operate within them.

This should support growth asset classes

including global equities, corporate debt,

property and infrastructure. Volatility will

remain high, and we continue to spread

clients’ capital across a range of diversifying

asset classes, sectors and regions.

A more confident forecast for next

year is that clients will continue to pay

more attention to sustainability-related

considerations. Greater integration of

environmental, social and governance

(ESG) research into investment teams

and processes comes up in almost every

conversation we have with asset managers.

Responsible investing practices have

always resonated with our outcome-based

investing philosophy and the alignment of

our clients’ long-term goals to positively

influence the world they will retire to.

We support responsible investing to

help create investments that are good for

clients and the world we live in. Because

when it comes to sustainable investment

growth, for us it’s personal.

18 www.bluechipdigital.co.za


With us, it’s personal

Client needs

Advice

Peace of mind

Guaranteed

solutions

Growth

Protection

Income

Certainty, irrespective of how the market moves. And certainty to plan for the future. Your clients

are seeking comfort and confidence in their finances. Because nothing is more personal to you

than your clients’ investment outcomes. That is why we have a range of guaranteed solutions to fit

your clients’ investment strategy. To give them the peace of mind when it comes to their money.

Because with us, it’s personal.

To find out more, visit momentum.co.za

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.

MI-512-AZ-6085-CL


OFFSHORE INVESTMENTS

The offshore

opportunity set

lA tour of the offshore investment landscape

In the past year, a growing number of voices in the financial

services world have been advocating that South Africans

should externalise all their wealth offshore, even suggesting

that individuals should cash in their retirement savings to do

this. These voices were loudest at a time of peak negativity early

in 2020, with the rand trading in the region of R19 to the US dollar,

and the local stock market struggling. The recent sharp reversal

in both the rand and local shares would question the wisdom of

having a binary view on local vs offshore, as well as highlighting

the dangers of disconnecting an investor’s portfolio from the

underlying investment objective it is trying to achieve.

We believe investing offshore can add significant value to

a portfolio if it allows for the specific circumstances of each

individual. Here we take a tour through what it means to be

invested offshore by looking at the actual opportunities we are

investing in, and the new risks we are exposed to in the search for

returns. To understand offshore better, we start by looking at the

local market.

Local equities

While the JSE is a reasonably large stock exchange by world

standards (17th largest by market capitalisation), we are starting to

outgrow it as an investment market. On an effective basis, around

65% of our listed equity market derives its revenues offshore. This

is concentrated in a relatively low number of shares, but increasing

as domestic shares expand offshore. As listed companies outgrow

their domestic growth prospects, it is natural for them to look

outside of our borders for opportunities. This has been the case

for a long time; however, because our market has a relatively low

number of shares, the composition can change, and has done,

quite frequently.

Ten years ago, we had almost half of our equity market (and

by extension, pension funds!) invested in commodity producers.

Today this is much less, replaced by Naspers (Chinese tech

platform), British American Tobacco (cigarettes), Anheuser (beer)

and until recently, Steinhoff (European furniture). This has meant

that in our “local” investments, our equity market is dominated


OFFSHORE INVESTMENTS

by a select few offshore companies, so in many respects, we are

offshore investors before we even set foot there.

What then are the benefits of investing offshore, if we can

already access it in our home market? There are a few key points:

• Diversification: being a smaller market, it is highly

concentrated in a few shares (eg Naspers is 19% of the market),

whereas offshore markets have a huge range and depth of

opportunities, so we are not beholden to the successes

(Naspers) and failures (Steinhoff) of a few.

• Diversification away from South African-specific risks –

economic, social and political.

• Access to new types of investment opportunity in sectors not

represented locally. Examples would include biotech, energy,

technology and utilities (electricity producers).

• Investment returns that are “hard currency” based – ie returns

earned in currencies that generally appreciate against the

rand such as the dollar, euro and pound sterling.

Looking then at the range of global options available to us,

we take a first step of asking what exactly it is that local investors

require from their offshore portfolios? By doing this we ensure that

they can gain exposure to the full range of opportunities, taking

into account the fact that because the world is a big place, global

managers have quite limiting biases in where they are comfortable

investing. By looking at the world through a wider lens we can

ensure that we correct for these biases.

Broadly, we look at global investing – specifically equities –

as six separate sources of return which provide investors with

alternative opportunities to what we have access to locally.

US-developed equities

“The source of innovation” and the home of the large “old-world

company”. The US accounts for over half of all listed equity on the

planet, so it is hard to avoid a US bias in a portfolio. Not that this

bias is necessarily a negative as companies listed there are subject

to high corporate governance standards, liquid capital markets,

quality management and entrepreneurial culture, which provide

the platform for a broad and deep opportunity set for investors. Of

late, the US has migrated to a tech-biased market with the FAANMS

increasing their share of the market as these new platform/tech

businesses breach their respective tipping points.

A more pragmatic take on this change would be that tech in

itself is less of a sector in the future, and more of a business as usual

underpin for the bulk of industries. Tech will become pervasive

in our portfolios, like it or not. With their size and reach, many US

companies derive their earnings outside the US, with companies

like Unilever as an example reliant on emerging markets for 57%

of its revenues.

Tech will become pervasive in

our portfolios, like it or not.

Around 40% of US company revenues are sourced globally.

So, investing in the US gives us exposure to stable old-world

companies, innovative new-world companies, and a range of

sectors not available locally, many of which are doing business

globally. This is a direct product of the globalisation of trade trend

we have seen over the last couple of decades.


OFFSHORE INVESTMENTS

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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 is still rather old-world

(consumer goods, financial services and all the oil companies –

Total, BP, Shell). The UK is largely a global market, with a minority

of revenues sourced domestically, 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.

markets given the complexity as well as the need to resource

significant 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 referring to lesser developed,

prospective emerging markets. Current exposure is concentrated

across Argentina, Kuwait, Vietnam and Nigeria where 60% of all

listed shares are either in financial services or telecommunications

– the frontier markets provide high-growth opportunities because

they still have much to achieve so returns to investors need to

be commensurately high to offset the investment risks of politics,

liquidity and governance.

Smaller companies

Some companies are small for a reason and will 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 rolling

out new, disruptive services to the market. Many of the current-day

disruptors are technology-based, but this can cover any industry

globally. This is another market often underinvested by asset

long-term business partner to an advisory • Global and local portfolio managers construction due to the different mindset required and additional

business. Emerging markets

capabilities. resources required. This asset class also tends to be quite US-heavy

These We believe are markets that the defined two most as “developing” important • ie The where skill there and relevant are due experience to the focus of the on innovation which enjoys substantial support

factors reasonable that advisors infrastructure need to and consider governance when to support core investment growth and team. in that market.

choosing where the a standard DFM are: of living is in ascendance, • currently The DFMs holding back-office compatibility with

• around Understand 15% of the world unique equity value exposure. proposition These are the generally advisor’s seen current Listed processes. property

as of high-growth the DFM given sources how of return different as the underlying • The scale economies of the business. Unlike locally, where property tends to be quite homogenous

are various developing DFMs’ at a offerings higher rate are, than and more how mature • The markets fee structures. like the

US. this While value this proposition is the theory, complements the reality has the been somewhat more

– meaning that most of our investment options are bundled

property companies across commercial, retail and industrial

mixed advice in process. many cases. With political volatility In and our various opinion, social DFMs do options have an – important global counterparts are considerably more specialised.

• conflicts, Make sure emerging that there markets is a are good not always culture a one-way role to bet. play They in are helping Companies advisors can have to a specific focus (eg data centres fast replacing

also and beholden philosophy to the fit demand between created the advisor by the developed professionalise markets. and grow retail their shops businesses; due to online shopping), or a regional focus (for

China, and the for DFM. instance, could be referred to as the ensure manufacturer consistent of investment instance, outcomes; a property share that only invests in B-grade London

Meeting the Western these world. considerations Looking ahead will decrease less so, but improve certainly communication looking commercial to clients property). and This provides substantial diversification

the backwards. probability Countries of “buyer’s include remorse” BRICS (Brazil, from Russia, enable India, advisors China and to focus opportunity on their core for role investors compared to history.

an South advisor Africa) who as well is as getting South Korea, something Taiwan and of giving Mexico. comprehensive All financial of this advice results in tens of thousands of listed shares in which

different Emerging from markets what they are expected, increasingly and dominated to clients. by the rise

ensures of China, that which when now differences accounts of opinion for over

emerge, 30% of all there listed is emerging common market ground equity. and

respect And within between this, the a parties huge to bias allow towards for a

compromise technology via that Tencent does not (the disadvantage source of

the Naspers’ client. success), Baidu and Alibaba – the

Chinese Key factors equivalent to investigate of Facebook, when carrying Google

out and your Amazon due diligence respectively. on the It DFM is becoming options

include: difficult to avoid a Chinese tech bias inside

• an Whether emerging the markets DFM is independent portfolio. Other and

sectors how important providing opportunity independence emerging is to the

markets advisor. include commodity producers,

• large The growing investment consumer philosophy services based and on

growing performance middle history classes, of and the DFM. the financial

• services The depth needed of the to fund DFM’s this global growth. and local Many

to invest globally. In the main markets, this is narrowed 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 currency

or other risks such as terrorism, corporate

fraud or the decline of an industry.

For equity investing going forward, it

pays to think globally as part of a client’s

portfolio, and while there are equivalent

risks globally to those which we face in

South Africa, we are less exposed to any

individual event permanently impacting our

portfolios and the achievement of longerterm

asset research managers capabilities. avoid investing in emerging

Ian Jones, CEO, Fundhouse

objectives.

22 www.bluechipdigital.co.za www.bluechipjournal.co.za

23


OFFSHORE

2021

THE REAL REASON YOU SHOULD

BE INVESTING OFFSHORE

KEY CONSIDERATIONS

WHEN INVESTING OFFSHORE

WHEN DIRECT INVESTING ISN’T AN OPTION

EMERGING AND DEVELOPED

MARKETS – A MIX OF RISK AND REWARD

FINANCIAL EMIGRATION – DO THE COSTS AND

COMPLEXITIES WARRANT THE BENEFITS?

IT PAYS TO PLAN IF YOU’RE

LOOKING OFFSHORE


TAKE YOUR WEALTH FURTHER

We believe that you are more than just your money. True wealth means different things to different

people, and how you define it is unique to you. This means having a tailored financial plan that

speaks to your needs, dreams and desires. Our wealth management solution doesn’t just consider

the assets you have, but also having a holistic picture of your wealth today, and for the future. Look to

us to help grow, protect, leverage and ultimately transfer your wealth from one generation to the next.

A WORLD-CLASS INVESTMENT DESTINATION

Our specialist wealth management solutions help you to bring out the best of your investment.

They are geared towards creating a unique experience for you, all while delivering on all your service

needs in a professional and dedicated manner.

OLD MUTUAL WEALTH INTERNATIONAL

Locally based offshore specialists providing you with

access to a wide range of international assets and

investment funds from some of the biggest and most

reputable portfolio managers in the world.

