RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – our weekly podcast series where I speak to leading South African financial advisors. My guest today is Igor Rodionov: he is the MD and founder of Advicement Investment Services.
It’s a new business – it only started operating in June this year and it offers a lot of interesting robo-type services, quite a new concept in South Africa. Igor was a quantitative analyst, he studied actuarial science; he’s also a lecturer at Wits on financial markets and numerical methods in finance. Igor, welcome to the Moneyweb studio.
Tell us what your business is all about and how is it reshaping the financial advice industry in the country?
IGOR RODIONOV: Thank you very much for having me. Advicement started two years ago when I was visiting New York and doing a workshop there in quantitative finance. There was a lot of talk about robo-advisors and building tools for the man on the street to understand their investments and I thought to bring this concept to South Africa.
So the idea behind advicement is to help the man on the street to understand their investments. We’ve built some online tools that you can try out before registering on our website, which is www.advicement.co.za and the way it works is that we try to understand your financial goal, we try to understand why you are trying to save, how much you want to contribute and how much you want to achieve with that financial goal. Then we show you an investment dashboard that shows you a whole lot of analysis: looking at historical data, we estimate historical returns, so what would have happened if you started saving earlier; we also look at projected analysis; we look at different case scenarios and then we show that if you change your contribution amount this is the impact on your portfolio.
So essentially what we are trying to do is to assist the man on the street to understand their investments and help them with their financial goals.
RYK VAN NIEKERK: I have a perception that, especially in South Africa, robo-advisors are seen as a second opinion to the advice of an actual advisor. How many people do you actually see coming to your platform and investing, as opposed to just using it to play around?
IGOR RODIONOV: We only launched in June, so it takes a bit of time to build credibility and to get people using the platform. What we found is that we don’t want to lock people in, we want them to try the process out beforehand. So there’s a lot of usage in trying our investment process and trying to see what we offer, but the conversion rates have actually been quite impressive. The percentage of people who register and open an account is in the region of 10%, so we’re quite happy with that at the moment but we also want to build on that and create a few more tools on the website.
The reason we started Advicement is that we want to also play an educational role in South Africa. We like the passive approach, so our portfolios are ETF portfolios. We’ve seen exceptional growth overseas in passive investments, whereas in South Africa there are many ETFs coming out but the assets under management is not that high compared to active funds. It takes a bit of time but we are quite excited to be in this space, because I think this is where the world is going and I think in South Africa, people will realise the advantages of passive investments as well.
RYK VAN NIEKERK: We’re going to talk about the costs just now, but you offer discretionary investment solutions. There are no retirement products per se, so you are looking for people with a bit of cash in the back pocket or who want to contribute to a monthly-type of investment. What is the demographic of your typical client within this context? I would assume that younger people would be more comfortable to use this platform?
IGOR RODIONOV: As a company we partnered with a platform called Easy Equities and they do our administration work for us. At the moment we’re looking to provide our solution to their existing clients and also get new users signing up. What we’ve found so far is that, as you mentioned, the younger generation like to use this product.
The millennials are looking out for the convenience factor. They don’t necessarily want to have a lot of meetings with financial advisors; they want to be able to click away and play around with it.
So that’s primarily our target market: 20- to 30-year-old professionals who have started earning and understand the importance of saving and putting money away, and they also understand the fact that they need to find a low-cost, low-fee solution because, as your listeners know, that enhances your returns in the long run. So that’s what we’re seeing in the types of people who are using our platform.
How accurate are the projections?
RYK VAN NIEKERK: The platform is very easy to use. For example it asks what is your goal to save a certain amount by a certain date, then it asks a few questions regarding your risk appetite and then it gives you a projection: best case, worst case and a historical one.
How accurate are those projections? Sometimes you get the feeling, especially if you look at the historical insurance projections – in which you pay a certain amount every month and then you would get these millions, but when you actually get to that date it’s not millions – how do you make those projections?
IGOR RODIONOV: We use sophisticated quantitative models to make those projections and these models are primarily based on historical data and we also make some adjustments to them. So we are not guaranteeing any amount. We are trying to explain to the client that, depending on the risk level that you choose with us, you may have quite a big deviation between your best-case scenario and your worst-case scenario, but obviously if you are going a bit lower risk then those deviations get a lot smaller.
So in terms of accuracy, we do thousands and thousands of simulations going into the future, changing different economic variables and different market variables and then we just average those out. So I’d say that primarily to use these tools it helps with trying to understand the risk you are taking on and I think that’s very important when it comes to investment portfolios and it perhaps doesn’t always get explained well.
