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The ‘perfect storm’ for rand strength

The sentiment at dinner tables is positive but that hasn’t translated to investments; the markets and economy remain subdued – Stephen Katzenellenbogen, NFB.

RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – our weekly podcast where I speak to leading financial advisors. My guest today is Stephen Katzenellenbogen, he is an executive director at NFB Financial Services Group and has been in the industry for a long time, nearly 15 years. Stephen, welcome to the Moneyweb studio.

Last year we saw a really negative economic environment – a negative political environment with low confidence levels – but this has changed quite dramatically since December last year, and obviously it changes the mindset and the perspectives of your clients. How does this affect your job as a financial planner?

STEPHEN KATZENELLENBOGEN: I think there’s an interesting dynamic at play at the moment and I certainly agree that sentiment has swung quite sharply from very negative to very positive, and investors, clients and my colleagues and I are all talking about it. I think the difficulty that I’m finding is that at the moment there is a disparity between the emotional side of things, where everyone is happy and buoyant, and the economy and the markets [itself]. So I think if you look at our economy it’s still in a very low-growth environment, the man on the street is really struggling and has been battling for a number of years.

Market returns, especially locally, have remained subdued for some time, so I think that’s definitely playing on us and investors. If I just look at our business and allocations in terms of what clients are talking about and asking for, I’m still not getting clients rushing in and saying ‘let’s allocate more to local markets, I think this thing is going to fly’. So I think the sentiment at, let’s call it, dinner tables, is positive but when it actually comes to investing we haven’t seen that translate and, as I said, definitely the markets and economy remain subdued.

RYK VAN NIEKERK: But it’s actually ironic because the improved confidence levels in South Africa have assisted the rand to strengthen against the major currencies and, of course, that has a negative impact on markets. So for investors, in the short term at least, this renewed optimism hasn’t really translated to increased valuations and good investments.

STEPHEN KATZENELLENBOGEN: It’s an interesting point that and the rand has obviously done very well and we are very aware of that and it’s good for trade where currency is important. But when looking at it in a broader context I think the first thing to look at is what’s happening to the dollar and the dollar is the weakest it’s been in three years, at its low or very near its low, so that’s helped the rand strengthen.

The rand itself is a very liquid currency and it’s often used as a proxy for emerging market traders to get access to emerging market currency. My understanding is that it was the rand and Turkey that took the majority of those flows and there has been some pressure in Turkey, and with that we have had a disproportionate flow of funds looking for emerging market proxies.

So we’ve had positive sentiment, we’ve had a weak dollar and we’ve had a disproportionate flow of emerging markets – so it’s almost the perfect storm for rand strength.

If I had to say, give my personal view, I don’t think it’s got too much room left in it. I would think we are at reasonable value and probably a slightly weaker rand would be better for economic equilibrium, where importers and exporters are happier.


Clients switching financial advisors

RYK VAN NIEKERK: I think many of the importers and exporters would prefer a stable rand – it doesn’t matter where it is. I just want to move to an email exchange I had with a financial advisor this week. He complained that it is very difficult to get new clients, and especially to get clients to switch from their existing financial advisors, even if those advisors are performing poorly. Do you see this, do you experience that?

STEPHEN KATZENELLENBOGEN: Thankfully not too much. If I look on the one side of our business we thankfully have a very low client turnover, exceptionally low in terms of clients leaving our business, so hopefully we are doing something right there. We do attract new clients through advisor changes and, interestingly enough, my view is that it’s actually in these types of markets where it becomes more relevant.

I think clients hone in on fees and things like that and what value are they getting for that and we often find that clients are disappointed with what they are getting. I think perhaps it’s not the returns, maybe people understand there are returns, but it’s communication and explanation around that. So we often find in poor markets that it’s quite an interesting or active time for us where people are looking around to make sure that they are getting good advice and that they are getting bang for buck.

RYK VAN NIEKERK: But it’s interesting because in poor markets most investment plans will perform poorly and that’s not the advisor’s fault, it’s not the asset manager’s fault. So how do you as a client evaluate whether the problem lies with markets or with the advisor?

STEPHEN KATZENELLENBOGEN: There’s enough research and availability with the internet to go out and assess the performance of your portfolio. You can also rely on your advisor and say, ‘well, what kind of benchmark are we looking at? How [have] we performed against that benchmark? How have we done relative to markets?’ Your advisor should also have that information available to you.