Contact details: +27 21 509 2187

service@omi-int.com

OLD MUTUAL WEALTH PRIVATE CLIENT SECURITIES

Specialising in crafting tailored investment portfolios,

your highly skilled Private Client Portfolio Manager will

work with you to select the best and most suitable

investments (locally and offshore) based on your

strategy, our extensive research and collective insights.

This level of individual attention and interaction is a

defining standard in the personal service we provide

to each of our clients.

Contact details: +27 21 524 4678

pcs@omwealth.co.za

OLD MUTUAL WEALTH TAILORED FUND PORTFOLIOS

Providing financial planners with a range of investment

solutions that targets inflation, diversifies offshore and

offers a sustainable income for life after retirement, while

offering a consistent, reliable thread through the asset

allocation process, managers and investment philosophy.

Contact details:: +27 21 524 4564

tfp@omwealth.co.za

OLD MUTUAL WEALTH FIDUCIARY SERVICES

Making sure your wealth is secure for the next generation,

by providing advice and implementation on estate

planning, wills, estate administration, professional

trusteeship and trust administration. We help you to

simplify complexities and technical elements relating to

legislative, regulatory and compliance requirements, and

commit to help you build a lasting legacy.

Contact details: +27 21 524 4911

fiduciary@omwealth.co.za

OLD MUTUAL WEALTH TREASURY AND

ADVISORY SERVICES

Our experienced team finds the most appropriate

cash and guaranteed rate instruments and expertly

negotiates preferential interest rates with various

financial institutions on your behalf.

Contact details: +27 11 245 3758

tas@omwealth.co.za

OLD MUTUAL MULTI-MANAGERS

A specialist investment boutique within Old Mutual

Wealth that offers you real return portfolios to meet your

specific investment objectives, using skilled investment

professionals and leveraging off vast experience and

insights to bring together a team of local and global asset

managers.

Contact details: 0860 999 199

service@omwealth.co.za


strategy and product suite. It is currently in the

spotlight given the low-return environment we

have seen in SA and the volatility highlighted

above. Therefore, we have used the opportunity to

remind investors of the importance of geographic

diversification.

At Old Mutual Wealth, we offer offshore investment

solutions through our Private Client Securities

business, Old Mutual Multi-Managers and Old

Mutual Unit Trusts, demonstrating our commitment

to providing relevant and market-leading

investment solutions to enable our clients to take

their wealth further.

INTRODUCTION

The levels of investment market volatility and

uncertainty reached in 2020 were significantly

higher than ever before. This was driven by

economies shutting down due to Covid-19,

the resulting economic recession, uncertainty

regarding whether governments were going to

support their economically inactive populations

through stimulus support and a contentious

US presidential election. Volatility can present

significant investment risk. However, when

working with a qualified investment professional

who can correctly harness it, volatility can be used

to generate investment growth and build wealth.

This can be done through diversification - by

investing in different assets or markets that would

react differently when exposed to the same event.

Empirical evidence suggests that diversification

is the most important aspect to reach longterm

investment returns and build wealth, with

minimum risk.

In the case of South Africa (SA), diversification is

important and is further underscored by the fact

that most local investors have an estimated 65%

to 80% of their total wealth invested directly in

the SA economy – an economy that represents

only 0.5% of the global market. Offshore exposure

has always been part of the Old Mutual Wealth

To complement the above, we have recently

increased access to offshore investing with the new

range of Old Mutual International Global Funds.

This range is focused on a unique offering that has

a competitive fee structure, reduced minimum

premiums and increased accessibility thought the

OMI Life Wrapper, which brings its own set of taxefficiency

and estate planning benefits.

Navigating an interesting but often complex

environment of offshore investing can be

challenging. In this publication, our subject experts

answer some of the frequently asked questions

regarding offshore investing:

• Why should I invest offshore?

• What must I consider when investing offshore?

• What are my offshore investment options?

• What is the difference between emerging and

developed markets?

• Should I be considering financial immigration?

• Where do I start?

As with any major financial decision, it is always

advisable to seek professional, expert advice to

ensure that your actions and objectives remain

aligned and that your investment plan is optimally

structured.

We hope you enjoy the read!

Farhad Sader

Managing Director: Old Mutual Wealth


THE REAL REASON YOU SHOULD BE

INVESTING

OFFSHORE

By Chris Potgieter, MD: Old Mutual Wealth Trust Company

Discounting for a moment the state

of the local economy and one’s

particular socio-political view, the

key motivation for any investor to

invest offshore should be to have appropriately

diversified wealth in pursuit of real capital

growth at an acceptable level of risk.

TOO EXPOSED TO SA

It is estimated that between 65% and 80% of South

African investors’ total wealth is exposed directly

to the SA economy. Total wealth includes career,

business and property interests, in addition to

investments such as pensions. With this in mind, we

need to recognise that the majority of South African

investors have too many eggs in one basket. This is

regardless of the economic and political climate

in the country, as the same advice would apply to

investors in most developing countries, were they in

a similar position.

The Afrasia 2019 South Africa Wealth Report shows

that South African high net worth individuals

(HNWI) hold less than 20% of their wealth offshore.

These HNWIs have the means to gain access to

offshore markets more so than the average South

African, which means that offshore exposure will be

even less for the average investor.

Apart from the mitigation of risk through

diversification, from an investment perspective

offshore developed markets offer more depth and

breadth relative to the local market. This allows

an investor to better diversify risk and to access far

more investment opportunities for growth.

THE HUNT FOR GROWTH

Along with risk mitigation through diversification,

growth is the key reason for investing abroad.

Global investment markets – especially developed

markets – present more opportunities to invest in

4


It is estimated that

between 65% and

80% of South African

investors’ total wealth is

exposed directly to the

SA economy.


long-term growth sectors such as technology and

healthcare. It’s telling to observe that any one of the

top five listed companies in the world is greater than

the combined market value of all the companies

listed on the JSE. For example, the market value of

Apple is nearly one and a half times the value of all

companies listed on the JSE. Simply put: the world is

a big place and one’s wealth needs to be invested to

grow with the world.

TAILORING TO INVESTORS’ NEEDS

“Failing to plan is planning to fail.” When devising a

global investment strategy, it is essential to consider

an investor’s total wealth. To talk about a portfolio

of investments in isolation to property, business

and career interests would be misguided. Should

an investor have adequate provision in South Africa

for local income requirements and liabilities – for

example through salaries, rental income from fixed

properties or distributions from an SA trust – then

more liquid assets could be invested offshore for

capital growth and capital protection. Such direct

offshore allocations are likely to be important

to supplement the limited offshore exposure

achievable through pension funds. Currently,

offshore investments are seen as a subset of total

wealth, but it should be the other way around, with

the local investment forming a subset of the client’s

total global wealth.

Global diversification involves asset location, asset

allocation and asset selection. Asset location relates

to the tax considerations of where investments are

held and the wrong decision in this regard can lead

to adverse consequences. Fortunately, there are

several viable options available to investors, such

as the Old Mutual International platform and/or

establishing an offshore trust.

An offshore investment portfolio should be created

around a client’s specific needs, but, broadly

speaking, a typical equity portfolio would be heavily

invested in US multinational companies together

with selected UK and European multinationals.

These multinationals, when properly selected, will

provide an investor with exposure to developed and

developing markets. A well-constructed portfolio

will provide a good balance between established

businesses and growth businesses. Exposure

to specialised and fast-growing industries such

as bio-tech can be achieved through exchange

traded funds without placing large, risky bets

on any particular company. Old Mutual Wealth

Private Client Securities (PCS) have established a

commendable track record as managers of bespoke

global portfolios for private clients and trusts.

Political, social and economic risks may be a part of

the argument to invest offshore, but these risks are

not unique to South Africa. Simply put, if you want

to mitigate risk and grow your investments in real

terms over the long term, you’ll do well to adopt the

mindset of a global investor.


KEY

CONSIDERATIONS

WHEN INVESTING OFFSHORE

By Wayne Sorour, Head of Old Mutual International: Sales & Distribution

The current political and economic landscape

in South Africa has led to a surge in interest in

offshore investment from local investors. The

decision to invest offshore is predominantly

influenced by the search for superior 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 currency fluctuation factors as a

key part of the initial planning process.

DIRECT VS INDIRECT INVESTMENT

In most cases, investors send discretionary money offshore

while their investments in South Africa satisfy their income

needs on local soil. The question is, when it comes to

offshore 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 currency and investing it abroad in hard

cash. In these cases, an investor will have an offshore 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 travelling or to finance your children’s tuition

overseas, as well as any situation when having money

abroad for immediate use makes sense. Other reasons to

invest directly are to hedge against local political instability

in a country of residence and for immigration.

* As at 30 June 2019 Source: Old Mutual Limited.

6


When you decide to invest offshore indirectly, you

need a mechanism to get this money abroad, which

is referred to as an asset swop, which is essentially 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 offshore. 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$60 000. These jurisdictions also clamp

down heavily on estate duty taxes.

Tax complications can at least be curtailed by

handing over responsibility to an investment

manager that can place their offshore investments

in a wrapper, an investment platform that legally

entrusts the investment manager to handle all 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’t take into account is that

while the rand strengthens, global markets tend to

correct at 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 better to phase in these

investments over a set period to account for these

currency 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

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.


devalue further, the best time to start taking money

offshore is now.

WHERE TO INVEST?

While the South African investment environment is

relatively limited, offshore 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 offshore investment

space plays a crucial role.

If an investor is risk-averse, lumping all their money

into risky offshore equity markets is futile. An investor

risk and needs analysis must be conducted by

investment managers first and foremost to decide

on the various asset classes to invest in abroad.

This involves keeping in mind that money invested

offshore 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.


WHEN DIRECT

INVESTING

ISN’T AN OPTION

By Wayne Sorour, Head of Old Mutual International: Sales & Distribution

It would be misguided

to compare direct and

indirect offshore investment

mechanisms on the same

scale. Some financial vehicles,

such as trusts, along with specific

individuals, don’t actually have

the option of going the direct

route when it comes to investing

money offshore.

While direct offshore investing is

largely the preferred choice – as

it allows investors to factor out

rand devaluation, offers better tax

outcomes and allows a choice

of whether to bring money

back to South Africa or keep it

in the jurisdiction it resides – for

many investors, indirect offshore

investing may be the most

sensible and accessible route.

For instance, business owners

who want to invest directly are

restricted by legislation. This

stipulates that commercial

entities can only take capital

offshore if the company is

registered in the same jurisdiction

and operating in the equivalent

sector.

Investors with assets in trusts, on

the other hand, run the risk of

exposure to significant taxation

if they used the wrong offshore

vehicle. A local trust, formed and

domiciled in South Africa, cannot

invest offshore directly.

INDIRECT OFFSHORE EXPOSURE

A more sensible option for these

types of investors is therefore

to take their money offshore

through a feeder fund or private

asset swop facility.

