RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – our weekly podcast where I speak to leading financial advisors. My guest today is Jaco Joubert of PSG Wealth in Sandton. Jaco is a professional accountant; he’s a certified financial planner and a fiduciary specialist. He started his career in 1994 and he has won several awards as the financial planner of the year – amongst others with Liberty and with PSG Wealth. Jaco, welcome to the show.
Let’s start with the markets: we are currently seeing a nice little run by the JSE, which is in line with recent performances of international markets. What are your thoughts about this run and are you concerned?
JACO JOUBERT: Thank you, Ryk. I think most important is that if you are already in the market it’s not a time to sell and we have to always look at what your goals are and how long you will be investing into the market.
To give you a little bit of insight on long-term investment, if you go back to the 1900s you’ll find that if you had invested R1 in equities it would be worth approximately R3 600 today; if you invested in bonds it would be only about R7 and in cash it would be just over R3. So long-term investment of over 100 years would tell you the story that there are returns in markets and we have to understand that returns are specific in specific market conditions. There will sometimes be challenges and sometimes opportunities but I think we must always bring it back to an individual and look at their needs.
Obviously if you have a long term ahead of yourself and you are looking for growth then you can enter a market. Maybe at this point in time when you enter the market it would be a good thing to phase that investment into the market, rather than to just invest at a specific level. By phasing in I mean you can invest it over a period of time and then you get a rand averaging of shares or unit trusts; but if you are looking for income it’s a totally different picture. So the answer is not always the same, but we have to remember that long term in equities is one of the only asset classes where you can comfortably beat inflation – which is the key to long-term investment.
RYK VAN NIEKERK: How should your clients look at the short-term political noise we are seeing and the potential impact it will have on South Africa, our economy, confidence by international investors? How do you consolidate those concerns into an investment plan?
JACO JOUBERT: I don’t think anyone has got a specific answer for that, because it’s a big discussion out there. I think we must remember to take emotion out of investment philosophy because that’s the key for investment and I think a financial advisor is always there to help remove emotion from investments. If you are sitting with a client who is highly upset and is maybe worried about the current state of the economy and who has a very short-term horizon of their investment, obviously to go into risky assets like equities would not be ideal. Gradually maybe investing them into other asset classes or looking for certain types of guarantees would be a more preferable way, even preference shares or different types of asset classes. I think that maybe the return of political certainty will not be as quick as the Springbok team from one week to another, but we are definitely all believing that the writing is on the wall and hopefully our leaders will also realise that we need a lot more certainty in the market.
I think it’s key for us to always focus on what we can do, rather than the macro economy out there, where we can’t influence it, and a discussion with a financial advisor will bring solutions like that, even if you need to temporarily invest into cash or other solutions.
Clients concerned about ‘political explosions’
RYK VAN NIEKERK: Rather focus on what you can focus on and what you know than try to anticipate what you don’t know. I think that is definitely sound advice. Do you get clients phoning you regularly when we have a little political explosion somewhere? What is that interaction like?
JACO JOUBERT: I think that is the norm, I think everyone wants peace of mind. Uncertainty, wherever it comes from – whether it’s from your personal life, traumatic events, financial challenges or the bigger political climate out there, the macro things that you cannot change yourself – that is when everyone is asking those questions, what’s happening, what should we do? It always predominantly comes from people who are not still building capital and have a number of years ahead of them before they potentially retire and so on. It will be more applicable to people who are in retirement and who are very worried about their capital.
I think we need to carefully understand that and the answer, again, is not a simple answer, but there are different methods these days. Yes, we are in a low-interest rate environment for many years now but there are products and there are specific asset classes that we can use to limit and reduce that risk and get a higher average return. I will be able to explain a little bit more about that where you push out your vulnerability on returns for equities, especially if you use a silo system where you are not dependent on returns from markets on a month-to-month basis but rather spread the investment – [this] is the type of philosophy that we specifically believe in.
RYK VAN NIEKERK: What is that philosophy and could you maybe also refer to asset classes and what the role of a financial advisor should be in asset class allocation?
JACO JOUBERT: I think all asset classes – cash, bonds, property, equities, local and offshore – are very important as they serve different purposes. The certainty of, for instance, fixed-income assets like cash and bonds provides income, they provide stability and reduce risk in a portfolio. These asset classes are more suitable for the immediate and short-term periods in a portfolio, especially if income is required. The inflation-beating returns of equities provides growth to a portfolio and it’s ideal for the longer-term periods in a portfolio.
