BLUE CHIP FINANCIAL
BLUE CHIP FINANCIAL PLANNING | DFM How we approach investments And the rationale for using a DFM. Maslow’s hierarchy of needs is a theory of psychology explaining human motivation based on the pursuit of different levels of needs. The theory states that human beings are motivated to fulfil their needs in a hierarchical order. This order begins with the most basic needs before moving on to more advanced ones. What this theory omits, in my personal view, is that each of these physiological needs can only be satisfied through financial means. For “wealthy” people, the financial means are readily available and sustainable (ie wealthy people are not required to perform any income-generating activity, such as trading their skill, time or both to have continuous access to financial means beyond productive years). But for others, in the majority, these financial means are not available, or where they are, they are not sustainable. Paying for a sustainable supply of food, rather than taking the trouble to build the necessary skills and take on the risk of producing these food items, has its appeal. In the same way, access to sustainable financial means that would outlive you without the need to perform any income-generating activity also has appeal. Investors are required to save and invest to achieve this ideal. The point here being that without the financial means, we cannot pay for these basic needs to be satisfied. For those that have found a way to generate enough money to pay for these needs, the solution is often not sustainable. And in the absence of the required sustainability, investors should consider efficient solutions to build the required financial means to be sustainable. Some have addressed these challenges by getting others to resolve them on their behalf for a fee. It is this backdrop that influenced me about being such a person that people would wish to delegate their problem to, for a fee. 46 www.bluechipdigital.co.za
FINANCIAL PLANNING | DFM BLUE CHIP When it comes to investing, it is my passion not only to understand the technical analysis of data and the applied process of forecasting, but also the odds of positive outcomes or returns from investing. This led me to broaden my skillset beyond the classroom setting and to apply it to real live portfolios. Calculating probability ratios is therefore a skill that I have come to appreciate and am able to apply. But helping people to identify the problem of diminishing marginal returns, risk required versus risk appetite in pursuit of building an asset base (financial means) that will be used to replace their current efforts of generating income is the real driver behind my career choice. My investment philosophy is taking a disciplined methodology approach across a range of different styles and objectives. As an advisor, I believe that my role is not to avoid risk, but rather to understand the relationship between risk and reward and to manage risk(s) appropriately, relative to the objectives of the portfolio. I used to personally select investment collective schemes (eg unit trusts) and construct individual portfolios for each client with an emphasis on identifying and controlling risk. I avoided speculation. My investment process involves understanding the specific objectives and risk aversions of each individual client (investor risk appetite) and ensures that my client portfolios are appropriately diversified. Before the use of discretionary fund managers (DFMs), tailored portfolios of funds were constructed to meet specific client objectives and then managed on an ongoing basis. The overall investment and fund selection process was a top-down approach using tactical asset allocation. The overriding premise behind this approach was that asset allocation is of crucial importance if the investment objectives are to be achieved and that these asset allocation decisions were determined by the current macro-economic environment (domestically or offshore). The second-tier fund selection process focuses on investing in the best-performing qualified funds that meet the objectives of the asset allocation process. Determining the best investment selection is based on both qualitative and quantitative analysis. All this made implementing my financial advice particularly onerous, and the requirement to stay abreast of these fund management options took a lot of my time away from my main role as an advisor: to provide good, independent financial planning advice to clients. To solve this problem, we have engaged with a DFM to assist us in advising on our clients’ investments. Our DFM is an established industry expert in the field of fund research and investments and offers a customised service which allowed us to implement our advice in the most efficient way possible. This benefits our clients directly and provides an additional level of comfort with respect to the quality and suitability of our investment options. To this end, together with our DFM, we have developed a customised range of “model portfolios” that represent the best investment view and the most appropriate way to implement our financial planning advice. These portfolios target a range of client outcomes and are reviewed and managed on an ongoing basis by the DFM and us at Emphasis Wealth Advisory. The portfolios consist of a range of leading funds which collectively deliver our investment solutions. This is based on the DFM’s extensive and independent research process and portfolio construction expertise, which is matched with our investment philosophy and compatible with our investment processes. Dez Tswaile, Founder and Managing Director, Emphasis Wealth Advisory www.bluechipdigital.co.za 47