There is a lot of terminology

around indirect investing,

including terms like randdenominated

investing, asset

swops or feeder funds, which,

for the most part, are the same

thing. With a feeder fund, which

is essentially a rand-denominated

unit trust fund, asset managers

use their own asset swop capacity

to invest in global assets on

behalf of investors. These feeder

fund options are limited to the

fund range of the particular asset

manager, which is why we, at

Old Mutual International, advise

high net worth clients rather to

invest using what we call a private

asset swop facility. In doing so, we

can invest in the same assets we

would for an individual investing

directly offshore, and structure a

diversified, bespoke investment

portfolio.

Using a private asset swop

facility has tax benefits, in that

the investment is taxed in US

dollar returns only, whereas a

feeder fund is taxed in rand. In

8


In many cases,

indirect investment

vehicles available to

investors can offer

the same diverse

exposure to offshore

markets with

many of the same

benefits.

other words, if you have a US

dollar return of 10% in a global

equity fund, in a private asset

swop facility you will be taxed on

this 10% alone. Were you to be

invested in a rand-denominated

fund and it devalued by 10%, you

would be taxed on the 10% US

dollar returns and lose on the

devaluation of the rand.

Another instance in which

individuals would choose to

invest through an asset swop

facility is to avoid withdrawing

money from a trust where they

would be liable for estate duty.

With a private asset swop,

investors can invest over and

above the foreign investment

allowance of R10 million per

person per annum, and the

R1 million discretionary allowance.

When an investor has exceeded

their R11 million threshold, they

can take out an asset swop to get

extra offshore exposure. At the

end of the year, they can disinvest

from the asset swop and use their

R10 million allowance again the

following year.

WHY GO DIRECT OFFSHORE?

If you have the necessary means

and are in a position to do so,

direct investing is the right option

if you want to hedge against

political instability or make future

provision for your children to


study abroad. In these cases

investing directly and having

money available in the relevant

jurisdiction is an advantage. If

you believe the rand is going to

decline in the future, why include

the rand devaluation in the

equation when you don’t

need to?

However, direct investment, while

generally being the preferable

means of investing offshore, is

not for everyone. In many cases,

indirect investment vehicles

available to investors can offer the

same diverse exposure to offshore

markets with many of the same

benefits.


EMERGING AND

DEVELOPED

MARKETS

A MIX OF RISK AND REWARD

Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Client Securities

While we know that investing

offshore should be a crucial

consideration when it comes to

diversification, less straightforward

is the answer to which offshore markets to consider.

More specifically, how much of your money should

be invested in emerging markets versus developed

markets? Are emerging markets still the growth

engine that they used to be? More importantly, are

these markets worth the risks?

Firstly, it is important to consider that most of the

assets that we as South Africans hold (including

our local properties and pension funds) are

predominantly emerging market assets. It is

therefore very likely that most South African investors

already have significant emerging market exposure,

albeit in a single market. However, this is not a

reason to write off emerging markets as a potential

investment destination, but rather an important

consideration when deciding how to allocate capital

offshore.

Against this backdrop, emerging market equities

currently constitute around 10% of the global equity

market, yet emerging market economies contribute

roughly 60% of global GDP. As such, investors are

naturally “light” on emerging market exposure,

unless there is a deliberate attempt to increase one’s

allocation to emerging markets. Importantly though,

investors are able to gain emerging market exposure

by investing in companies that operate in emerging

markets. Obvious examples of this include Diageo,

Starbucks, Walt Disney and Nike, to name a few.

10


otherwise have to do for more well-known,

developed market companies. This often results in

people having to be on the ground in the country to

see and understand the various dynamics, which can

be a costly exercise.

Having said that, emerging market equities have

historically outperformed developed market equities.

In the long run, corporate earnings growth typically

drives equity market returns. And, unsurprisingly,

the key ingredient in driving corporate earnings

growth is economic growth (South Africans will be

acutely aware of this). From there it is a short leap

to arrive at the conclusion that economic growth

plays a vital role in driving longer-term equity

returns, although this is not necessarily the case in

the shorter term. Therefore, when thinking about

emerging market economies and equity markets, it

is easy to understand why emerging markets have

historically outperformed developed markets, given

that emerging market GDP growth has typically

outpaced that of more developed markets.

As we approach the end of the decade, it is quite

apparent that the past 10 years have seen a reversal

of fortunes for emerging market equities, as they

have lagged developed markets by a hefty margin,

There are a number of reasons why investors are

naturally drawn to developed market equities

as opposed to emerging market equities. These

include the obvious points that developed equity

markets are larger (as alluded to above), more

established and more liquid than their emerging

market counterparts, and as such present a

larger opportunity set for investors. Alongside this,

emerging markets are also viewed as inherently

riskier than developed markets given the potential

lack of accounting standards, corporate governance

and transparency issues, volatile currencies, political

uncertainties, a lack of analyst coverage and the

inability to completely trust what is presented in

annual reports and on company websites. In this

way, investing in emerging market companies

requires far more research than what one may

as illustrated in graph 1. There are a few reasons for

this. Firstly, low interest rates in developed markets

have helped bolster developed market equities in

what has been a lower growth environment over the

past decade.

Graph 1: Developed vs Emerging Market

Equity Returns: May 1990 – May 2020

Annualised Total

Returns (%)

12

10

8

6

4

2

0

-2

-4

-6

1 Year

Developed Market Equities

5 Years 10 Years 20 Years 30 Years

Emerging Market Equities


The second main reason for the underperformance

of emerging market equities is that the growth

differential between emerging and developed

markets has reduced significantly over the past

decade (see graph 2). When China is excluded, the

differential is very close to zero over the past five

years. This collapse in emerging market growth

is due to a number of factors. While idiosyncratic

factors have played a role, specifically in various large

emerging market countries, there are also a number

of common factors at play. These include the trade

dispute between the US and China, increasing

debt levels in emerging markets, and a strong US

dollar. These have compounded to ultimately lower

emerging market GDP growth rates to levels closer

to those of developed markets.

Graph 2: GDP Growth Rates

Annual GDP Growth (%)

10

8

If we know one thing

today it is that the

short- to medium-term

economic outlook is as

uncertain as

it has ever been.


6

4

2

0

-2

-4

-6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Advanced Economies Emerging Markets EM ex China

Given the above, it may seem clear-cut that

developed market equities should be prioritised

over emerging market equities. This view is

potentially reinforced by the onset of economic

shutdowns, and the fact that emerging market

economies are likely to be more severely impacted

by economic shutdowns than their developed

market counterparts. Taking a step back, if we know

one thing today, it is that the short- to mediumterm

economic outlook is as uncertain as it has ever

been. We also know that extrapolating recent events

into the future is a sure way of being wrong. Our

memories are often short, and we forget that at the

beginning of the previous decade emerging market

equities were all the craze after their spectacular

returns of the 2000s. Given the resultant poor returns

generated by emerging markets over the 2010s

decade, today that sentiment is completely turned

on its head.

From a pure equity perspective, the emotional

response is that emerging market equities are likely

to deliver more of the same over the next 10 years.

The rational response, however, is to ensure global

diversification across markets and geographies, and

this includes emerging markets. Our experience of

the past decade should teach us that the rational

response is the more prudent one.

12


FINANCIAL

EMIGRATION

DO THE COSTS AND COMPLEXITIES

WARRANT THE BENEFITS?

By Chris Potgieter, MD: Old Mutual Wealth Trust Company

South Africa’s “expat tax” and its potential

implications have caused a great deal

of hype (largely based on inaccurate

information), resulting in many clients

looking to financial emigration as a means of

resolving their issues around paying tax in South

Africa on income earned offshore. Financial

emigration is the application, as part of a formal

emigration process, to the South African Reserve

Bank to change from a resident of South Africa to a

non-resident for exchange control purposes. It does

not by itself impact one’s tax residency, but can be

seen as a related process. Formal emigration and

changing tax residency are complex processes and

may well be the desired outcome for individuals

seeking to live permanently in another country, but

it is certainly not a quick-fix solution for tax relief.

Furthermore, changing tax residency status could

result in immediate tax consequences in the form of

exit charges.

REVISED LEGISLATION

The revised Income Tax Act (effective 1 March 2020)

results in South African tax residents working abroad

temporarily being exempt from paying tax on the

first R1.25 million they earn abroad. Thereafter they

will be required to pay tax on any foreign earnings.

Previously, the foreign employment income earned

by South African tax residents was fully exempt from

tax in South Africa, provided certain requirements

were met. Importantly, the amendment only affects

income received from employment and does not

affect those earning foreign investment income

(which is already taxed) or individuals who are no

longer residents of South Africa for tax purposes.

Much of the misunderstanding around this topic

stems from the fact that financial emigration is a

colloquial term that does not exist in any legislation.

Rather, the key issues are formal emigration and

tax residency, which are two separate (often linked)

processes. Formal emigration entails physically

relocating from one country to another country.

Formal emigration will typically also involve financial

emigration, i.e. changing one’s status to non-resident

for exchange control and tax purposes. The entire

process is lengthy and includes rigorous audit,

and upon South African Reserve Bank (SARB) and

South African Revenue Service (SARS) approval,

the individual will be issued with an Emigration


Formal emigration and

changing tax residency are

complex processes and

may well be the desired

outcome for individuals

seeking to live permanently

in another country, but it is

certainly not a quick-fix


Tax Clearance Certificate. Sometimes, financial

emigration needs to be done retrospectively when

people physically emigrate and only subsequently

recognise the requirement to regularise their status

as non-resident for exchange control and

tax purposes.

SUBSTANTIAL EXIT CHARGES

Changing your tax status to non-resident could

have significant capital gains tax consequences, as

your worldwide assets (with the exception of fixed

property situated in South Africa) are deemed as

being disposed of at market values. Therefore, 40%

of any gain would be included in your income and

you will be taxed at your marginal tax rate. This “exit

charge” can be quite substantial and you may need

to raise liquidity to settle your affairs with SARS.

It is important to ensure that your intention to

relocate and your affairs are fully disclosed in your

tax returns in the year of your emigration, as well as

in the proceeding five years. These disclosures could

be key if, at a later stage, your tax residency or ability

to exit funds were to be examined.

COMPLEX RESIDENCY TESTS

South Africa’s tax regime is a residence-based system

and one’s tax residency status is determined by how

much time you spend in the country, where your

assets are based, where your family resides most of

the time, and the location of your primary residence.

In order to become non-resident, individuals must

prove their intention to become ordinarily resident

in another country and demonstrate the steps they

have taken (or are taking) to carry out this intention.

Finally, they will then need to meet requirements of

the physical presence test by being in South Africa

for no more than 91 days in total during the current

assessment year; 91 days in total during each of

the five years of assessment preceding the current

assessment year; and 915 days in total during those

five preceding years of assessment. Contravening

any of these periods will result in an individual’s tax

status being reverted to South African resident. So,

one could have formally emigrated, changed your tax

residency status and then subsequently be classified

as a SA tax resident again.

