RYK VAN NIEKERK: Welcome to this Financial Advisor podcast, in this series I speak to South Africa’s leading financial advisors and my guest today is John Harman, he is from the Rosebank Wealth Group. John, welcome to the show, we live in interesting times, has your phone been ringing off the hook from clients asking what they should do with their money?
JOHN HARMAN: Thanks, Ryk. Thankfully not, I think most of our clients were ringing in December when Nene-gate happened, this almost seems like a repeat of some sort, so our clients are relatively well trained, we like to think. We have a long-term plan in mind and short-term noise like this is something we try to avoid, even though it’s quite difficult at the moment.
RYK VAN NIEKERK: But short-term noise is an interesting thing, people can get very nervous when it comes to their money, obviously it’s very important for an advisor to communicate with a client, how do you communicate and do you try to be positive?
JOHN HARMAN: Ja, I think we as a firm are quite optimistic about South Africa, I think we don’t have to do too many things to improve this country immeasurably, it’s easier said than done obviously. One or two panicked in December, which is a very natural reaction, looking back at it now we can see it was a storm in a teacup almost. But I think it’s very important to have a long-term goal, to meet with your clients regularly, two or three times a year at least, face to face. If something happens, as we are seeing now with Treasury and government, just send out a communication, pick up the phone to some clients that you know might be thinking about taking money offshore or doing something like that and just reassure them if you can. No one knows what’s going to happen but generally, looking back in hindsight, these are the worst times to make decisions.
RYK VAN NIEKERK: But do you try to be more conservative in your advice, are you maybe advising clients to move money to cash and bonds?
JOHN HARMAN: Our advice generally is conservative, I would say.
Our philosophy is first and foremost don’t lose money. Generally our clients are lucky enough to have already made their money and our goal is to preserve capital, make sure that they earn some sort of decent inflation-beating return, we’re not trying to shoot the lights out.
So generally our portfolios are quite conservatively positioned already. So these things obviously rock the boat but we’re not out there swinging for the fences, so we generally have all sorts of investments, cash, alternatives that can make money on the downside, things like that in place for times exactly like this.
RYK VAN NIEKERK: You focus predominantly on high net worth individuals, not a person like myself, who earns a salary and I put away my 15% in an RA, does the investment approach need to be different for a normal salaried individual, as opposed to a high net worth individual?
JOHN HARMAN: I wouldn’t say materially different, obviously for your average man in the street they are looking to make a decent return over time, so that one day when they get to retirement they have something to support them. Whereas a high net worth individual their goals might be slightly longer in nature, generally they have more than enough money to live on, their goal is to preserve capital, make sure there is some sort of legacy for their children, for their spouse. So it’s slightly different but I would say it’s not materially different for the average man in the street and those fortunate to have more money than they actually need.
RYK VAN NIEKERK: Rosebank Wealth Group is a small player, I don’t think it’s that well known and it’s a family-owned advisory firm, is there still space in the market to compete against the big guys in the advice business?
JOHN HARMAN: I think so, there are obviously some much bigger names than us, the big banks obviously are always well known but some clients prefer a smaller, personal touch. We only have around 80 to 90 clients, so we know them particularly well, some of our clients have been with us for 25 years, so it’s a small, niche, boutique kind of firm and I think there’s always going to be some kind of role for a firm like that.
RYK VAN NIEKERK: What do you do differently as opposed to a firm like Citadel?
JOHN HARMAN: I think we focus slightly more on the individual, there’s longevity in our staff, most of our staff have been with us for five, six, seven years at least, so you’re not constantly getting a new private banker or a new person dealing with you but it basically comes down to relationships I think. A successful firm like Citadel or a firm like ours, some clients are going to prefer dealing with you as a person than others.
RYK VAN NIEKERK: I’ve spoken to a lot of financial advisors and you did the theory quite well, you’re obviously a CFP but you also did several other commerce-related and finance-related degrees, do you think a theoretical financial education is the biggest differentiating factor when it comes to advisors, opposed to people who only have a CFP and not the BCom or a master’s degree in finance?
JOHN HARMAN: Not necessarily, I think it helps, most people who have gotten a CFP via other means have 20 years’ experience, so you can’t buy that but in my mind you can never have enough education, particularly if it’s something that you are going to be relying on on a day-to-day basis. You are constantly learning, no one knows everything, even with a CFP you are doing continuous development points, you need to do a certain amount every year, so you are constantly learning, laws change, things change, so it’s never a bad thing. Just because you don’t have it isn’t necessarily a bad thing either. But I think in an industry that needs to professionalise more, which financial services, and financial planning in particular, has to, a CFP is almost the starting point for someone entering the industry I would say.
RYK VAN NIEKERK: Elaborate a little bit on the professionalising of the industry, what are your views there?
JOHN HARMAN: I think the industry, rightly or wrongly, has a tainted reputation historically. Your average financial advisor or planner was more a salesman than a planner and I think there is new legislation coming down the line, RDR and things like that, which will help the industry but really the professionals in the industry need to up their game and it’s not just about selling products, it’s about providing real, decent financial advice.
RYK VAN NIEKERK: One of the most frequent phone calls we get here at Moneyweb is somebody phoning in to ask where can I find a good financial advisor. We’ve got many listed advisors on the website but it’s the good word in that sentence that seems to be the problem. What do you think embodies a good financial advisor?
JOHN HARMAN: I suppose it’s a very subjective word but I suppose the place to start would be the FPI, the Financial Planning Institute’s website, they have a list of all their accredited members, most of whom have an up to date. That’s probably a good place to start. The Moneyweb Click an Advisor feature on your website is probably also a decent place to look. Then I think it’s important, many people, lawyers and doctors get referrals from people they trust and I think that’s an important point in this industry as well.
