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We have to plan for the worst-case scenario

Every investment kind of works the same but it’s the discipline to stick to it that’s going to get you to the end: Vick Lallbahadur, financial advisor – Masthead Financial Planning.

WARREN THOMPSON: Welcome to the Click an Advisor podcast. I have the pleasure of welcoming Vick Lallbahadur to join me: he is from Masthead Financial Planning. Good to have you with us, Vick.

VICK LALLBAHADUR: Thank you for having me here, Warren.

WARREN THOMPSON: The idea of the Click-an-Advisor podcast is to get our audience to understand a little bit about the financial planners that we profile and the way that they go about their profession. Specifically what we like to do is just start off with a little bit about your personal journey and understanding why you chose to become a financial advisor. You mentioned before we started that you had been involved in financial planning for about four years and you are in the process of getting your chartered financial planning accreditation. Tell us a little bit about why you chose to become a financial planner.

VICK LALLBAHADUR: I got introduced to financial planning by my advisor actually. When I was in high school my parents used to give me an allowance every month and I didn’t know what to do with it – we kept spending it on eating out and all kinds of things, typical teenage stuff. Then my father said maybe you should save some money because he wasn’t going to buy my first car and maybe I should buy it myself. So I got worried about that and I looked into investing online and looking at things like unit trusts, and I came across one of my old friends who became a financial advisor… he introduced me to his senior financial planner with their company.

When I spoke to him he told me all about investing… the dos and don’ts, and I became very interested in his job, because he’s actually in finance and business consulting. … he told me about what he does on an average day, in an average month, how the whole industry works and it became quite a mind-click because that’s where I wanted to be, I just didn’t know how to get there. So I started investing at the time but I always had that inkling that I should maybe get into it and see what it’s about.

It wasn’t my first job, though. My first job was in property – I was a leasing consultant. But even there it overlapped with the finance industry as well because I worked for a big property company and they worked with listed property and listed property is also an asset class; they also have funds and people invest in those funds. So the whole thing started coming together and after a while in property I decided ‘let me just check this out, let me become an advisor. I like the feel of it, I like the change of scenery every day dealing with different people, maybe I should try it’. When I tried it for the first six months it was very difficult.

WARREN THOMPSON: Was that with Masthead?

VICK LALLBAHADUR: No that was with a franchise – a Liberty franchise at that time. The first six months was very difficult, but then once you get into it, it becomes very interesting and that’s the way it started for me.

WARREN THOMPSON: What’s the interest for you? Is it the financial markets themselves?

VICK LALLBAHADUR: It is the financial markets. I like the changes, I like the quick pace of the industry, I also like the grounded feel that you get because you’re not always dealing in high corporate. Yes, you do touch on that sometimes, but most of the work you do is with individuals and families and small companies and I like that – I like that personal touch that it gives you.

WARREN THOMPSON: When do you anticipate finishing your CFP?

VICK LALLBAHADUR: It will probably be 2019 when I’ll be done and dusted.

WARREN THOMPSON: … [of] the financial advisors that we talk to, [many] have quite personal interactions that led them to become financial advisors as you have described. Another question I like asking is what did your parents teach you or not teach you about money? It seems that your parents were very progressive in the fact that your father said you’re going to have to save up for your car on your own, but was enlightened enough to tell you to go and speak to a financial advisor. I certainly wasn’t aware of a financial advisor when I was 18 …

VICK LALLBAHADUR: My parents took a different approach, which was more like throw you in the sea and you must learn to swim. So my father would always give me heart attacks, like with the car. He said ‘I’m not buying a car for you, you must buy one yourself’ and that gave me a mini heart attack because I thought ‘what am I going to do without a car if I’m trying to apply for a job?’ Then that leads you to other things and I don’t know if that’s where he intended me to go, but that’s where it led me.

In terms of lessons that he taught me, he actually taught me a lot of things but he never taught me how hard it is to actually get money. Nobody ever tells you that. When you get paid your salary it’s very easy to spend, but you’ve got a long time before you get that salary again and you’ve got to make use of it very wisely and very effectively. I think we weren’t taught that because we always got that weekly allowance, whereas if it was monthly I would have had to stretch it much longer.

The things they did teach me though was to grow your money: so never park it in a place where it’s deteriorating. For example, parking it in your current account where it’s not earning interest – don’t do that because even if it’s very little interest, if you just earn R7 for example, it’s still something and your money has worked for you. I think they always taught us about that and I’ll always appreciate that fact because if I ever parked my money and it deteriorated it [would have meant] I am losing and you should never be on that road. If you want to grow your wealth you have to grow it somehow. I think that’s the main lesson he ever taught me.