BE CLEAR ABOUT YOUR OBJECTIVES; SEEK

PROFESSIONAL ADVICE

In conclusion, it is clear that financial emigration is a

highly complex, costly and long-term decision and

pursuing this path solely to avoid tax is ill advised.

Investors should bear in mind that all South Africans

have an annual R1 million single discretionary

allowance and R10 million foreign investment

allowance – both of which can be used for foreign

investment and asset transfer without having to

change tax residency.

While everyone’s circumstances are different, there

are numerous factors to consider and it is important

to understand the real cost and lifestyle implications

before deciding to financially emigrate. As with any

major financial decision, it is always advisable to

seek professional, expert advice to ensure that your

actions and objectives remain aligned and that your

investment plan is optimally structured.

14


IT PAYS

TO PLAN

IF YOU’RE

LOOKING

OFFSHORE

By Kim Rassou, Portfolio Manager at

Old Mutual Wealth Tailored Fund Portfolios

Incorporating an offshore component into an

investment portfolio makes sense for every

investor; doing so provides exposure to the world’s

leading economies and high growth industries

while spreading the investment risk.

even individual stocks and property. Without a plan,

they tend to build their portfolios from the bottom

up, focusing on investments piecemeal rather

than on how the portfolio as a whole is serving the

investment objective.

Amid forecasts of declining domestic growth and

extreme uncertainty, when offshore investing seemed

the obvious choice, the past few months have shown

that no economy is immune to a global crisis.

Many will be enticed by projected returns, the

buzz around tech stocks, or the sense of security of

having dual citizenship that comes with investing in

international property. However, in my professional

experience, decisions that are influenced by fear,

vanity or greed are the worst an investor can make.

Do-it-yourself investors tend to focus on the markets,

the economy, the asset manager’s performance and

The possibility that these decisions are based on an

irrational assessment is exceptionally high. Nonprofessional

investors tend to “trust their gut” – and

generally don’t understand market valuations, nor

the underlying forces driving the performance of

Facebook, Apple, Amazon, Netflix and Google (the

FAANG companies), for example.

It follows that these investors wouldn’t necessarily

understand, for example, the full impact of COVID-19

on the FAANGs, whether these stocks are currently

trading at fair value, or if they’re overpriced or in

bubble territory.


Nor do investors realise that owning offshore

property often comes with a massive cash obligation,

leaving them at the mercy of changes in legislation,

economic instability, tax implications and ongoing

costs that are often US dollar-euro hedged.

It is important to point out that these asset classes

are not a problem in themselves, as they are

essential components in principle. However, without

guidance, investors may inadvertently expose

themselves to an unnecessary gamble.

In my experience, going offshore requires some

strategic thought and planning on behalf of both

the client and the financial adviser to ensure that the

journey that is meant to lower risk doesn’t result in

the exact opposite. Without guidance, investors can

easily make ill-advised decisions unless they follow

fundamental investment principles.

The first rule, in my view, is to set a clear goal that

will guide the client’s offshore investment strategy.

With the help of an expert, this way, the client

is in a better position to build a portfolio that’s

appropriately structured to meet their specific goals,

and not the other way around.

However, allowing the strategy to deliver on

the investment goal through asset allocation,

diversification and rebalancing the portfolio requires

the client to stick to the plan. The adviser adds value

by helping clients avoid reacting to the news, yet

continue to make the best long-term investment

decisions despite market volatility.

The second principle is to manage risk through

the choice of markets invested in. Developed and

emerging markets, for instance, have different risk

profiles and characteristics that influence whether

certain markets are more or less of a risk.

The way this may influence investment decisions

is that developed markets tend to be highly

competitive, efficient and highly liquid in such a

scenario. A low-cost index strategy might be more

suitable for capturing global market performance

because of the broad exposure and lower fees.

Emerging markets, by contrast, tend to have more

risk concentration and are generally less efficient.

Given these risks, stocks that score highly in

environmental, social and corporate governance

(ESG) criteria are good investment targets.

Incorporating ESG considerations could even

become a source of outperformance, as

there is some guidance on how to avoid

potential bad apples.

The pros and cons of different geographies

considered, the next guiding principle investors

need to bear in mind is asset allocation.

A well-structured offshore portfolio should be based

upon reasonable expectations for risk and returns,

and diversified sufficiently to limit exposure to

unexpected events. The asset allocation exercise is

Investing is often about

discipline and patience

and having the control

not to panic or change

our investment strategy

based on market

volatility.


16


a fine balancing act that aims to escape volatility

and short-term losses, while still growing faster than

inflation.

Should a portfolio lack investment with higher

growth potential, it’s likely to fall short of long-term

financial goals. What people often forget is that

inflation can be particularly damaging, because its

effects compound over longer time horizons.

The final fundamental principle that investors

need to bear in mind when planning their offshore

portfolio is the management and transaction costs

involved. Costs create an inevitable gap between

what the markets return and what investors earn, but

keeping expenses down can help narrow

that gap.

Markets are unpredictable and cannot be controlled.

However, you can manage your costs. Failure to do so

can significantly depress a portfolio’s growth over the

long term.

In conclusion, successful investing is often about

discipline and patience and having the control not

to panic or change our investment strategy based on

market volatility.

Whether you are bearish on South Africa or not,

the reality is that South Africa represents less than

1% of global investable assets, which means that

limiting your investment universe to pure South

African investments, limits your opportunity.

However, regardless of the market, following some

fundamental principles could help manage key risks,

as financial advisers strive to help clients reach their

financial goals.


THE AUTHORS

Chris Potgieter

MD: Old Mutual Wealth

Trust Company

Chris joined Old Mutual Wealth at inception and was responsible for establishing

Old Mutual Wealth Private Client Securities (PCS). He also heads up our Treasury

and Advisory Services and Fiduciary capabilities. Chris is passionate about

investments and is a lead portfolio manager of the PCS Global Equity Portfolio.

He has over 20 years of experience in the financial services industry and fulfilled

senior and diverse roles within a number of investment businesses. Chris is a

CFA Charterholder, Fellow of the Association of Chartered Certified Accountants

(UK) and holds a Bachelor of Mechanical Engineering (Cum Laude) from the

University of Stellenbosch and an MBA (Cum Laude) from the University of

Stellenbosch Business School.

Andrew Dittberner

Chief Investment Officer:

Private Client Securities

Andrew joined PCS in 2017 and was previously employed at Cannon Asset

Managers. He joined Cannon in 2007 as a research analyst. During his

tenure, he rose through the ranks to become a portfolio manager in 2011

and was then appointed CIO in 2014. Andrew has extensive knowledge

and insight into valuing businesses across multiple industries and

identifying suitable investment opportunities. He holds a Master’s Degree

in Economic Science from the University of the Witwatersrand, where he

lectured for a while. He also holds a PhD in Investments and Securities

from the University of Pretoria.

Wayne Sorour

Head of Old Mutual

International: Sales &

Distribution

Wayne matriculated at Grey College in Bloemfontein. He obtained his

BProc LLB at the University of the Free State and is an admitted attorney.

He joined Old Mutual as a legal adviser and has spent many years in the

financial services industry where he gained vast experience in sales, wealth

management and the distribution side of asset management. Wayne

currently holds the position of Head of Old Mutual International in South

Africa and has been working in the offshore market for over 15 years. He

also holds a CFP® qualification.

Kim Rassou

Portfolio Manager: Old

Mutual Wealth Tailored

Fund Portfolios

Kim has been in the investment management industry for 16 years and

her experience includes both active and passive management. Prior to

joining the team, Kim was a portfolio manager in the Indexation team at

Old Mutual Customised Solutions. In addition to her portfolio management

responsibilities, she was responsible for the team’s retail business

development. Kim has completed an MBA at the University of Stellenbosch.

18


PROUDLY SOUTH AFRICAN OR A GLOBAL

CITIZEN? SMART INVESTORS ARE BOTH.

Diversity is the key to a well-balanced portfolio and with over 30 years

of global experience, Old Mutual Wealth can offer the expertise

you need to expand your portfolio offshore and reduce your risk.

Take your wealth further with our wide range of expertly managed

offshore solutions, built around your unique needs.

Stay connected to expert advice. Speak to your planner today.

www.oldmutual.co.za/wealth

WEALTH

175 YEARS OF DOING GREAT THINGS

Old Mutual Wealth is brought to you through several authorised Financial Service

Providers in the Old Mutual Group who make up the elite service offering.


20

Old Mutual Wealth (OMW) is an elite service offering brought to you by several 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 important 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 employees shall not be responsible and disclaim all liability

for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may

be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document.


SLOWLY UNPACKING

FINANCIAL

EMIGRATION

South African financial planners are

regularly presented by clients with the same

conundrum: should I leave South Africa…

or take all of my money out of the country?

OFFSHORE INVESTMENTS

We are members of the Vulintaba Association, a

group of lifestyle financial planners all of whom are

CFP® Professionals. We work together to see how we

can serve our clients by doing financial planning better

and also how we can run world-class businesses. 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 process comes first, and then when

this planning process is finished, and then and only then, we look

to implement the plan and use financial products. This distinction

is critical because financial emigration is the implementation of a

financial plan. If you just jump straight to financial emigration, you

are, as they say, putting the cart before the horse.

The genesis of financial emigration is based on fear. As financial

planners, our job is not to decide how or where people should

live. Our skill is to show them the consequences of the lifestyle

decisions that they have come to discuss with you, their trusted

Our skill and value add is in

the questions we ask rather

than in the answers we give.

advisor. All our advisors recently completed a behavioural

coaching programme. During the course, one starts to pick up

that as financial planners we all 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 possible, out of the

conversation. Never forget, the meeting is about 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 skill 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.

Currently, 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 sells

If you want to sell 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 hit the fear button. It will sell the product

or service very successfully. The media regularly use bad news and

fear to capture our attention, so product houses and advisors are

now too pushing this button more regularly.

The issue is that more clients are saying that they do not want

to make contributions to retirement annuities (RA) this year.

They also want to cash in on their pensions and take what they

can offshore. Some even want to sell their homes. You hear the

comments around the braai or at small gatherings. Prescribed

assets, sovereign downgrades, tax morality and state capture add

to the long list of other 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 fact that they may be wrong.

RULE 2 | The power of compound interest

We assume 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 getting as

much money offshore as you can get your hands on. Should you

contribute to your 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

www.bluechipdigital.co.za 43


OFFSHORE INVESTMENT

So now you can take R206 500 (after-tax) directly offshore or

R350 000 (pre-tax) into an RA. How long will it take to make back

the 41% paid in tax?

The second scenario is to withdraw as much money as possible

out of your retirement funds and take the proceeds out of South

Africa as soon as possible. We will use the extreme example of a full

withdrawal of a preservation provident fund. We will assume there

is R10m invested in the fund. We have chosen this as you can access

all the funds in this vehicle, which are then taxed according to the

retirement withdrawal table.