RYK VAN NIEKERK: In any business I think word of mouth is the key. The new regulations that will come in it will change the fee structures for many advisors, how will that impact you?
JOHN HARMAN: I don’t think it will affect us materially at all. All our fees are disclosed to our clients up front and at every single meeting we have, they know exactly what we are earning. We earn an advice fee only, it’s structured in a couple of ways, generally it’s either an assets under management fee or it’s a monthly retainer, so our clients are very aware of what they are paying us. But I think, much like lawyer, people are happy to pay for advice that they feel is improving their life.
RYK VAN NIEKERK: What is your percentage fee and your retainer fee?
JOHN HARMAN: It varies on a client-by-client basis, the highest it goes is 0.75% per year and it obviously decreases on a client-by-client basis.
RYK VAN NIEKERK: Ja, 0.75% is actually quite low in comparison to some other asset managers and advisors. Sometimes you get prospective clients who do more research in the costs of an advisor than actually the historical performance, are fees a big discussion point when you engage clients?
JOHN HARMAN: I think so, particularly with new clients and rightly so.
I think anyone who doesn’t know what they are being charged is probably being charged too much. So it is an important point but it’s also not the only point and we would like to think that no one is going to make excess returns year in and year out.
I for one don’t think that a financial advisor’s role is to make excessive returns, it’s planning, it’s structuring, it’s minimising tax wherever possible, it’s holding clients hands sometimes through traumatic experiences, through a death, through a divorce. At the end of the day I think you get what you pay for.
RYK VAN NIEKERK: You’re a totally independent advisory group and that’s the big advantage obviously, you can cherry-pick the funds you want to invest in. What fund managers do you like and into whose investment philosophies do you buy into?
JOHN HARMAN: Like, I said earlier, we believe in preserving money, so we’ve used a lot of alternatives in the past, particularly hedge funds. So we are very excited that hedge funds are finally being regulated in this country. So we’ve used a lot of the hedge fund managers in our client portfolio, some of them you might be quite familiar with, 36ONE, Laurium and then we use a few others, Bateleur are a firm based in Cape Town that we rate highly, Frederick Capital, Nitrogen, who are just up the road here in Illovo. I think we see hedge funds in this country almost as an alternative of asset class, not just as a something to invest with equities but almost as a standalone, so we are quite excited that that process is well underway and in the next few years I think those names will become more well known in the industry.
RYK VAN NIEKERK: The retail side of hedge fund investing is actually very small and there are not that many regulations governing that industry. You must be one of the more progressive advisors to actually look at those investments.
JOHN HARMAN: Ja, I think in the past the hedge fund manager himself has always been regulated and their business has always been regulated but the funds, which was a bit of an anomaly, was never regulated. So you had to do your own homework. We outsource our DD work and our investment management work to an external third party that specialises in hedge funds, so it’s not like we are doing all the manager research ourselves. But I think it’s worked well for our clients in the past and it’s not like we only use hedge funds, we use them as another arrow in our quiver, so to speak.
RYK VAN NIEKERK: How has that impacted on the performance of your investments, especially in this recent volatile period we’ve seen?
JOHN HARMAN: The returns have been a lot more stable I think, if we just used long-only funds. Last year the hedge fund industry in South Africa as a whole had an excellent year, the market was up 5%, if memory serves correctly, and the average long-short hedge fund was up by 15% to 20%. This year the hedge funds, along with most other long-only managers, have struggled but it’s a relatively long-term game, we don’t try to judge over six to 12 months and over the last five or six years we have been very happy with what the hedge fund managers in this country have done.
RYK VAN NIEKERK: Is there a pushback from some of your clients against a hedge fund strategy?
JOHN HARMAN: There’s obviously some reticence, definitely there was a bit more reticence when it was an unregulated product but I think over time they have seen the role that they can play. Again, we don’t solely invest in hedge funds, so it’s quite easy to see a hedge fund’s performance, versus a long-only fund, for instance, and you can see how over time they have complemented each other quite nicely.
RYK VAN NIEKERK: Local versus international investments?
JOHN HARMAN: A lot of our clients have more than 50% of their wealth offshore. It was a very conscious decision that thankfully we made a good few years ago, so we were taking money out when the rand was at R7, R8/dollar, so obviously in hindsight when you look in rand terms that’s a job well done. But I think despite South Africa’s political problems you can’t have South African-only assets, this is a very small country, the GDP to the rest of the world is tiny, you have to diversify your assets, regardless of what’s going on in this country. The global environment and the global markets are much bigger and a lot more difficult to figure out than the South African market.
RYK VAN NIEKERK: Where do we invest internationally? Do you do your own research or which funds do you prefer?
JOHN HARMAN: Again, offshore we have used some alternatives, so different names to Orbis and Investec that many people would recognise, we’ve set up an offshore structure for some of our clients where necessary but, again, we outsource the investment management to an external third party that we’ve appointed.
RYK VAN NIEKERK: What do you think currently is the biggest risk to investors in South Africa?
JOHN HARMAN: The political risk is obviously first and foremost, it’s a difficult one to deal with I think. I think the recession or the recession that was narrowly avoided technically on Tuesday but along with the recession risks, downgrade risks obviously just weigh on people’s minds. So when there’s no growth in the economy it’s quite difficult to see where growth and investments are going to come. I think around the world you can see how quantitative easing and negative interest rates are distorting financial markets, people are chasing yields, hot money is flowing into all sorts of things around the world, where it probably shouldn’t be.
RYK VAN NIEKERK: Thank you, John. That was John Harman, he’s a financial advisor at the Rosebank Wealth Group.