 

Independent brokers versus agencies

WARREN THOMPSON: Your interaction with clients … tell us when you joined Masthead?

VICK LALLBAHADUR: I joined Masthead at the beginning of 2017. It was very new being in the broker space because we are independent, as opposed to coming from an agency, where I had come from, where they are tied to a certain brand, a certain FSP, a certain company.

WARREN THOMPSON: What’s the difference?

VICK LALLBAHADUR: The difference is, for example, if you are a tied agent you can only advise on products that are from that company, from that financial service provider (FSP). For example, an Old Mutual-tied agent will only advise on Old Mutual products. In the broker space we have contracts with different FSPs. So in my instance I can advise on Old Mutual, Discovery, Stanlib, Liberty, Sanlam, Momentum, so it’s a different perspective. You have to do a lot more work for each client – comparing different products and different benefits and which one suits the client more – but it’s also a lot more enlightening, because you get to match different things from different companies and actually create a unique portfolio for that client, so I think that’s very different.

 

Common investor mistakes

WARREN THOMPSON: Drawing on your experience of dealing with clients both at the agency and as a broker, have you seen any common mistakes or errors that challenges that investors make?

VICK LALLBAHADUR: Investors, yes, in short-term and long-term investments. There’s a lot of leaning towards ‘I am saving towards my holiday’ or ‘I am saving for a rainy day’ but the definition of that rainy day is blurred. I’ve had a lot of young clients who have the right intention, for example, ‘I am saving for unseen events, just so that I have some spare cash’ but as soon as there’s a new pair of shoes out or something like that then that’s the ‘rainy day’, so the definition gets blurred. Some people also like to save for the short term for a December holiday, but they end up going on holiday in July. When December comes they are now spending their salary and their extra savings to go on holiday and then in January they come back with nothing. Then it’s the whole process again. If you are trying to build a long-term investment portfolio, that eats into it and you never really get there, especially with the young people.

The older guys have been around. I think they have lost that money and they have felt that pain, and they do the longer-term investments but they also get very finicky and very panicky when an investment doesn’t do that well. For example, on a ten-year term if you are looking at six years of earning good interest, they will focus on the one year where it is not and they start panicking. They want to change portfolios and move investments, which is a bad idea most of the time because you are going to pay new fees, you’re going to pay new commissions, and you’re going to pay start-up fees all over again, which actually puts you one step backwards.

So I think the follow-through with what the plan is becomes difficult across the board with any client. You have to have a very dedicated client to the plan that you make as an advisor to get that person to where they want to be.

WARREN THOMPSON: So they have really got to believe in the plan?

VICK LALLBAHADUR: They’ve got to believe in the plan and stick to it as well. I know myself, I get distracted quite a lot. But if you have a long-term goal and a long-term plan and somewhere that you want to be in five, ten, 15 years , whatever it might be, even a 12-month goal, you’ve got to stick to it, because your advisor can only do half of the work – you have to come in as well. It’s a team effort, it’s not that the advisor is going to do everything for me and I’m going to be fantastic. So I think you kind of loose that lesson somewhere along the line and I try to teach it as much as I can with my clients. I’ve got some very good clients who are sticking to their plans and I’ve got some who I am still working with to get them there, but I think that discipline is key.

 

Client procedure

WARREN THOMPSON: What’s the process you follow when you meet a client for the first time and you’re asked to put together a proposal for them?

VICK LALLBAHADUR: I like to take a very personal approach, an informal approach in a way because I like talking to the client about where they want to be and why isn’t it working now – because most people do have policies and investments in place but they want to fix it. So I just need to understand why it’s not working as is, not from a product space but from just understanding the client – what family politics are there, are there any personal reasons why these things aren’t working out?

The product is important but sometimes the problem lies within the person themselves – like I said, the discipline. Every investment kind of works the same but it’s the discipline to stick to it that’d going to get you to the end. So I like to take that informal approach: just talk to the guy, see what he wants out of the policy, his investment or out of the whole planning regime in total – what does he want to take away from it and work on that. So the first meeting with a client that I usually do is just a conversation. I want to know where he’s from, I let him know where I am from and what we can do – obviously within the limitations of financial planning.

The second meeting is where it gets a bit formal and we go through paperwork and I try to explain to them the plan that I’ve brought forward and then I want their engagement because I think it’s very unfair, as an advisor, if you bring a plan to a client and you try to force it upon them, you say ‘this is the right thing and this is what you need’. You can’t ever do that because after your first appointment with the client, after your first meeting, they might have gone back and thought about different things and they might come back with a plan as well that you might learn something from. Maybe they haven’t been that open with you in the first meeting and at the [second] time they are more forthcoming. So you need to tailor these plans and they can’t be static: you’ve got to move with the lifestyle of the client. So that’s how it goes in the first two meetings.