Preservation provident fund withdrawal (100%)

Capital withdrawal Tax rate % Tax paid Capital withdrawn

R0–R25 000 0%

R25 001–R660 000 18%

R660 001–R990 000 27%

R990 001–R10 000 000 36%

Total R3 447 000 R6 553 000

In summary, you have to take a -34% loss to take retirement

money offshore. This is equivalent to the bottom of the stock market

crash in 2008 or March 2020.

Now here is the point. Assume you are invested in a run of the

mill balanced fund. Every manager in the country has already taken

30% directly offshore. Conservatively, they are invested in large rand

hedge stocks that do not count towards the 30% offshore allowance

(Naspers, Richemont, all commodities stocks, BAT, etc). You could

assume there is another 20% invested in these types of shares,

granted to varying degrees of success.

If this is true you could have had 50% (R5m) in your RA or

preservation fund offshore already. You would have had another R5m

exposed to South Africa and, yes, potentially to prescribed assets.

The question to ask currently is: are global equity prices presently

quite high? Are global bond markets overpriced? Is the dollar very

strong against most currencies? Most commentators believe all of

these to be so. Is history about to repeat itself?

RULE 5 | You never know what is going to happen

This article does not suggest that you should invest all of your

clients’ money in South Africa. It is not saying that you should invest

all their assets in South Africa. It is not saying that South Africa, as a

country, is a certainty to bounce back.

What we are saying is that if you as a financial planner get caught

up in the fear of the moment and are listening to the herd, then the

numbers show that you better get this one absolutely right! You

have created a stock market crash in your clients’ retirement savings

that you will never ever recover from, unless, of course, South Africa

INTERGENERATIONAL WEALTH MANAGEMENT

is doomed forever.

Wisdom in financial advice

If your client wants to live in South Africa and/or has very little

chance to be able to afford to move overseas, then we think that you

should approach this with a solid framework. As a CFP® Professional,

you need to find out how much capital the client will need in his

or her retirement funds to afford their lifestyle. (Remember these

funds will have 30-50% in offshore assets.) You want to make sure

your client will be able to meet their liabilities in South Africa and to

do this you as the advisor need to have assets facing this economy.

When giving advice to clients we have found that it is not about

binary moves (eg choosing between leaving or staying) it is about

knowing you don’t know and then leaning into a move rather than

jumping completely. Once you know the client has enough assets

in South Africa, then build up any surplus savings in offshore assets

slowly over time, whether feeder funds or directly offshore.

RULE 3 | You should also learn from history

Your client will have achieved your goal of getting the money

offshore, but hold on, could they be running into other trouble?

You might remember 2001 when Thabo Mbeki was president. He

thought that some players in the ANC were plotting against him,

and there was a run on the rand. It was a scary time to be in South

How do you hold on to the next

Africa. The rand went to R13.53/USD. The brightest

generation of

business

your client

people

base?

bonded their big houses to the hilt and took the money offshore.

Phew, you are safe now. Or are you?

RULE 4 | Never sell at the bottom

From that point they bought into offshore equity, primarily US equity

(S&P Index: 1140), and then, surprisingly out of nowhere, the rand

strengthened (December 2002 – R8.58/USD), the offshore equity

cycle turned and the dollar prices collapsed (December 2002 – S&P

Index: 899). It took around nine years for the S&P to recover these

losses. It took the rand 14 years (September 2015) for this market

PLANNER® certification, would help.

to recover to the same dollar basis. The rand also strengthened to

R5.68 in December 2004 (a 42% loss in currency and a stock market

loss in dollars of -4%). Just to rub more salt in the wounds, interest

rates on home loans were at 15% at the time.

44

www.bluechipdigital.co.za

can get money to work for them instead

of the other way around. It is the ability

to help them steer their way through the

information overload and show them what

all the various options ultimately will mean

to them – beyond their bank balances.

Listening. Giving the impression that you

are saying to a young client “Now listen

here boy” ain’t going to cut it. You need

to listen to the client and treat him or her

with respect. Energy levels. Speaking to

a young client who has still not inherited

assets can be difficult. If you feel you are

unable to relate to a younger client or lack

the empathy and energy to do so, you

need to bring in someone who is more

suited to this role. A younger advisor,

someone doing their CERTIFIED FINANCIAL

Learn a different approach. See it as a

challenge to understand this generation

and how you can be on the cutting edge in

your interactions. Go out and understand

how the 22seven app works. Read Sam

Beckbessinger’s Manage Your Money like

a F*ckin Grownup to give you an insight

into how this generation is thinking and

Get the call right!

approaching money. It also shows you the the constitution, but economically tying

Although a terrible idea, we don’t think prescribed assets can lose as

tools available out there. More importantly, people together is where my issue lies.

much this as sense a permanent that you yourself 35% are now growing

cashing Bring them out up or as best not you contributing

can and then

is empowering. That enthusiasm will be set them free!

to a retirement fund. After watching the news about state capture

endearing to the younger generation.

Multi-generational planning is a highly

and mismanagement Fee income. Consider of state charging enterprises a creative activity it feels and like should you energise need you to

take monthly swift action service fee as payable some by people debit order suggest. and your But team. you If it don’t doesn’t, necessarily

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and of then family make as the the patriarch incremental

or matriarch

adjustments sees them and needed. sets certain Don’t rules for concentrate

on the right call, rather Barry O’Mahony, Founder,

future

management of wealth.

I have a personal bias against holding

focus adults on the and best future call. generations to a Veritas Wealth Management

particular course of action and conduct

that denies them the freedom to make

their own choices. I support the values of

Barry O’Mahony, CERTIFIED FINANCIAL

PLANNER® professional and founder of

Veritas Wealth Management

www.bluechipjournal.co.za

31


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RCK_77636DI_07/12/2020_V1


OFFSHORE INVESTMENTS

Your offshore investing

questions answered

What holds South Africans back

from investing offshore?

Think of a country’s currency as its share price. When

there’s negative sentiment about a country the local

currency weakens and overseas currencies become more

expensive. It seems an inopportune time to sell your rands

and yet many investors do just that: when the domestic currency

loses values against peers, spooked investors tend to move their

money abroad. Those investors who did this when the dollar was

at R18 will be sitting with their heads in their hands now that it’s

strengthened to R15-odd.

In short, investors tend to chase performance in currencies 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 all investments, fear is never a great strategy. A

sound, solid financial plan looking at all aspects of your investment

goals can help you stay the course and chart the “unknown”. And

if anything, this year has been a pretty stark reminder of how little

control we have over predicting the future.

The level of comfort or terror you derive from watching the rand

move up or down in line with most foreign currencies is part of the

emotional roller-coaster that tends to follow markets, and then

investors. Investing offshore, like all investment allocations, should

be done in with a holistic view of your financial plan in mind.

Local funds can invest up to

30% of their assets overseas

and an additional 10% across

the African continent.

What should I invest offshore?

How much you can invest offshore will depend very much on

your financial circumstances, your risk profile and your investment

horizon. Most importantly, you should consider how well your

assets and liabilities match. Your assets should, for the most part,

be in the same currency as your expenses.

It might be that you want 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 currency to

avoid being unnecessarily 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 well be prudent to move some of your assets overseas

from a diversification point of view.

46

www.bluechipdigital.co.za


OFFSHORE INVESTMENTS

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 currency to

depreciate over time. The fact that we’ll be importing goods in our

shopping baskets at a weak or weakening currency, will over time

increase inflation and the cost of living. Common advice suggests

that 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 all investors.

When should I invest offshore?

The wrong time to invest offshore is when the rand is weak because

one unit of foreign currency is going to cost more rands than it did

before the currency 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 guess,

but it’s far better to consistently move your money over time. This

way your gains from exchanging at a good rate, and your losses

from exchanging at a bad rate, should balance each other out.

The principle remains that it’s the long-term effects that matter

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

allowance, or investing indirectly by accessing a fund manager’s

institutional allowance.

Direct. You can convert your rands into foreign currency by

physically 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) allows individuals

to take up to R1-million out of the country a year without tax

clearance. A further R10-million 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 currency you receive your proceeds in.

Indirect. The alternative is to invest in rands through:

• A locally-administered unit trust that is mandated to invest a

portion of the fund in international markets. Local funds can

invest up to 30% of their assets 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”.

How do you genuinely assess the

merits of any international market

from as far away as South Africa?

Both structures can give you access to international markets

without physically moving your money abroad and you are not

restricted by how much you can invest in the unit trust (it doesn’t

count as part of your personal R11-million offshore allowance). 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 accessible way to access

offshore markets as investors could start saving with R500 a month

via debit order in some of these funds.

All investors should be sure to understand the tax considerations

and differentiations involved with these routes, as well as the

estate planning consequences for owning assets abroad. While

it is potentially simpler then you thought, we would suggest you

surround 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 well-known developed markets, where companies

are potentially better 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 better and earnings prospects

may be brighter? How do you genuinely assess the merits of any

international market from as far away as South Africa?

The best way to navigate these challenges 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 not the long-term

investment partners you can count on.

The views and opinions contained herein

are those of the author.

Ebeth van Heerden,

Head of Intermediary

South Africa, Schroders

www.bluechipdigital.co.za 47


ASSET MANAGEMENT

Shooting for

the NORTHSTAR

Blue Chip speaks to Rory Spangenberg, CIO and Director of Global Equities at Northstar Asset

Management, a specialist boutique asset manager investing in South Africa and abroad

Please give us an overview of Northstar and its offerings.

Northstar is a research-led boutique asset manager with a focused

offering of domestic and global investment solutions, suitable

for clients requiring income, retirement savings or long-term

capital growth.

What makes Northstar different from other asset managers?

Northstar has an obsessive focus on fundamental research, which

provides differentiated insights, builds conviction and over time

translates to superior performance. Our size means that we

provide a credible and competitive investment offering, combined

with exceptional and personalised levels of client service.

What are Northstar’s principles?

Our core principle is “closer to the truth”. This, in essence, refers

to Northstar having an obsession for research which guides

independent thought and is key to outperforming peers over the

long term. Our investment in research skills rivals that of the larger

managers. Northstar focuses on being led by investment rather

than size and thus can nimbly navigate markets. Furthermore,

our principles include growing our clients’ capital while managing

risks, to always act honestly and

provide excellent client service.

What is Northstar’s investment

philosophy?

Our mantra is to hold longterm

exposure to quality assets

where value exceeds price. In

practice, this means that we

seek to invest in a relatively

small group of companies, which

exhibit a strategic competitive

advantage, evident in superior

and sustainable return on capital

and free cash flow measures.

Rory Spangenberg, CIO,

Northstar Asset Management

What is your investment process?

The departure point of our process is a quantitative screen and

relative ranking of companies based on various return on capital,

free cash flow, earnings quality, and balance sheet criteria. Over time

we have found that advantaged companies exhibit a high degree

of stability and persistency in these measures, enabling us to settle

on a master list of companies meeting our fundamental criteria.

Our initial analysis would be aimed at ensuring data integrity and to

develop an understanding of the valuation opportunity.

