RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – our weekly podcast where I speak to leading financial advisors. My guest today is Martin de Kock of the Pretoria-based group, Ascor Independent Wealth Managers – a firm that offers a range of accounting and wealth management services. Martin has been in the industry for two decades, he is a chartered accountant and a certified financial planner. Martin, welcome to the show.
You have been in the industry for a long time, how does the current environment for financial advice compare with what you encountered when you first started your career?
MARTIN DE KOCK: I think there’s been a big mark in terms of investors being more educated because of information being more freely available. The effect of the information being more freely available is you often find that investors tend to react to short-term noise in the market, short-term fluctuations in either markets or currencies and so forth. So because of these short-term movements up and down you find that investors very often make an incorrect decision, [putting] long-term goals at risk by taking decisions based on short-term fluctuations in the market.
RYK VAN NIEKERK: So how would that work in practice? Your phone would ring, you have a client who says, ‘listen, I believe there is a lot of danger on the horizon, please move my assets from equities to cash’. I would imagine that’s a typical conversation. How do you react to that?
MARTIN DE KOCK: Yes that is a typical question we do get and I think what’s very important is to at that point in time take the investor or client back to the initial consultation, where the approach was explained to him and the reasons for moving into a certain strategy was discussed with the client, because clients very often tend to have amnesia when it comes to short-term decisions, and also try to convince the client to actually stick to a strategy and a plan. Because for me, as an advisor, when I get the question move to cash out of equities, I always explain to the client that I need to get two decisions right: firstly when do I move out of the market, secondly when do I move back into the market.
The problem with that is there’s been extensive research done in the market and I’ve just recently seen a report generated by Glacier from Sanlam, where they have taken the market over the last 20 years and taken an initial investment amount that was just invested, stayed in the market, and then they took the ten best days in the market and took that out, then took the 20 best days and so on. I think if you just missed the ten best days in the last 20 years the effect on the outcome after 20 years was almost half of your growth that you would have lost. For that reason I am not prepared to take that risk because it’s like looking into a crystal ball and we are not prophets.
Tweaking a long-term plan
RYK VAN NIEKERK: No, obviously that’s a strategy of sitting on your hands, but if you have a long-term plan sometimes you need to tweak it. How and when do you decide this strategy is not working, let’s try something else?
MARTIN DE KOCK: I think what’s very important is to do your homework in terms of your research in which are the underlying funds that you select for the client. We do review the underlying funds on a regular basis and see if there are any substantial changes. Typically we refer to the fund manager as the jockey or the person driving the behaviour and the decisions; if there’s a change in an underlying fund manager, that would be a reason for reevaluating that fund. You do find that different funds move differently because of the different investment strategies – move differently in different market cycles – and that is one of the reasons we use different funds in a portfolio, so that you have diversification of investment approaches. So we would reconsider on a regular basis to ascertain whether it was still right having the underlying fund in a portfolio but, again, it’s not worth taking out a fund manager just because he’s underperformed on a one-year period.
Just thinking of long term, you are looking at five, six years plus and to take out a fund manager based on a three-month or six-month or year bad results could be very dangerous. There I’m thinking specifically of – just to mention a few names – like a Foord Balanced Fund or an Allan Gray Balanced Fund … they are both good funds but there are times when they underperform and you could just at the time of underperformance take them out of a fund and that underperformance is followed by a period of good performance, which you then miss out on.
RYK VAN NIEKERK: But it should be difficult to take those decisions whilst there is so much short-term noise in the market. How do you detach such an amendment or a change in a portfolio without also taking into account short-term changes, because if you take the trajectory of expectations under President Zuma, I would assume slightly lower than many people expect at the moment that things will go better in South Africa under the new president, Cyril Ramaphosa. How do you take that into account when you amend a portfolio?
MARTIN DE KOCK: It’s difficult, it’s not easy but I think what needs to be taken into account is the damage over the past decade has been so severe that it is going to take time for the economy to recover substantially. Not just looking at South Africa, if you look worldwide the expectation going forward is that we are in a market of sideways movement and, again, you don’t know when the market is going to start recovering and you might miss a blimp up 3% or 4% move on a day and that could have a major effect.
I think what one needs to take into account is when we look at an investment strategy, our time horizon is extremely important. So you would find that over the short term, say two to three years, you’d be looking at conservative funds in a portfolio. Your medium term, three to five years, you’d incorporate funds that are moderately positioned in terms of exposure to equities of, say, 40% to 60%. Then your aggressive, your long-term growth, would be aggressive funds looking at from 60% plus in equities. So your time horizon has a big impact on the underlying funds you select.
Then also what we do in our approach is we use an asset-matching liability, where we look at what the client’s expected returns or income is that they need to survive on and we look at their asset portfolio and we see what risk needs to be taken to generate that income. Then also in addition to that we use the bucket approach, where your different timeframes go into different underlying funds.
So, for instance, your first 18 months’ income requirement is in a money market [fund], which is not exposed to the market. From an emotional point of view that helps the client a lot when I can explain to them don’t worry, the markets are up and down but your money that you are drawing on a monthly basis is coming out of a money market [fund], which is not exposed to the market.