The third meeting that I usually do is the conclusion – so this is the plan and I usually give them a sheet of paper detailing the plan and a timeline, which is more in graphic form. So they know after year one this is what you can expect, the pros and cons, year two the pros and cons, year three this is what you can expect and that goes up to year five, this is what’s expected from your investment, this is the worst case scenario and we always plan for the worst case scenario anyway. So it reassures the client that even if my investment does badly, or not as well as I expected, at least I have planned for the worst case. So they always sit comfortably and I need to keep that comfortability in the whole planning process because there needs to be transparency.

 

Keep your mind on the goal

WARREN THOMPSON: You said that the hardest part once the plan is in place is to keep the investor sticking to that plan. How do you keep a person committed to the plan?

VICK LALLBAHADUR: You keep them committed to the goal – that’s what you do. Last week I had a 22-year old from Wits and he wants to buy his first apartment. He’s moving to Cape Town, so his six-year goal after his degree is to buy that apartment. So we need a deposit for the apartment and transfer duty and so on, so we start saving now for that deposit and transfer duty and those costs. So he has the goal in mind, so when it comes to the newest PlayStation that’s going to come out sometime and he wants the money from his unit trusts and he’s going to come to me ask for the money, I will say ‘okay, I can’t stop you from having it, but remember the goal. Remember the apartment that you want to have in Cape Town. Are you going to sacrifice that for an immediate gratification situation or are we going to stick to the plan?’

So obviously I can’t stop a client but I can provide the options and maybe the different perspective they need to get them to that goal. So I think it becomes a lot of reminders, a lot of checking up with the client: ‘how far are you’, ‘do you know what’s going on?’ ‘do you still remember what we said and what we talked about?’ – those kinds of things. A reminder is very useful.

 

Insurance, wills

WARREN THOMPSON: So keep your mind on the goal, a very important lesson there. Typically when it comes to risk, you start talking about protecting the assets of the client. Are clients careful and wise to the way that they should use risk products to protect them? Are they generally underinsured? What do you suggest to different types of clients around using risk products in their portfolios?

VICK LALLBAHADUR: Most people are very underinsured but they overspend, from what I have experienced. A lot of people sign up for things over the phone and when you pull out their documents or you say just give me statements of everything you have, even to their own surprise they find maybe three or four funeral policies, they’ve got five or six life cover policies, maybe costing R300 or R400 each and they don’t know these things until you ask the question. So yes those are very small policies, but the expense is too much. So they are underinsured but they are overpaying.

The good thing is that you can consolidate all of them but you both have to know what’s going on first. I’ve had a lot of experiences where people overspend and they wonder why their budget isn’t working out; they wonder why these things are so expensive, where it just needs to be a unique plan, it needs to be tailored, not a one-size-fits-all situation. I think the client also needs to be reminded of what they have. It comes into that monthly communication that you have or the phone call or the birthday, whatever it might be. They need to just hear your voice and know where you are from, so that when the call comes in to reorganise or sell them a new policy or whatever it might be they remember what they have and they remember the goal, so they don’t overspend because they’re trying to keep to the goal.

WARREN THOMPSON: I read a statistic the other day that said that almost in single digits is the amount of South Africans with an up-to-date will. Is that another big challenge for you? Do you find that many people don’t have a will? Have they thought about it or not thought about it? What’s the attitude been, because it seems that we’re very poor in thinking about things that we want to take care of once we’ve passed away. What’s your experience been of that?

VICK LALLBAHADUR: I would say that probably 80% of my clients don’t have a will when I first meet them and that’s very simply because when you do a life cover application they ask you for beneficiaries: who would the money be paid out to, and the people seem to think that as long as they have that in place everything is going to be fine. So the money that gets paid out goes to beneficiaries and everything is sorted. Who’s going to take the house? Oh, my wife will take it but it’s not stated anywhere. What about the expenses that come with passing away – who’s going to pay that? What’s covered for that, who’s covering that, how much is it? These kinds of things people generally don’t think about.

I think a lot of people also have a will in mind but not on paper, so they know what’s going to happen or they think they know what’s going to happen, but once they pass away they are not around to ensure those things happen.

So I think putting it to paper becomes the problem and when you start putting it to paper it gets much more detailed and once you get much more detailed people realise what they haven’t thought about and that’s where you uncover a lot of gaps that need to be sorted out. So wills are very important but not a lot of people have done them correctly and that’s the problem – a will needs to be very detailed.

WARREN THOMPSON: I would imagine that most of your work is putting together investment proposals and investment savings plans for people largely for retirement savings, but obviously with your clientele you’ve got different ages and they have different needs at different points in time, as you mentioned: a house, a wedding, a car. What’s your preferred method? So you use the investment funds available in the brands that you’ve got certification for – is that the basis on which you would put together an investment plan for someone?