Our fundamental process follows a four-pillar approach, aimed

at understanding industry landscape and a company’s competitive

position, the source, and durability of any competitive advantage,

the sustainability of a company’s business practices, and the track

record and strategy adopted by the management team, as well as

the alignment of their incentives with ours, as minority shareholders.

We combine this qualitative assessment of business fundamentals

with a long-term, scenario-driven, proprietary valuation, which

directly informs portfolio construction and position sizing.

Our mantra is to hold longterm

exposure to quality assets

where value exceeds price.

Please provide an overview of your equity investment focus.

We consider bottom-up stock selection to be our core skill and the

team has a long and successful track record and hit rate in both

domestic and global equity.

Identifying, analysing, and valuing companies for potential

inclusion in our portfolios is, however, only half the job. We think

a real differentiator of the Northstar equity process is our scenario

and probability-based valuation framework and the ability this

affords us to optimise portfolios for both return and risk.

A stock offering a high Base Case return may be significantly

less attractive than a lower return alternative if a higher probability

exists of its Bear Case becoming a reality. Equally, a pre-investment

Bull Case scenario (to avoid narrative creep) typically results in

longer holding periods and lower turnover and avoids the risk

inherent in continuously having to find new ideas.

48 www.bluechipdigital.co.za


OFFSHORE INVESTING

Emerging markets

Why you should consider other emerging markets (EMs) when investing offshore

Don’t let historical biases put you off investing in other EMs.

Throughout the 2010s, there were long periods when moves in

EM currencies, which include the rand, were highly correlated.

Given our history of foreign exchange controls, many investors

concluded that it’s a waste using up scarce global exposure to

invest in other EMs.

As a South African, it is true that your access to global investment

opportunities is still normalising. While government continues to

liberalise exchange control, some restrictions remain. However, the

correlation between EM currencies broke down in 2020, primarily

due to much better management of Covid-19 in Asia. In addition,

increasing political instability in some of the major developed

democracies has further undermined the popular notion that

developed markets (DMs) are the only option if you are looking

for stability and uncorrelated investment returns.

Here are the reasons why you should consider a healthy

exposure to EM assets, specifically equities, in your global portfolio:

EMs are still considerably underrepresented in benchmark

world equity indices. 80% of the globe’s population lives in

EMs, which now represent half of global economic output, but

EM equities make up less than 20% of the global benchmarks

frequently tracked by investors. Economic and demographic

dynamics suggest that EM businesses will have, in aggregate,

higher earnings growth than DMs and this should allow stock

exchange market caps to grow faster than DM caps, ultimately

increasing their relative size.

Investors in EMs stand to benefit from a demographic tailwind

not found in DMs. Just think, the Chinese upper middle class is

roughly the same size as the US middle class and the Indian middle

class is approaching the size of the European middle class – and

if current growth rates are maintained, both are set to become

significantly larger.

Also, many industries in EMs are not as developed or

consolidated as their equivalents in DMs, which gives them longer

runways for earnings growth. Given local political and cultural

requirements, local champions are more likely to remain the big

beneficiaries of technological disruption in their home markets.

There have been deep structural changes in the compositions

of EM stock markets. Back when Coronation launched its first

EM fund in December 2007, more volatile commodity-producing

countries heavily dominated the EM universe, with energy and

commodities making up more than 40% of the index market

capitalisation. Now, however, the combined weight of China,

Taiwan, Korea and India – none of which are particularly commodity

dependent – are almost 75% of the total EM universe.

Putting all these factors together, we believe there is a

convincing argument in favour of including EMs in your global

investment exposure mix.

Investing in EMs through the Coronation Optimum Growth

Fund. You can gain access to EMs through investing in Optimum

Growth, a long-term portfolio of the best investment ideas

Coronation can find around the world. The fund is unconstrained,

so it can invest anywhere in the world and across all available listed

asset classes. It currently has 70% exposure to equities, which in

turn consists of 45% EMs and 55% DMs.

Optimum Growth is managed by an exceptionally accomplished

investment team, which decides on the optimal allocation

between growth and income, as well as EM and DM assets. The

fund is aggressive and aims to achieve a long-term return of at

least 5% above inflation, so it is best suited to those investing for

periods of 10 years-plus and willing to deal with a higher level of

risk than a classic 60/40 global equity/bond multi-asset portfolio.

The fund’s average historical equity exposure was between 70%

and 80%. So you shouldn’t expect this fund to deliver a smooth

double-digit annual return, but, if you are seeking meaningful real

wealth creation and you are patient, then Optimum Growth could

be the right fund for you. Here is how it has performed over time:

More than double the index over 20 years. Investors who

have remained in Optimum Growth since its launch in 1999 have

achieved returns more than double that of the MSCI World Index

at end November 2020. As the fund marked its 21st birthday last

year, it was certainly something for them to celebrate.

Can this performance be repeated over the next two decades?

The same factors that have driven the remarkable performance

of Optimum Growth remain in place at Coronation today. For 27

years, the company has remained single-minded in the pursuit

of creating wealth for clients, while responding to ever-changing

market conditions with acuity. Active long-term investing is about

focus, agility and conviction. While no-one can predict the future,

when it comes to investing, you can prepare by building robust

and resilient portfolios.

To find out more about investing with Coronation,

visit www.coronation.com

The information contained in this article is not based on

the individual financial needs of any specific investor.

Reference to specific funds should be read in conjunction

with the minimum disclosure documents available on

www.coronation.com. To find out more, speak to your financial

advisor. Coronation is an authorised financial services provider.

50 www.bluechipdigital.co.za


ailout

blackout

Brexit

Despite the world’s biggest headlines,

our Optimum Growth Fund has doubled

the returns of the global index over 21 years.

Start your offshore investment journey by speaking to your

Financial Adviser or visit coronation.com today.

Coronation is an authorised financial services provider. Please refer to the fund’s MDD for full details.


ASSET MANAGEMENT

New

horizons

The dominant asset management model in South Africa is going to change

An expanded investment universe, competition from

cheap passives, lumpy performance and increasingly

sophisticated demands from advisors pose challenges

to the local asset management industry. The incumbent

“single-manager” model in South Africa, which has dominated

for the last several decades, will be placed under pressure. It is

increasingly difficult to accept the case for an “in-house” investment

team driving global asset allocation decisions, while also conducting

securities-level research in all asset classes. In a market where

portfolios are progressively becoming more internationalised,

asset managers in South Africa will need to find a niche.

The story of modern retail asset management in SA

In the early 1990s, the traditional insurance savings industry was

being disrupted by emerging platform (LISP) insurgents, which

symbiotically propelled the unit trust industry’s assets into the

stratosphere. These were halcyon days for freshly minted CFAs and

spawned a plethora of new asset management firms.

Platform choice had turned advisors into fund pickers and

market timers. The Emerging Market Crisis in 1998, followed in

quick succession by the bursting of the Dotcom bubble in 2000

and the catastrophic collapse of the rand in 2001 put paid to many

advisors’ sense of adventure. This heralded in the ascendency of

the ubiquitous multi-asset fund – the venerable income, cautious,

moderate and balanced funds. This was asset management’s first

recognition of the critical role of risk-profiled funds and of the

intermediary as an advisor as opposed to salesman. Advisors,

bruised, were equally happy to outsource these decisions as the

ambit of professional advice services expanded.

CHANGES AND CHALLENGES

Globalisation of portfolios

As SA-specific risks became more concentrated, so investors’

portfolios have become more global. South African asset managers

have traditionally offered their standard risk-profiled ranges

as Regulation 28-compliant, but pitch them for discretionary

and living annuity assets too. This domestic concentration is an

anomaly that is becoming harder to support, especially as one can

build portfolios with similar volatility characteristics with higher

offshore weights.

As SA-specific risks became

more concentrated,

so investors’ portfolios have

become more global.

The need for specialisation

The breadth and depth of the global investment universe is

mind-boggling. Outside South Africa, you have developed

market equities across North America, Western Europe and the

Pacific Rim; emerging equities in Asia, Europe, Latin America

and Africa; global sovereign, inflation-linked, corporate, high

yield and emerging market bonds. Then there’s property,

commodities and infrastructure – and the list goes on. In each of

these asset classes there are specialists that you can put through

52 www.bluechipdigital.co.za


ASSET MANAGEMENT

the wringer in a way you can’t in a job interview.

If you fire them, it is a decision, not a labour process.

The simple point is that the team you need for

modern, multi-asset portfolios cannot be housed

under one roof.

Passive and the separation of alpha and beta

The market is polarised between adherents of an

active approach and passive investment acolytes.

Both have their role and multi-managers sensibly

exploit this. However, it cannot be that the incumbent

asset management model is one or the other, which

it currently is. In unconflicted fee models, the

specialist multi-manager is spending the investor’s

money to achieve the best outcome and resists being

boxed by ideology.

The costs of lumpy performance

Many traditional active managers treat asset

classes as an extension of securities, something

you are required to take strong directional

view on. However, macro calls are hard to get

right consistently and are a massive driver of

performance variability. Large fluctuations in

performance affect investor composure, who

predictably then make poor decisions. Many

incumbent firms experience protracted periods

of out- and underperformance, often accompanied

by large inflows and outflows of assets, damag-

-ing money-weighted returns. There is not a

great deal of evidence that this extra active risk is

sufficiently rewarded.

The role of engineering

While tactical asset allocation as a core

competency is losing its lustre, the importance

of asset class optimisation, portfolio construction

and risk management is gaining ascendency.

This has ushered in a whole new breed of

investment professionals who never need to

look at a company’s income statement (there are

super-specialists around the world who can be

appointed to do that). Instead of managing an

individual multi-asset fund, their job is to get

a range of risk-profiled portfolios to predictably

“fly in formation”.

Outcome-based investing

As advice has become more specialised, what

advisors demand of asset managers has changed

too. Instead of identifying single manager

multi-asset funds that can be cobbled together,

they are increasingly seeking a fund toolkit that

can be linked to the advice process. Individual

funds are no more than numbered wrenches.

There will be a far greater focus on mapping

advice to predictable portfolio characteristics.

Quo vadis

South Africa has great asset managers and

the number and quality of our investment

professionals relative to AUM must be world

leading. But the day of reckoning is out there,

and firms will need to decide what they are and

find their niche.

Being a South African single asset class

specialist appealing to a global market of

investors seems more sustainable than aspiring

to being a global asset manager in South

Africa appealing to domestic investors. Really

understanding your core competency and

doubling down on it is a good strategy.

The team

you need for

modern,

multi-asset

portfolios

cannot be

housed under

one roof.

Brandon Zietsman CEO of

PortfolioMetrix, a global

asset management firm

www.bluechipdigital.co.za

53


INVESTOR BEHAVIOUR

Being Spock

(AND NOT BEING HOMER)

How understanding investor switching behaviour can help you improve your investment returns

When we make decisions, we would all like to think that we are more like

Mr Spock from Star Trek (who uses relentless, emotionless logic) than Homer from

The Simpsons (who doesn’t). Unfortunately, it is sad, but true, that the opposite

is usually correct. Multiple studies have demonstrated that investors’ decisionmaking

is dominated by their emotions and these emotions are usually counterproductive

from the point of view of their investment returns. These studies all clearly show that there

is a “behaviour tax” across 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 this 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.

