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Listen: My investment philosophy is to stick to the basic principles

We’re independent because we’ve managed to get those risk and administration costs down. The independence gives us the opportunity to play companies off against each other – Nikki Taylor

RYK VAN NIEKERK: Welcome to this first ever financial advisor podcast. My name is Ryk van Niekerk and in this brand new series of podcasts I will be speaking to leading South African financial advisors and we will talk about the industry, their personal investment philosophies, how they deal with their clients and their views on fees and regulations. My guest today is Nikki Taylor, she heads up Taylored Financial Solutions in sunny Ballito in KwaZulu Natal. Nikki, welcome to the show, tell us a bit about Taylored Financial Solutions.

NIKKI TAYLOR: Thank you so much for having me. We are Ballito based and our core business is helping employers to give their staff pension or provident fund benefits, so we look at business sizes anywhere from 20 people up and we help them implement benefits to their staff and if they do already have benefits then we try and see where we can improve on what they’ve already got.

RYK VAN NIEKERK: So you focus on businesses and you want to provide a range of retirement and other related services to them. How many businesses actually provide these services to their staff?

NIKKI TAYLOR: It’s become more and more popular, so if you work for a big corporate, it’s sort of a given that you got benefits, that you walk in and there’s a pension fund in place. Small businesses traditionally have thought that it’s too expensive for them to do benefits to their staff or that it’s just not feasible for them, but in the last five years, there’ve been such dramatic moves in the industry that some of the big insurance companies have looked at SME’s and decided that this is the demographic that they want to focus on. So it’s become fairly inexpensive and then I’m looking at life and disability and funeral benefits for staff at 1.5% of payroll for small businesses. That’s really good whereas five years ago that used to cost 4%, 5%, 6% of payroll. So the costs have come down quite dramatically and that means it’s feasible for an employer to put a pension fund in place for 6% or 8% of its payroll.

RYK VAN NIEKERK: What is this structure of such an arrangement? Where do you, as the advisor fit in?

NIKKI TAYLOR: Very often employers don’t even know where to start. So when we go and see them we say, look, what is the demographic of your staff? Is it a retail store, is it a factory, is it a farm? And looking at the size of the payroll we will make recommendations and we will say, if you’ve got forty five staff members and your payroll is X, we think that you should give them at least a year’s worth of salary in the event of death or disability. You can throw in a funeral benefit and you can have a 4% or 5% going towards retirement, so that you’ve got something in place. If something happens to that staff member, very often in this economic climate they’re the sole provider for the entire family and the entire family could go into the business and say, this is the sole income provider, he worked for you for five years, what do we get now that he’s passed away.

So employers actually are quite receptive. I’ve only been in business two years, and we’ve already got 15 SMEs, some of them national, and we’re getting phone calls all the time to say we are interested, can we have a look? And it is something you can integrate into your annual increases, if you give increases to your staff annually, say, this year we want to be able to give you benefits over and above your salary increase, so a percentage of your increase is going to go towards providing benefits for you and your family. So it’s actually going really well received which is so heart-warming.

RYK VAN NIEKERK: You’re quite clear on your website that you are independent and product agnostic. Do you think it’s a big advantage to be totally independent or are there some asset managers you actually prefer?

NIKKI TAYLOR: Yes, on the investment side we do have asset managers that we actually prefer but from a risk costing perspective, it’s hugely important to be independent, so we play the insurance companies off like divorced parents. We go, if you’re wanting the scheme and the X company is offering the rate of 1.8%, you’re offering 2.3%, if you budge on your risk rate, we’re prepared to give you the business. So you can’t do that if you’re a tied sales agent, you have to be independent and we’re so flexible now that we’re able to take the life cover from one company, the disability cover from another company and actually link the product specifically for our clients. So we couldn’t do it any other way, we have to stay independent.

RYK VAN NIEKERK: Are there some asset managers you prefer?

NIKKI TAYLOR: I love Coronation, I love Allan Gray, just because they’re just so professional, it’s so easy to do business with them and they’ve got a healthy track record and so I do prefer those two asset managers. We also use Sanlam Glacier because they’ve got an amazing research team, there’s a lot of research that goes into the buy list that they give us. Yes, so it just depends on the actual demographic of the client, if it’s a factory for example their needs are a lot simpler than if it’s just a firm of attorneys. So it really depends on the client.

RYK VAN NIEKERK: One of the most contentious topics in the industry is the one on fees. Take us through your fee structure.