In order to ensure these are combined correctly, the purpose of an investment must be to establish the need of a client. We have some specific processes and inherent technology that we use to be able to use all of this information and produce a long-term cash flow – so that can be like 30 years in advance and I know it’s not certain for 30 years in advance but every year that you revue it you can forecast it again for another 30 years by looking at what will be the immediate need for the next 12 months, 24 months, 36 months, five years, eight years and so on, and what income is required for that client. We will then rather use interest-bearing type of investments to produce the income and allocate correctly the percentage of the capital up front to those types of asset classes, where you will then not have volatility in your portfolio because you will not draw down on equity investments or unit trusts that are linked to equities and rather allow it to go through its volatility and equalise or normalise in five-year, six-year, seven-year longer periods. It’s almost like baking a cake: with equities you’ve got to allow it to grow and then to use it and roll it back into income-generating funds. That’s the short of it, but it’s a methodology that works very well.
Responsibility of financial advisors when allocating investments
RYK VAN NIEKERK: What is your view on the responsibility of a financial advisor to allocate investments into different asset classes? Many advises would argue that that may be the job of the fund manager.
JACO JOUBERT: Correct, I think … one approach in the market is to use a lot of different balanced funds and to use a portfolio manager to do its job. But I think that could work in a phase when you are still building assets and building capital. It doesn’t necessarily work when you are generating income for a client in retirement or when they need to generate income for various other reasons. The job is very specific in allocating asset classes correctly because, like I said, with technology we can make sure that in the first, second, third, fourth year we allocate enough money to generate the income with inflation adjusted increases in order to make sure that you produce that income and it removes the volatility of equity returns in the longer term. Then you roll it back every year in order to make sure that there’s always income. It’s like using a silo system or a process where you have different classes of assets that produce various things, but when it’s ready the asset class that will be ready will be the fixed interest and you will draw from that rather than from the equity. That is a very, very important job for a financial advisor because this process will allow you to have higher average returns in the long term and, therefore, the asset allocation must be specific for every client.
RYK VAN NIEKERK: I just want to return to the technology you use to forecast potential future growth. In the ‘90s you had many insurance companies offer products where you pay R100 a month and after 15 years you get a lump sum of few million and sometimes those forecasts or estimations didn’t materialise. How accurate is the technology you use currently?
JACO JOUBERT: I think what you refer to would be the average returns and the benefit illustration guides that life assurers used many years ago, but it’s been done away with for I think almost a decade. The probability of returns in different asset classes are used these days. For instance in cash you can be assured that the return will be within certain boundaries, maybe 6% to 8%. For instance in equities, longer term it will be with a return of CPI plus five and so on. For commercial property you’ll combine the income that is adjusted with inflation every year as it increases in line with the rental agreements plus the capital growth. So there are expectations and we call it expectations but we use it in the back end to get an average return based on the percentages that we allow to be allocated to different asset classes and you minimise the risk because you have fixed interest investments that you draw down and this is not illustrated to the client as a benefit illustration, it is real signs, backdated- and forward-looking returns.
So where we are currently we do not have returns of 18% on cash like in the year 2000, we have returns on cash of 7% to 8% in different asset classes and all of that did change….
RYK VAN NIEKERK: Fees are always a contentious subject. I think many clients know more about the fees than they know about the actual returns they have achieved. What is your fee structure?
JACO JOUBERT: My clients get the benefit of a long-term partnership and a 100% allocation of their capital into their investments. So I do not have any upfront or initial fees on any investment. It’s a joint partnership, that’s the way we see it. So if you invest R500 a month or a big capital lump sum all of that is allocated, and we only have ongoing management fees for clients.
RYK VAN NIEKERK: Do you have a fixed fee for first-time financial advice to develop a financial plan for a potential client?
JACO JOUBERT: We have structures like that. I prefer not to get into those relationships per se, but I like to advocate long-term relationships. I would rather provide a financial plan for a prospective client in order to show them the loyalty and take on long-term relationships. I’ve found that after 23 years in this business you just can’t establish a short-term relationship and achieve anything that’s not something that’s in the best interest of the client or for the advisor, because you just cannot establish all the intricacies of the client’s life and give them advice. A long-term relationship develops to a level where a client phones you and you almost know exactly what’s going on in their lives and you can almost give them an answer on the spot when circumstances in their life change.
RYK VAN NIEKERK: PSG has done phenomenally well in recent years – how does the fee structure within the group work? Can you have a different structure to another PSG advisor?
JACO JOUBERT: No, we have specific guidelines for our group and it’s applicable to all offices. There are small changes that could happen; there might be initial fees and lower ongoing fees but in principle we have what we call a model that is exact and it must be adhered to and it’s in the best interest of the client. I would like to think that is an extremely good value proposition for clients.
RYK VAN NIEKERK: Thank you, Jaco. That was Jaco Joubert of PSG Wealth in Sandton.