54 www.bluechipdigital.co.za


INVESTOR BEHAVIOUR

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 losses more

than they like gains; and secondly, decision-makers’ inability to

correctly assess 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

attracted or repelled by risk, this preference is mediated by our

“risk perceptions” or assessment of risk in any given situation and

our “risk propensity” to take risk, which is a function of recent

experience in this 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 losses and often look for

excess risk at the opportunity of negating

such painful losses. Moreover, our propensity

to assume risk is significantly affected by prior

outcomes (recent successes 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 finally, the average number of switches and

their frequency. The use of the Hierarchical Clustering technique

showed that 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 asset 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 current

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

market timers constantly move between funds in an attempt to

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.

beat the market and maximise returns. These investors show a mix

of 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

current funds are performing below inflection. Such behaviour led

to high behaviour tax, especially during periods of growth where

they would be “missing 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 expect these investors to be overconfident and

to follow their ways and not be influenced as much by advisors.

The distribution of the occurrence 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 right time to avoid the associated negative

implications of these behaviours. Ultimately, the

point is to help all 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”

written by Paul Nixon, Evan Gilbert and Dirk Louw of

Momentum Investments in October 2020.

Professor Evan

Gilbert

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.

www.bluechipdigital.co.za

55


3FINANCIAL PLANNING

ROLES

of the financial planner

Facilitating thoughts,

choices and actions

A World War II

Wellington bomber

My 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

56

www.bluechipdigital.co.za


for the client to answer. As Albert Einstein said (or is famously

attributed to have said), “If I had one hour to solve a problem

and my life depended on the solution, I would spend the first 55

minutes trying to find the right question to ask, and the last five

minutes determining the answer.” For the Robo-advisor the real

risk is Garbage In, Garbage Out.

In working with a person directly, the human advisor should try

to find the right questions to ask. Questions that help the client

to think through their circumstances, situation, dilemmas, plans,

goals and dreams. A conversation is a fluid process where people

think together. The Robo-advisor may think up to a point with

a client. But it will need to be pre-programmed with multitudes

of options to help each client think through their own life before

no surprise, then, that Ricardo Semler, a

coming up with appropriate answers for whatever aspect of

highly successful, innovative industrialist

their life is being examined.

and entrepreneur from Brazil, wrote a

People in general don’t always have the privilege of

book insight entitled into The their Seven own Day lives. Weekend. We don’t know He what we don’t

encourages know. We employers have blind spots. to think We differently

have hidden undiscovered

about how talents. they We manage may even their have people, hidden and or repressed goals,

more importantly, desires, dreams. how to The get Robo-advisor the best out assumes your

of people. client He argues knows that what technology they want. that You as a human

advisor was cannot supposed assume to make that. As life a thinking easier such partner, as you help your

clients laptops, think cellphones about their lives. and email, To understand has actually their context, their

relationships encroached with on themselves, people’s free their time. relationships with others and

the world. Having developed that understanding, you can help

But as he says, this can be a good thing

clients explore their potential choices to deal with the murky water

if you have the autonomy to get your work

in which they find themselves.

done on your own terms and to blend your

Choice work architect life and personal life. He suggests that

My father innovative could’ve employers instructed will his eventually crew to stay realise with the wreckage.

It was that what people he believed may be was more the productive best course if of they action. But in that

case have of life the or flexibility death, he had to decide to allow for each themselves man to make their own

decision when and to live work or and die with play, it. rather If your than clients the don’t own their

decisions, employer you deciding. rather than Rather they become than time accountable in, for those

decisions. employers The waters ideally of should the future focus are on always value out. murky.

In helping The clients importance make choices, of value financial was planners play the

role of the choice architect. But anyone who has worked with an

highlighted for me recently when I met

architect will know, it is not simply a matter of the architect telling

with a financial planner who related how

you what to do. The client always has opinions, wishes, desires

they helped a potential client resolve a

and wants. Often there is much emotion that underpins a choice

– whether

dilemma

it be

about

fear, desire

their

or even

future

excitement.

retirement.

And unfortunately,

it seems They that helped when the it comes client to assess working retirement with clients’ money, very

often options choices in are a more made rigorous in fearful and response creative to the obvious or

perceived way than dangers if the or threats. client had simply tried

Most to do often it on the story their we own. focus No on doubt is the story the of the threat. It

is the experience way we are and wired. thinking Our brains that this are planner continually looking for

threats. had That’s done how over we have many survived years as made a species. this Identify threats

and meeting avoid them. very It impactful.

is no surprise that the most commonly used

tool to help with client investment decision-making is called a risk

When it came to discussing the financial

profile. It’s not called an opportunity profile or a return profile,

planning fee, the planner mentioned that

it’s called a risk profile. And we use such a profile when making

the upfront financial planning fee was

investment decisions because we as human beings struggle to

make rational decisions. We are not always rational.

improved by 40%. Operational costs

with 23% less electricity and 90%

FINANCIAL paper PLANNING

used.

Perpetual Guardian, a New Zeala

based financial services firm, moved t

four-day week in late 2018. Producti

Would my father’s crew have swum off into the dark, supposedly

improved 20% over an eight-week per

to get away from the sharks if they were rational? No. They made

an independent survey showed staff str

a decision based on fear. Probably more like terror. Rationally, the

levels reduced and work-life bala

chances of swimming off into the open ocean with sharks around

and surviving are very low. In this improved case, it was from zero. dramatically.

The rational

decision would have been to stay with As you the floating think about wreckage. innovating to k

Despite trying to think through their up situation with constant and consider change, the don’t get st

options that faced them, my father’s on crew technology did not act and rationally. forget about y

They made a decision based on their people. emotions. They You may face just the end same up working f

challenge with your clients, all the business time. that has found a real way to m

a dent in traffic congestion!

Your client’s actions start with

how well they think and the

R20k, and that the process usually involved References

four meetings. The potential client had David Rock, The Neuroscience of Leadershi

experienced so quality much value of in just choices one – Improving they Organisations make. by Understand

aspect of the Behavioural first meeting coach that they were the Brain, Talk at FPI Convention, 2012

moved to ask After if this his was two R20k crew per members meeting had Morgan swum off, Housel, I’m sure The advantage my father of being a

– not because considered they didn’t whether want to or pay not the had little made underemployed, the right choice. www.collaborativefu

He was

fee but because alone. they His thought mind must given have wandered the com, and 17 wondered. May 2017 Perhaps he

value they had was already tempted experienced, at some point this to swim Ricardo off. But Semler, he stuck The to his Seven original Day Weekend,

was a possibility. decision, and it saved his life. Your Penguin clients face Publishing, similar challenges

2004

when making choices. They may second Robert guess Booth, themselves. Four-day week: Or be trial finds low

The value in people swayed by friends and family. Or stress by news and headlines increased productivity, or market www.

sentiment. Enter the role of the behavioural coach. A decision is a

In a knowledge-based economy, when you theguardian.com, 9 February 2019

form of behaviour. An action. Not only does your client need your

are providing a professional service based McKinley Corbley, Microsoft Japan Recently

help to make a decision, but to stick to it, and only change it for

on knowledge, experience, thinking and Gave their Employees a 4-day Week – and

the right reasons. Clients who own their decisions are more likely

interpersonal to skills, do this. to But quantify they will anything still need your Productivity help as a behavioural Skyrocketed coach. by 40%, www.

in terms of time Vanguard – be it your defines employees’ behavioural coaching goodnewsnetwork.org, as a process that, 8 November “… 2019

working hours facilitates or the thinking time spent such with that a the client LinkedIn succeeds Talent Solutions, in changing 2019 a Global Tale

client – is a disservice behaviour to which the would value that otherwise Trends prevent Report, him 2019 or her from

financial planners achieving and their staff goals”. potentially You facilitate Samantha your client’s McLaren, thinking How these as a 4 Compan

can add to their thinking clients’ partner. lives. But as we have seen are Embracing this is not Flexible enough. work They – and Why Yo

So the opportunity need your is ripe guidance for the as picking a choice Should architect Too, to www.businesslinkedin.com, make the most

22

to innovate with appropriate respect choices to how for you themselves. get May And 2019 they need your gentle but

firm challenging as a behavioural

and keep people and make them more

coach when they begin to wonder

productive. LinkedIn’s 2019 Global Talent

or wander.

Trends Report indicates that over 30% of

Your client’s actions start

job-seekers will

with

turn

how

down

well

a job

they

if there

think

are

and

not flexible work the arrangements. quality of choices Computer they

giant Dell implemented make. Attending flexible to your work client’s

practices in 2009. thoughts, US healthcare choices and company actions

Humana did consistently the same in and 2016, systematically using

technology to will enable give them call-centre the best workers chance of

to work from home. dealing with the challenges of an

More recently uncertain Microsoft future. in Japan

experimented with a four-day week for

References: The Vanguard Advisor

their employees. Without an adjustment Rob Macdonald, Head of Strategic Advis

Alpha guide to proactive behaviour- Rob Macdonald, Head of

in remuneration. The result? Productivity Services at Fundhouse

al coaching; Donald G. Bennyhoff, Strategic Advisory Services

CFA; November 2018

at Fundhouse

44 www.bluechipjournal.co.za

www.bluechipdigital.co.za

57


FINANCIAL PLANNING

Have you thought

of your

2021 PLAN?

Master your destiny

We all know that 2020 was a difficult year in all 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 about 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. Let them know what you stand for and what makes

you unique. There are so many financial advisors out there, but

your clients work with you for a particular reason. Do you know

what that reason is? Do you know why they trust and understand

you compared to your other colleagues? If you don’t know that

reason, send a select group of clients questionnaires that will give

you a clear reason why they work with you and if it defines you.

58 www.bluechipdigital.co.za


FINANCIAL PLANNING

Find a mentor or coach that can help you avoid mistakes and

guide you when you feel lost and want to discuss ideas that will

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 will be able to give you tools to resolve

your problems. They must be able to guide on both personal and

business aspects to help you balance your life.

We need to allocate more time

to working on the business

than working in the business.

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 taught the difference between working in the business and

working on the business. Working in the business means going out

and seeing clients full-time and working on the business is working

on growing your business by attending sessions and workshops

that talk about business development. We need to allocate more

time to working on the business than working in the business.

Restructure your business by reviewing your client base, your

products, sales and review strategy. This will help you find your

specialised area that you can focus on and be the best at it. When

you review your client base, you will 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

businesses we end up losing focus on our target market as we take

any clients that come our way, which is understandable, but will it

grow your businesses at the pace that we want it to grow?

Work on that target market and stick to it.