Selecting ETFs and asset classes
RYK VAN NIEKERK: You have five investment portfolios ranging from a conservative bundle – which you recommend – an investment term of less than two years, and then it works its way down to an aggressive bundle, which you suggest needs an investment of eight years-plus time horizon and all of those investments are in ETFs. Just take us through how you make these recommendations and how you select the ETFs that will go into these portfolios?
IGOR RODIONOV: We really, really like the passive approach to investing, which consists of ETFs, and we do a whole lot of analysis to construct these portfolios and also to monitor them on a regular basis, so we look at things like performance of the underlying ETFs; we look at the historical risk and try to associate what the risks are associated with different asset classes, diversification capability; and when you’re putting those ETFs together, we also look at tracking errors to benchmarks that the ETFs claim to track.
The other very important thing is liquidity – so if the ETF is liquid – and also the cost associated with different ETFs. Then we use various mathematical models to put the ETFs together so that they reach their risk objective and, behind the mathematical models, what we are really trying to achieve is to maximise the diversification benefits for our clients – so make sure that our clients are exposed to different asset classes and that if, for example, some asset class doesn’t perform well, there are other asset classes that can give some performance enhancements to our clients. So that’s our approach, it’s primarily a very quantitative approach and combined with passive investment methodology.
RYK VAN NIEKERK: So the value you add is just the asset allocation – so if you see certain events on the horizon like, for example, Brexit or the property market, then you adjust the asset allocation. What currently are you avoiding and which asset classes are you actually preferring at the moment?
IGOR RODIONOV: The other thing that we do when we put ETFs in portfolios is … because we have five ETFs and they are all very different degrees of risk, they also have various benchmarks and the benchmarks that we chose are average active funds in the different Asisa categories. So because they are multi-asset portfolios, we have chosen multi-asset low equity, medium equity, high equity and then the aggressive bundle tries to get a very similar return to the general equity category. And because of that approach, we can construct the portfolios so that they have quite low tracking errors – in other words they are very closely related to the average active fund in those categories. So it’s a very quantitative approach. We adjust them by looking at their different quantitative metrics, as opposed to trying to prevent events going into the future.
No hidden fees
RYK VAN NIEKERK: You then use the Easy Equities platform to go and buy these ETFs. What is the fee structure?
IGOR RODIONOV: Easy Equities is a retail online brokerage and it’s one of the cheapest accounts that you can have because you don’t have any opening fees and they only charge 25 basis points, which is 0.25%, for a brokerage, which is exceptionally competitive in the retail market. On the back of that we also charge 1% product fee, so for that 1% we construct the portfolio for you and we monitor it over time. We don’t charge any advice fees; there are no hidden fees; there are no initial fees. So it’s quite easy to understand our fee structure and we explain that on our website.
RYK VAN NIEKERK: You give a comprehensive number of 1.65% as your fee structure and you compare it to a typical advisor who would charge up to 4% – that is a significant reduction. Obviously the fees are important, but do you think that there’s a perception amongst your target audience, the millennials, that can have such a long-term impact?
IGOR RODIONOV: Having launched in June we realised that our business depends on three things:
- I think it depends on the performance of our portfolios and I think through our models we are able to achieve that.
- The second thing is the convenience factor. I think the processes need to be really, really simple. You need to be able to use technology and Fica, and it must be very seamless.
- The third factor is the low fees … although at the moment it seems like people don’t always really understand the impact of fees, I think with time and as the passive approach becomes a little bit more popular, people realise that fees really impact your investment performance and because people invest over a long-term horizon the impact of fees becomes really, really significant.
That’s what we want to achieve with Advicement: to really concentrate on these three factors, the performance, convenience and be able to give the benefit of low fees to our clients.
RYK VAN NIEKERK: Are you considering adding a retirement product to your offering?
IGOR RODIONOV: Absolutely. We are in talks with Easy Equities to see if we can add some tools around retirement and also offer retirement annuities through our platform. That hopefully will come online within the next six months.
RYK VAN NIEKERK: Sanlam bought into Easy Equities recently – do you see any synergies there?
IGOR RODIONOV: Definitely. I think it’s really interesting that Sanlam has bought a third of the Easy Equities platform. I think what this lets Easy Equities do, is give them a bit of fire power to expand into different products, perhaps also offer more products on their platform – including unit trusts and retirement annuities.
Secondly, there’s also talk about going overseas and expanding the platform to other emerging markets, which is definitely quite exciting and also gives us opportunities to enter those emerging markets.
RYK VAN NIEKERK: Igor, thank you for coming in and good luck with your ventures. We’ll get you back into the studio in a while and get an update and see how things are developing.
IGOR RODIONOV: Thank you so much for the opportunity.
RYK VAN NIEKERK: That was Igor Rodionov, he is the MD and founder of Advicement Investment Services.