NIKKI TAYLOR: So I have harped on a little bit about the risk costs and the administration costs that if an employer is putting a fund in place for its staff and it’s going to be doing 10% of payroll where the staff members pays 5% and he pays 5%, of his 5% it’s so important to make sure that those fees are as low as possible because if the fees are 3.5% to run that fund, then only 1.5% of his 5% is going into retirement funding for his employee. So that is why we’ve remained independent because we’ve managed to get those risk costs rates right down and administration costs right down and like I said the independence gives us the opportunity to play companies off against each other. We’re only interested in giving our client the best costed or lowest costed most affordable option that’s out there and available, so we’re very price competitive.

I’ve launched some schemes, some pension fund schemes for Spar Group at 6% of payroll which is where the employers actually got a percentage and just over a percent going towards retirement, which means that a risk cost of less than 2% and if you think of the demographic of a Spar, for example, they’re shop workers, they’re not massive earners, so those risk rates are really very good.

RYK VAN NIEKERK: You also provide judiciary and investment services for individuals. What is your investment philosophy?

NIKKI TAYLOR: Investment philosophy, I try and stick to really the basic principles of investing.

Very important is your time horizon, so that’s going to give us an indication of where we should be invested.

If clients are wanting to go in for 18 months or two years. I say to them, I actually think if you go to Investec, you’re going to get a great money market rate for tying your money in for 12 months or more and taking absolutely no risk.

So my investment philosophy is really based on their time horizon, how much they’ve got to invest, their tax bracket. Because if you’re on a really high tax bracket, losing 41% of your investment to tax obviously you need to look at a different investment vehicle or a different portfolio with someone that doesn’t really have a tax issue. So for me, I just stick to the basic principles, we need to diversify across asset classes, across geographically, across managers, time horizons are really important and then obviously what is your expected outcome or goal because I think investors have been so spoilt with the bull market that we’ve had for the last 10 years and going forward it’s going to be really difficult to get those kind of returns on a three and five year basis. So managing expectations going forward is going to be a big part of the conversation.

RYK VAN NIEKERK: What asset classes do you currently see is offering value?

NIKKI TAYLOR: The bonds this year have been amazing which I don’t know how much longer that wave is going to ride. Property, for years and years, they’ve been saying that bubble’s going to burst but property still seems to keep delivering double digit returns. I think for this year the big asset class winner is going to be cash because clients are taking absolutely no risk and they’re outperforming the equity markets. So lots of clients are very hesitant to actually move out of cash because they don’t want to take any risks, they don’t want to be stuck there for five years and they’re getting really great rates on cash and the expectation is that interest rates will go up, I think with the rand strengthening now interest rate increases might slow down or might even be capped going forward, but what I’m finding at the moment is that most clients are just wanting to stick in cash. Sure, the money market rates at the moment are good and equity markets aren’t expected to do a third of that, so I think this year definitely people are going to be hanging around in cash until they start seeing things getting better.

RYK VAN NIEKERK: The exchange rate of the rand is also another contentious topic. We recently saw the rand plummet close to R17 to the Dollar following the President’s dismissal of his finance minister. But subsequently the rand has strengthened. What is your view on the currency and what do you think investors should do? Should they take their money out? Should they not?

NIKKI TAYLOR: Look, if you’re going offshore, you’ve got to know that it’s a long game. You’re not going to go offshore for two years. So I actually think now may be a good time to go into pounds, because historically, I mean if you look at sort of the rand to the pound decline, over five years it’s been 11%, two years 8.5% but recently it’s against the pound, its strengthened. So offshore, the rand, if you think of back to in the 80’s and when I was kind of travelling, it’s not going to go back to those levels, but you need time. I can’t see the rand strengthening dramatically, the recent strengthening of the rand I think is a short term or a short story, I don’t think it’s a 3 year, 5 year, 15 year story, so I think it is good long term. You know it’s also only for high nick working investors, I mean it’s not for your average family. It’s for investors that already have max property exposure, they’ve utilised all their cash, liquidity holdings and they need to diversify.

RYK VAN NIEKERK: There are advisors who actively encourage their client to take as much money offshore as they can because the long term trend of the rand is so negative. Are you as aggressive in advising your clients to take money offshore?

NIKKI TAYLOR: Yes, I stick to the basic principles. I don’t say that they should take more than 20% of their portfolio offshore in their own money. The growth is quite sluggish offshore but to invest it locally, most of the asset managers are aggressively invested within their portfolio holdings, most of the fund managers are offshore invested anyway, but the returns are – I had a client offshore for the last 2 years and she made money in rand terms but the growth has been fairly slow, it hasn’t been – and I’m using a stockbroker for her offshore. So the returns haven’t been amazing but she’s made money in rand terms just to cover the exchange. I wouldn’t say, unless you plan on emigrating, take as much money off, but it should be a percentage of your portfolio, you should diversify, you should be getting growth offshore.