The importance of a skilled planner
RYK VAN NIEKERK: How much does skill influence that amount of money that the investor receives at the end of the day? Because if you manage a client’s money since that person starts to work and for 30, 40 years contributes to a fund, obviously you hold a key to the comfort that individual will have at retirement. It’s a big responsibility, how much does skill have to do with [the client] driving a Golf or a Merc?
MARTIN DE KOCK: I think skill is definitely an important aspect of that. What research has also shown is that sticking to a strategy gives you lots of upside, whereas switching in between different strategies could mean permanent loss of capital. This is also a perception in the market where you find advisors who want to be perceived as actively managing a portfolio and because of the perception, they want to be changing underlying portfolios and strategies, and very often at the bequest of the investor.
We disagree with that approach because if you’ve got a fundamental, sound approach then over time you’re going to get the growth you need. Over the short term there might be pain but then again it’s just managing client emotions to not take the wrong decisions. I think Warren Buffett is a good proponent of sitting on your hands when the markets are up and down.
RYK VAN NIEKERK: His big motto, rule number one, is don’t lose money, which is not always that easy to achieve. Martin, I am looking at your website and the first line is really interesting, it says ‘Ascor is an independent, fee-based wealth management group’. Two words stand out, ‘independent’ and ‘fee-based’. Why is it so important to be independent? What are the advantages over non-independent advisors?
MARTIN DE KOCK: If I just look at the last ten, 20 clients who I’ve seen recently, almost without exception one of the first statements the client makes is they approached us because we’re independent. So we don’t have any targets to chase down to keep a contract in place with an investment platform or an insurer. So being independent we don’t have that pressure and we can look for the product that suits the client’s needs the most.
So being independent, I feel, going forward is a big plus and also with the new RDR (Retail Distribution Review) legislation coming in it’s going to become more of an issue for clients and, as we mentioned earlier, with the clients being more aware of financial issues they are starting to cotton on to the need or requirement to use an independent advisor.
RYK VAN NIEKERK: Why do you refer to a fee-based group? I know fees are always contentious and normally clients are more informed about the fees you charge than the returns that they can expect or hope for. Why fee-based in the first line on your website?
MARTIN DE KOCK: I just think that there is a perception amongst advisors that clients are not prepared to pay fees and our experience is that if you position [it] as to why you are charging the fee and what the client is paying for, most clients are happy to pay. I always explain it this way, when I do a financial plan: I distinguish between setting up the plan and the implementation and monitoring or continuous maintenance of the plan.
So by charging a fee upfront for the plan I, as an advisor, am paid for my work in drafting that plan. That plan can be taken and implemented elsewhere but usually clients ask us to do the implementation as well. I always explain that if I’m paid for the time that I’m putting in to develop that plan there is zero pressure on me to actually write a product. Because of that I think the market is structured in such a way that in terms of where you’ve got commission only, it’s not conducive to ongoing maintenance of the plan for a client because there’s not always incentive for the advisor, especially when you are looking at risk products. With risk products you get maybe a first-year commission and a second-year commission, and after that just premium increases, so there’s no incentive for the client to be continually serviced by the advisor because there’s no flow of income going there.
RYK VAN NIEKERK: So that’s a fixed fee for you to draw up a plan?
MARTIN DE KOCK: Correct and the fixed fee is based on the complexity of the plan, so the more complex a plan is, the higher the fee will be and then also in our practice we’ve got different levels of advisors, where we’ve got from junior up to senior and on those different levels of advice we have a different fee structure, so it’s up to the client. Then what we also do is we have a look at the profile of the client; we tend to find that younger clients converse easier with the younger advisors, although it’s not always the case but we do find that.
Financial planning fees
RYK VAN NIEKERK: How much is the fee, say a normal 30-year-old starting a family, a salaried individual, contributing 15% towards an RA (retirement annuity) looking, looking for a plan. How much would that typically be?
MARTIN DE KOCK: Typically that would be somewhere between R5 000 and R7 500, just give or take. Again, a typical plan like that would probably be done by one of our more junior planners. If it’s a more complex plan – where there are trusts and company structures and there’s a will and testament involved – that will be done by a more senior planner and then that can go up to R30 000 or R40 000 depending on the extent of the research that needs to be done to actually prepare the plan.
RYK VAN NIEKERK: Just lastly, you did state that younger clients typically prefer a younger advisor. I believe that grey hairs do play a role, not only because I have a few but luckily I am not in that industry. Obviously you talk in Ascor between the different advisors. Does the fact that you meet with a younger advisor differentiate your plan in the end or is it a pretty much homogenous approach of the whole group?
MARTIN DE KOCK: It’s important to us because also in terms of our strategy in how we allocate clients to the underlying planners it does happen that a client might fall outside the ambit of who your client base is and we do not want that if you move to another advisor within the practice the nature of the service you get and the advice changes, so the process that we use throughout the practice is the same process.
So you’ll find that you have nuances of approaches by – and this is more softer skills, not necessarily the technical detail – but the technical stuff is usually the same, but it’s just from advisor to advisor you’ll have more of the soft skills changing.
RYK VAN NIEKERK: Thank you, Martin. That was Martin de Kock of the Pretoria-based group, Ascor Independent Wealth Managers, a firm that offers a range of accounting and wealth management services.