Let us learn to do things differently this year. Start calling all

your existing clients and touch base with them to understand their

current financial goal. This will help them rethink their lives and

their financial goals. Calling your clients for a check-in will 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 will pay for it.

Lastly, get a supporting team such as an administrator and

a paraplanner because you cannot handle all the paperwork by

yourself. You will need to delegate activities that are not directly

linked to affecting your results. I know most of us cannot afford

to pay them but there are programmes in the industry that help

with funding. You can partner with TVET (Technical and Vocational

Education and Training) colleges that need to place learners for 18

months to assist 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 business.

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 are essential

and will redefine your perspective

towards the future. Happy planning for

your successful 2021!

Nonhlanhla Nxele,

CEO, Tokoloho

Financial Services

www.bluechipdigital.co.za

59


FINANCIAL COACHING

Are you, the financial advisor,

STILL RELEVANT?

Momentum Intermediary Coaching Programme

The Covid-19 pandemic has not only impacted people’s

health and livelihoods; it has also had a dramatic impact

on clients’ finances, global investment markets and the

world economy. South Africans are uncertain of the

future and their family’s health. Budgets are tighter and many

families have had to make tough tradeoffs between adjusting their

financial policies and cutting out non-essential expenses from their

budgets. Clients will need practical help from their trusted financial

advisors to think through all these factors, needs and tradeoffs

and decide what’s best for them in their circumstances. On the

investments side, we have been here before. 1929. 1987. 2000.

2008. Investors who panicked at the wrong time and switched to

cash missed out.

Similar to previous recoveries, the key was and will always be

about time in the market not timing the market. But it is not easy

to convince clients of this. Advising your clients with a coaching

approach will help your clients reevaluate their priorities and

finances sustainably and holistically. It will ensure that they don’t

give in to short-term emotional discomfort at the cost of their longterm

financial health and growth.

With that backdrop in mind, Momentum is launching a 12-month

financial coaching programme for independent financial advisors

starting in February 2021 that will run over the digital platform

Zoom with a total of 18 contact sessions including six practical

group coaching sessions. The Momentum Intermediary Coaching

Programme will empower independent financial advisors with the

60

www.bluechipdigital.co.za


FINANCIAL COACHING

insights, knowledge and power skills to, in turn, have empowering

conversations with their clients about their finances, helping

them in their journey to success. The programme aims to equip

financial advisors with the necessary skills to support, influence

and guide their clients to integrate their money and life decisions

seamlessly and to stay focused on their long-term financial health

and personal growth.

Advising your clients with

a coaching approach will

help your clients reevaluate

their priorities and finances

sustainably and holistically.

According to the Centre for Applied Research (CAR), the financial

services industry faces a “crisis of faith”: clients have a growing

distrust in financial advisors, often voicing their dissatisfaction with

what they deem to be costly advice, which they could have gotten

on the Internet for free. They mistakenly believe they are capable

of managing their personal finances better than professionals.

On top of this, research indicates that millennial’s prefer digital

touchpoints and Robo advice above getting advice from a human

advisor. This trend has been accelerated by the Covid-19 pandemic

and the recent rapid adoption of technology in every aspect of our

lives, including our personal finances.

The programme seeks to plug this gap and help financial

advisors of the future to remain relevant, not just in terms of

helping their clients to navigate their finances but to navigate that

critical intersection of where their life and money meet. Financial

advisors that want to remain relevant in a post-Covid-19 world

will need to reimagine their roles by rethinking and inventing

themselves to future-proof their client value propositions and to

have a better connection with their clients through coaching their

clients.

Simply knowing and understanding the financial services

industry and investment landscape no longer suffices in our

modern technologically filled world. At Momentum, we believe

that there is a science to success and helping your clients to meet

their life and money goals by having the ability to speak not only

to your clients’ head (rational thoughts), but also to their heart

(emotions) and hands (actions).

The programme will help financial advisors adopt a “coaching

approach” when engaging with their clients. As a financial advisor

of the future, you will understand the “money psyche” of your

clients and, with your highly developed interpersonal power skills,

you will be able to listen, question, guide, counsel, empathise and,

most importantly, coach your clients to financial success. It is from

this need that a new field within financial planning has grown

called “Life Planning” or “Financial Life Planning” and herein lies the

future and endless possibilities and value of the advice profession.

Throughout all the programme modules, there will be

theoretical and practical input in six key areas, namely:

• Coaching theory and practice

• Behavioural finance and investments

• Communication theory and practice

• Human psychology

• Life planning

• Financial planning

In addition to supporting the overall transition of the financial

services industry from a product-led to an advice-led and

client-centric industry, the Momentum Intermediary Coaching

Programme has also added an enterprise and supplier development

(ESD) angle by providing funding support and assistance

to qualifying enterprises in terms of applicable ESD legislation.

This funding assistance has been facilitated through our

partnership with ASISA as Momentum’s ESD partner in supporting

SMEs while Fundhouse will independently facilitate the virtual

delivery of the programme.

We believe this direct funding support and assistance for

qualifying and deserving applicants to join the programme will

enable and facilitate increased diversity, inclusion and indeed the

transformation of the financial services industry for the benefit

of all. Over time this intervention aims to support the growth

and incubation of a younger, more gender-balanced and racially

diverse industry that will be able

to reach an equally diverse and

growing consumer base.

Momentum has always believed

in the power of partnerships and

we are excited to launch this

industry transformative Programme

in partnership with ASISA and

Fundhouse to unlock the value

and relevance of independent

financial advisors while supporting

overall inclusive growth and

progressive client outcomes for

the end consumer.

Visit www.momentum.co.za for

further information.

Bekithemba Mafulela, CFA,

CFP®, Head of Retailisation and

Strategic Markets, Momentum

Distribution Services

www.bluechipdigital.co.za

61


ETHICS

How conflicted

are professional

FINANCIAL PLANNERS?

Appreciating the psychological factors that lie behind conflicts of interest

When asked, financial planners believe they are objective and impartial

during the advice-giving process and are seldom aware of how frequently

their self-interests conflict with acting in the best interests of their clients.

However, literature and research on the psychology of conflicts of

interest (COIs) highlight that we are regularly conflicted in our daily activities and our

brains need to work hard to avoid conflicts that may negatively impact on the interests of

others. Most financial planners tend to think of COIs in terms of the disclosure requirements

found in the FAIS General Code of Conduct and the FPI Code of Ethics and Professional

Standards. However, many planners do not fully appreciate the underlying psychological

factors behind COIs that are often subtle but hugely influential on their attitude and

decision-making, as well as the awareness necessary to minimise the negative effects of

giving clients biased advice.

COIs fall within the realm of moral standards and decision-making and are loosely

defined as a clash between the proper exercise of professional judgement and personal

A conflict only

becomes unethical

when it negatively

influences the

professional judgement

of a financial planner

and damages the

interests of a client.

62 www.bluechipdigital.co.za


ETHICS

(often material) interests. As financial products and advice are

intangible and due to the asymmetry in the client-planner

relationship, clients must trust that the advice they are receiving

is unconflicted and in their best interests. Although there are

manageable conflicts present in the relationship, they are lowertier

conflicts that do not impair professional judgement. They arise

regularly and merely require a refocus of attention and effort to

overcome and maintain sound professional judgement. Therefore,

a conflict only becomes unethical when it negatively influences

the professional judgement of a financial planner and damages

the interests of a client.

Although our rational, thinking brains believe that our

professional judgement is always unbiased, conflicts are an

inherent part of any profession and all professionals are influenced

by subtle psychological factors. Decision-making, when conflicts

are present, is subconscious and is based on both emotion and

cognition (the ability to think). Although we think our decisions

Decision-making, when

conflicts are present,

is subconscious and

is based on both

emotion and cognition

(the ability to think).

are made based on rational thinking, the

reality is that our emotions often distort our

judgement. We are genetically primed to put

our interests (and those of people closest to us)

before the interests of others – this is known as

our self-serving bias and is usually based on our

emotions. To avoid the influence of this bias, we

need to use our rational, thinking brain; however,

this takes thinking work and energy. Without conscious awareness

of this bias or a tendency towards it, planners can easily fall prey to

the unconscious influence of a COI without realising it.

To manage their self-serving bias, a planner will rationalise their

conduct. When making a compromised decision, they construct

self-serving explanations for their actions, insisting they are doing

their job, or that the product they recommended is in the client’s

best interests (subtly ignoring the commission or fees received)

or that they acted under their professional obligations. It can be

challenging for a planner to be objective and to take responsibility

regarding the influence of a conflict. The opposite is true: they find

it easy to persuade their brains that they acted in their client’s best

interests even when the evidence is stacked against them.

This form of self-deception is not a matter of lying to oneself;

it consists of the unexamined acceptance of a belief that is

dubious to an objective outsider. Another psychological factor

Lee Rossini CFP®, Co-Author,

SA Financial Planning Handbook

that may be present in COI situations is ethical fading. This occurs

when moral issues are pushed into the background or even

removed from the decision-making process and business or

personal issues are pushed to the fore, for example, when faced

with the pressure to meet business targets or pay bills.

Unfortunately, the self-regulatory mechanisms that govern

moral standards do not operate unless they are activated, and

hence a planner may not view a COI as a moral dilemma. Many

psychological processes are used to selectively disengage from

moral self-sanction in a process known as moral disengagement.

This is not a sudden process as it creeps up on the person and

gradually erodes any self-imposed sanctions. Moral disengagement

includes planners minimising, distorting and denying the harm

that flows from being influenced by a conflict.

Clients are dehumanised and blamed for making the wrong

financial decisions while planners justify the conflict and obscure

their accountability. Currently, disclosure is used to manage COIs

and in a perfect world filled with rational

people, it would be an effective remedy.

However, research shows that disclosure can

have the opposite effect. The rationale is that

if a conflict is disclosed to a client, they should

consider it when making their financial

decisions. However, even if the potential

conflict is pointed out or disclosed, clients

do not necessarily discount the conflicting

advice as they are willing to overlook it

based on the trust they have in their planner.

Furthermore, planners may give even more

biased advice because they have disclosed

the conflict to their client.

In summary, COIs are not only associated

with intentionally self-interested financial

planners but also with well-meaning

professionals who succumb to the unintentional

psychological factors at play.

Due to the complexities in the financial

services environment, conflicts are on the increase and they

cannot be avoided. To ensure they do not damage their

relationships with clients, planners should be aware of the

subconscious factors underpinning COIs, and that they need to

be managed appropriately. Clients rely on their planners for

unbiased advice that is in their best interests. Therefore, taking

on the mantle of being a professional includes making moral,

independent, objective and impartial decisions that transcend

all self-interest.

References:

Sah, J. Conflicts of Interest and Disclosure, Research Paper, Cornell

University [2018]. Commissioned by the Royal Commission into

Misconduct in the Banking, Superannuation and Financial Services

Bearden, FC. The Subtle Influence: Conflicts of Interest in Financial

Planning. iUniverse Inc. [2010].

64 www.bluechipdigital.co.za


VIR I UAL

EVENTS

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