RYK VAN NIEKERK: Just talk about clients and the biggest problem for many advisors is the volatility in the market and you need to calm down nerves when there is a sharp downturn or a weakening in the rand. How do you calm the nerves of your clients?

NIKKI TAYLOR: I keep reminding them of those investment principles that we haven’t gone in for a year or two years so the ideal is mostly with pension or provident funds particularly if you go in for long-term investments and there’s all this noise around the Brexit and then it bounced back within a matter of a month or two when some of the markets had recovered. So the noise typically is from traders and people that are hedging and short-term traders, the noise in the market is not – if you’re in for five years or more, and there are always going to be little dips in the market, so all the way through history there have been little noises. But the market has always recovered and it’s recovered in less than 18 months and so if the clients want to go out we don’t go in for 18 months because I don’t deal with money, that going in for less than two years. We’re going into the longer-term and over the longer-term you are going to outperform cash and you are going to outperform just sitting on your money. It’s worth being invested because sitting on cash and not being invested if you’re going to be in it for the long-term you’re just going to pay tax so on a net basis you’re not going to be beating inflation and you going to miss the bounce when the market does recover. You’re going to get in too late and you’re going to miss all that growth. So if you’re a long-term investor you are still going to make your money and that’s been proven over a five-year running period for the last 100 years.

RYK VAN NIEKERK: How often do you speak to your clients and what is the typical tone in a volatile period?

NIKKI TAYLOR: Every time there’s a big headline and the markets have taken a dip clients do want to have that discussion and revisit their portfolios. But those are for the clients that have a shorter time horizon, so starting to save too late. For clients that have started earlier and still have 10 – 15 years, I don’t get those phone calls but its clients who have too little money too late and as a shorter time horizon that now start to panic because they don’t think that they can ride out the market slumps.

So like I said because I focus predominantly on longer-term investments I don’t really have a lot of panic phone calls. It’s really those clients who are already in their 60s and have only got five or so years to go and they’re concerned about, should they rush into cash or should they try and ride this one out. And like I said historically, and we’ve had a lot of market dips in the last 100 years, the 2008 financial crisis and in all of those dips the market has always rebounded in less than two years and come back and with Brexit it never happened but neither did the financial crisis, neither did the IT bubble, neither did the great depression. All of those things were unexpected, so the market never saw them coming and it still rebounded, it still bounced back, and it didn’t take 10 years, it only took less than 18 months.

RYK VAN NIEKERK: Where do you stand on the active versus passive debate?

NIKKI TAYLOR: I believe you need a mix of both. The active managers will say you’ll always get 1% less than what the market is doing because of the charge and you’ll never outperform an active manager. But active managers are expensive and there’s such a small percentage of them that outperform the market anyway. So if you mix the two together you’re getting a reduced costing and then you’re getting the advantage of growth in that active managers kind of outperforming whatever the tracker fund is doing. So I think a mix of both makes the most sense.

RYK VAN NIEKERK: What split would you recommend?

NIKKI TAYLOR: Recommendation on splits, again it depends on the client. So if it’s just a client that asks what do you think, I have no idea, I’d say well let’s look at a 50-50 split because then you’ve got the active managers who might bring up the costing a little bit. They’ve got proven track records and over three or five years they’ve outperformed the markets by 1% or 2% or 3% and then you’ve got the tracker fund that’s going to bring the costing down. And in this market Coronation about three months ago published their 10-year outlook in very single asset class and its dramatically different to the past 10 years. So even really very good active managers aren’t going to be able to get the returns their clients have been used to in the past, so we are having to cut those costs and if you’re only paying the asset manager 1.7% it’s still going to get between 8% and 12% as a return. We’d rather try and cut your costing down.

RYK VAN NIEKERK: What is your view of Robo Advisors, are they a threat to the industry or do they serve a good purpose?

NIKKI TAYLOR: The younger generation may interact more with a faceless entity but people my age and up they want to see somebody in front of them. I’m not particularly feeling threatened by Robo Advisors. My demographic is older anyway but maybe someone coming into the industry who is 20 years younger might feel a bit threatened.

RYK VAN NIEKERK: Thank you Nikki. That was Nikki Taylor of Taylored Financial Solutions in Ballito, in KwaZulu Natal.

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