It’s maybe slightly divergent from your question, but it’s also a good time to assess risk profile. You may have come in in a bull market and things look good and inherently our emotions will drive us to a higher risk profile until things aren’t going so well and then maybe you realise that you actually started off on the wrong foot. And that’s probably no direct fault of client or advisor, but something that needs to get taught and spoken through and adjusted if necessary but, importantly, not making any rash decisions.

RYK VAN NIEKERK: Administratively, how difficult is it to switch between advisors?

STEPHEN KATZENELLENBOGEN: In 90% of instances it is very easy – it’s literally one piece of paper that has to get done from an administrative perspective. From a business perspective it’s a word we spoke about before the interview, which is ‘compliance’. There’s obviously a whole bunch of take-on documents and service level agreements and all those compliance issues that go with it. But from the client’s side it’s relatively straightforward: it’s signing a few forms and Fica.


Changing existing investment policies easily

RYK VAN NIEKERK: So you don’t need to liquidate all your investments, take the cash over and then reinvest?

STEPHEN KATZENELLENBOGEN: No, the majority of platforms allow for change of advisors. So you don’t have to sell with the associated tax implications of that and reinvest your money – you can actually just change on your existing investments, policies and whatever else there is.

RYK VAN NIEKERK: And there’s no cost to this?

STEPHEN KATZENELLENBOGEN: That would be advisor-dependent or business-dependent. So some advisors may have an upfront planning charge or administrative charge to go with that, but from an institutional fund manager and a fund manager’s perspective there is no cost on that side of things.

RYK VAN NIEKERK: So it’s actually quite easy and I think the perception out there is that it’s actually quite difficult – it’s almost like a marriage and it’s expensive to get out of it.

STEPHEN KATZENELLENBOGEN: The thing I always think of when you say that is banks. I find that often when I speak to people they’ll say ‘I can’t stand the bank I deal with’, but they’ve been with them for 30 years and they don’t change. I think naturally people are averse to change and I think that’s probably the biggest hurdle – it’s emotional.

RYK VAN NIEKERK: But it’s difficult to change from one bank to the other; there is a lot of admin involved. I must say to fill in a few forms and change advisors….

STEPHEN KATZENELLENBOGEN: … on an advisory side you’ve got to also remember that there may be history involved and that’s maybe the difficulty – where you’ve dealt with someone for a decade and they know your story and your family’s story and who your trustees are and your auditors, and sometimes I think people are reluctant to start that again. So I think my word of warning would be that before someone changes their advisor look carefully at why you’re changing. As you said, if markets aren’t performing well it’s not the advisor’s fault, so long as you’re in the correct risk profile. So you need to look carefully as to why you are changing before you change.

RYK VAN NIEKERK: What are the right reasons to change?

STEPHEN KATZENELLENBOGEN: I think if we go straight to the hornet’s nest it’s probably cost. You need to make sure that your costs are appropriate relative to what else is available. I think communication is important and that’s from an advisor directly to the client, or the advisory business directly to the client. Something that we see a lot of is that people want to make sure that there’s continuity within their financial plans, especially when we’re looking at generational wealth, especially when we find people who are a bit older in their 50s or 60s and they’re starting to think in that way in terms of their life plan. They want to make sure that the person or the business that they are with is going to carry on beyond just the person that they deal with. I think you need to be able to have a sense of trust in whomever you are dealing with and we gain trust through being honest and transparent in dealings.

RYK VAN NIEKERK: And the wrong reasons I would imagine would be emotional and more short-term focused?

STEPHEN KATZENELLENBOGEN: Yes, very much. I think the one would be if there’s a breakdown in the interpersonal relationship, you’ve got to look at that separately. Wrong reasons would be something like market performance – where it’s out of everyone’s control, the investment philosophy and [where] the construction of the portfolio has been well discussed and well documented, then no one is really at fault.


The Twin Peaks Act and the Financial Sector Conduct Authority

RYK VAN NIEKERK: In another development, we’ve seen the signing of the Twin Peaks Act and now we have a new dispensation in which you as a financial advisor need to operate. You also have a new regulator, the Financial Sector Conduct Authority, basically a renamed FSB (Financial Services Board). How does this affect you and does it affect your clients? 

STEPHEN KATZENELLENBOGEN: I don’t think clients necessarily see the front end of it. But from a business point of view and maybe I’ll focus on the one aspect of it which is Treating Customers Fairly, if you come to us for advice and you come out as a moderate investor and we put you into one portfolio and your friend comes along, who’s also a moderate investor, and he gets put into a slightly different portfolio, my sense is from a Treating Customers Fairly perspective we could run a risk then if you chat to each other and you have different results, it essentially puts us at risk.