VICK LALLBAHADUR: That is the basis of how we do it, but we also look at the risk profile, the age of the client, how far they are in life. But, like I said, it’s more personal for me. … my preference is to go with lower-yielding investments, so maybe one or two points above CPI, the safe ones. For example, bonds and sometimes property as well, I tend to gravitate towards that. I also like guaranteed investments: they are costly, but it makes planning easier because if we know what the payout is going to be we can plan for how that money is going to be used and that just allays a lot of fears for the client as well.

But if someone comes to me and says ‘I want to be highly aggressive, I want 15% per annum, 20% per annum, give me 50% per annum’ or that kind of thing, I shy away because I need to show them perspective. I need to show them this is what the market is doing, this is what you can expect and with great risk also comes great loss sometimes – so they’ve got to keep that in mind. So I don’t shun a client, but I have to make them aware of where it might go and what the worst case scenario is. So planning, like what we do, is planning for worst-case scenario. We can’t plan the best case, because not all of us are that lucky to get there. So it depends on the client, but yes, we do work with a contract.

 

Investors with risk appetite

WARREN THOMPSON: When people say they have risk appetite and they want to put as much of their money into equities, for example, what has your experience been of the actual experience after that’s happened? Because we all want to take on risk when the markets are giving us 15% to 20% but how many of us still want to take on risk when the market has been flat like the JSE has been over the last few years or in 2009 where it’s fallen 40%? The natural inclination is to withdraw when things are going badly and enter when things are going very well. But financial markets don’t work like that; you need to be greedy when others are fearful and fearful when others are greedy. So when people say ‘I can take risk’, how many of your clients really understand what that means, because it’s very counterintuitive?

VICK LALLBAHADUR: It is very counterintuitive. I think not many understand what that actually means. I think they see a lot on TV and in the movies and they want to replicate that; they want to buy low and sell high, and it doesn’t really work out. Even if you go 100% into equities for whatever reason, one year down the line if that investment hasn’t done what the client expected it to do, he is panicking and he wants to now change and we know that’s a bad idea, and he seems to not want to go the whole nine yards with the investment anymore. So he’s going to keep losing every single time. Yes, there are the occasional winners who might just kill it for some reason, but the majority don’t.

That’s where planning comes in: we have to plan for the worst-case scenario. When we get a client asking for as much equity as possible, I always show them the best-case and the worst-case scenario. If they are willing to accept the worst-case scenario – losing 100% of their capital – and they still want to go ahead with the investment I have to assist, but at least I have done my due diligence and told them that this is what can happen and are you willing to accept that? So as much as it becomes a team effort, I have to show them both sides of it.

 

Offshore investing guidelines

WARREN THOMPSON: Lastly, currently the situation in South Africa is there’s a lot of political uncertainty. Some people are wondering whether they should even stay in the country, or whether they should keep their money in the country. Have you been seeing a lot of enquiries around [people asking if they] should be taking money offshore at this point and when people say they want to take money offshore, how much money should they take? Is it very individual or is there a rule of thumb that maybe half your wealth should be invested offshore? What do you tell people in the current environment with the challenges that they see?

VICK LALLBAHADUR: Currently a lot of people are aware of the political unrest – everybody knows about the government and other influencing factors and when they decide to take it offshore, from what I’ve seen, it’s a very risky practice, highly risky. Most of the offshore funds that I’ve seen are usually on your extreme-high-risk profile or just two notches below that, which is still massive risk to take on. The clients who I have done offshore for I usually go with nothing more than 20% – even that’s high – of whatever the value is. I did one last month where the guy invested offshore in offshore property and he hasn’t been doing well, even though projections said that he would, and he’s doing better locally than he was offshore. So I think it’s a bit of a toss-up. I think it’s nice to diversify your portfolio as well, but you’ve also got to take care as to how much that is.

When clients ask me to go offshore I obviously have to give them best-case and worst-case scenario, but they have to understand that there’s a lot more that goes into offshore investing: there are fluctuations, interest rates there and here as well, there are costs, as well as exchange rates. We might win, it can go much further but the thing is you have got to take care. We know how the market works in South Africa and, yes, it’s not the best – it’s not booming and people are not making huge amounts of money – but at least we can predict, to a certain extent, what can happen in future and I think that provides a lot of reassurance to clients.

WARREN THOMPSON: It’s been very interesting talking to you, Vick, thank you very much for your time.

VICK LALLBAHADUR: Thanks a lot, Warren.

WARREN THOMPSON: That was Vick Lallbahadur from Masthead Financial Planning.

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