But our business philosophy, thankfully, has always been to have a relatively focused offering that goes through a rigorous due diligence process so that client outcomes aren’t vastly different. I think, in fact, in some ways it can actually support advisors, because I can’t imagine anyone sitting here and saying that they look at client portfolios every day. So if you’ve got clients who are in a relatively contained set of funds you can put quite a stringent due diligence process in that, that sits around it. From an advisor perspective that keeps your life slightly more simple to be able to manage changes, if necessary, on a bulk basis across client bases.

RYK VAN NIEKERK: One impact would be increased compliance cost. I know it’s a word that is not the most liked within the financial services industry and, of course, that flows through to increased costs for clients. How substantial is it from a client’s perspective – what they pay for compliance?

STEPHEN KATZENELLENBOGEN: I can only speak about our business and we haven’t consciously increased our fees or costs to clients – it’s almost something that’s been absorbed within our business. But within our business it’s definitely a cost and it’s become more and more relevant. First you could almost outsource it, then you have to have one permanent person and then you have to have two or three compliance-type roles within a business to take care of all the necessary aspects.

RYK VAN NIEKERK: Do you think the compliance is overdone?

STEPHEN KATZENELLENBOGEN: I think it’s very important that the consumer ends off getting something and they know what they are getting, so I think that’s critically important. But to answer your question directly, yes I do think it’s overdone to a certain degree. My feeling is that the regulated get overregulated and the cowboys manage to stay out of that compliance ring and they carry on swindling and stealing, sadly, from clients. It’s difficult to have this blanket approach but there are always going to be guys who stay outside of that realm unfortunately.

RYK VAN NIEKERK: You can’t regulate somebody to be honest.


RYK VAN NIEKERK: Thank you, Stephen. That was Stephen Katzenellenbogen – he is an executive director at NFB Financial Services.

Please consider contributing as little as R20 in appreciation of our quality independent financial journalism.


Stephen Katzenellenbogen

NFB Private Wealth Management



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I have learned one thing in my more than 40 years in Corporate Treasury (FX) trading: FX trading is not a ‘’zero sum game’’, hence my disagreement of some of the statements/assumptions in your discussion.
Stephen statement at best to me is extremely confusing and incorrect: ‘’ to look at is what’s happening to the dollar and the dollar is the weakest it’s been in three years, at its low or very near its low, so that’s helped the rand strengthen’’
The ZAR is a commodity currency with a very high yield. In my trading days – the Funds have always been looking to invest in something like the 10 years German Bond, which yielded > 10 % p.a. currently it’s around 0.6 percent. Long term treasuries in the US (10 year current yield 2.6 % p.a.), also yielded double digits. Those high yielding markets collapsed and most ‘’pension funds’’ etc. industries worldwide is in crisis as al the asset classes is underperforming.
A wall of money left SA under JZ 783, but the carry market continued and even increased despite this, due to our high bond yield etc. The ZAR obviously reacted with the changing sentiment from a high of 17 against the USD.
The strengthening ZAR will greatly negate most of the offshore investments (30 %), that was made, methinks by investors 50 plus, that are looking to increase their pension yields. I think the ZAR is just busy marking time (very obvious from positive sentiment – always been the main driver that I watched), as CR’s actions/plans might secure a ‘’wall of money’’ to start flowing back into sunny SA. I think the offshore investors will also add ‘’strong conditions’’ on these funds and I hope our authorities will also change the conditions of some of these investments (as the 2007 Eastern Europe crisis proved that investment that is pulled out overnight leaves a massive hole in an economy).
ZAR Performance – Please note how the ZAR reacted and overreacted to political regimes as the funds were flowing in and out of SA (Source SARB Data etc.)
USD/ZAR 6.0000; EUR/USD 0.9500; EUR/ZAR 6.0500
USD/ZAR 13.0000; EUR/USD 0.9800; EUR/ZAR 11.7000
USD/ZAR 6.4000; EUR/USD 0.7000; EUR/ZAR 14, 0000
USD/ZAR 11.5000; EUR/USD 0.7000; EUR/ZAR 10.8500
USD/ZAR 6.6000; EUR/USD 0.7000; EUR/ZAR 9.8500
USD/ZAR 17.000; EUR/USD 0.9500; EUR/ZAR 18.5000
USD/ZAR 11.8000; EUR/USD 0.8000; EUR/ZAR 14.3000

End of comments.





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