Offshore diversification of wealth in a global universe

When we’re looking at a wealth member holistically, it’s not just the individual person, it’s also their significant other and family that we plan for – Linda Sherlock, executive head of PPS Wealth Advisory and Business Development.

RYK VAN NIEKERK: The Professional Providence Society or PPS, as it’s probably better known, celebrates its 80th birthday this year. It was founded in 1941 and offers a range of insurance, healthcare and investment solutions to 150 000 members, all graduate professionals. PPS also launched the PPS Wealth Advisory Service last year to assist its clients in building and preserving their wealth and leaving a legacy to their loved ones.

Linda Sherlock joins me now. She’s the executive head of PPS Wealth Advisory and Business Development. Linda, thank you so much for joining me. Let’s first talk about the launch of PPS Wealth Advisory. It was launched in February 2020, and 2020 was probably the strangest, most volatile and disruptive year we’ve ever seen. What has the response been since you launched?

LINDA SHERLOCK: Thank you so much, Ryk. It’s been an interesting journey. We obviously, along with hundreds of other businesses, had to pivot very quickly and, being a brand new business, we had to ensure that we kept our north star of creating a wealth business for the PPS stable. We really reached out to our existing members to ensure that they were feeling secure and navigating what at the time was a very torrid market. Then [we] basically took our proposal and value proposition to market as we had already planned, and just [used] a different key by hosting a lot of virtual webinars. This was before people suffered from the webinar fatigue that followed. But we ensured that there was an intimacy and a closeness, both with our existing members and our opportunity-creation with new members throughout the period.

RYK VAN NIEKERK: There are many existing wealth managers in South Africa, and many regard themselves as being boutique wealth managers. But what differentiates PPS Wealth Advisory from these other wealth managers?

LINDA SHERLOCK: I believe that the answer to that lies in the PPS group. PPS follows an ethos of mutuality, which means that we are not a listed company. In fact our members participate in the profits of the business on an annual basis through the solutions that they hold. That is a key differentiator. We also find that with our brand of PPS, as you know and you said earlier on, we work with graduate professionals. So in working in the wealth business with the older graduate professional who is established – we call them an ‘established professional’ – we find that the differentiation is assisted through the mutuality and the profit share that our members do participate in. That is a significant differentiator.

The second one is that everything is bespoke, and privately put together for each individual wealth manager or family.

RYK VAN NIEKERK: Just speak more to the sharing of profits or the profit-sharing. Of course PPS is a mutual institution, but how does it typically work? And what are the quantums of these profits that are shared?

LINDA SHERLOCK: What happens is that in joining members become a member immediately, without any product or solution. Then, in taking out various solutions, they participate within the profit-share structure, and that has two main prongs to it. The one is our operational profits that they participate in, and the other one is that the profits that have already been dispersed and haven’t yet vested into the member’s hands attract investment returns. So, there are two mechanisms at play in helping them build additional wealth.

What we advocate strongly through this profit-share account that each member holds, is enhancing your retirement planning, and your post-retirement income solutions are enhanced as a result of this profit share. What we’re able to demonstrate to our members is that everything that we do, every decision that is made, goes through many, many governance forums before we decide to spend any money – because it is our members’ money that we are using.

So even, for example, starting a new business, like Wealth Advisory, it went through multiple governance forums before the board actually signed it off and gave it the go, because it is our members’ money at play.

RYK VAN NIEKERK: Let’s talk about the objectives of the division. In your marketing material you state that the focus is on building and preserving wealth, but then another leg – which I haven’t seen in the marketing material of many other asset manager or wealth manager – is to leave a legacy to loved ones. There is actually a big focus on legacy. Just take us through the thinking on why you place such emphasis on the legacy part within a wealth-management approach.

LINDA SHERLOCK: It’s a very good question. Within the professional market what the professional is worrying about is not only the protection of themselves, the asset accumulation for their future, but [also] as it extends into their families. They’re at stages in their lives where protection of the future of the family is of huge importance. So that is either fitted into risk solutions which will protect the legacy or, on the investment side – which is where I believe the bigger focus is – it’s about preserving that legacy in continuum through the different generations.

The reason that we focused on it is because we believe it’s probably the area most wealth clients don’t give enough attention to. So, there’s a lot of attention given to tax planning, and there’s a lot of attention given to asset accumulation, but there is not necessarily sufficient attention given to asset retention, and how that is best served to the family and how it best passes in the most tax-efficient ways in the most correct investment strategies to be applied.

So when we’re looking at one of our wealth members – I know it’s a well-worn term in our industry – but if we are looking at them holistically, it’s key to us that it’s the wealth member, their significant other, and their family that we’re actually doing the planning for. It’s not just the individual person.

RYK VAN NIEKERK: That is an interesting approach. Does the investment approach differ from when an individual or a family is in the wealth-building phase of their lives, as opposed to when the focus moves to building a legacy?

LINDA SHERLOCK: I think that we should always start with our investment philosophy, which is goal-based investing: what is the outcome that we’re looking to achieve? Obviously, most people will have multiple of those in parallel at any given time, so they’re looking to create wealth for the immediate future, the long-term future, and then in our focus area right through to the legacy.

The investment approach would not differ. What would differ would be how the portfolio is composed to meet that outcome, because clearly your shorter-term needs, your longer-term needs, and then the longer longer-term needs, which is the legacy planning, will have completely different approaches in terms of asset allocations and, frankly, the solution that they are placed within – an endowment structure versus a unit-trust structure, onshore or offshore, [and] the diversification by geography that people want to achieve, and what that looks like in a legacy plan.

And then of course, there’s the estate-planning angle, which is key to legacy planning because, without the correct estate planning in place using all the different legal structures, if we don’t do that correctly, the best legacy planning can fall away on the passing of the original wealth member.

RYK VAN NIEKERK: You referred to offshore investing, because in any wealth-building exercise offshore investments will be one of the core pillars of the approach. What is your approach towards offshore investing?

LINDA SHERLOCK: Again, it begins with the goal of the member, their significant other, and the family, because different people have different reasons as to why they want to be offshore or should be offshore. We advocate diversification of geography in the construction of our portfolios, but over and above that each family or member has a different goal. It could be to emigrate in time, or their children may be emigrating in the future; or they may be wanting to diversify against the rand, for example. So there are different reasons why people would look at it.

When we’re looking at offshore exposure, we really offer either [something] rand-denominated, which is always payable back in South Africa, or the foreign domicile – where you can use your discretionary allowance of R1 million a year or/and your foreign investment allowance of R10 million a year, and go truly offshore, where the money is actually payable to you overseas – depending on what it is that you are trying to plan for.

In doing so we’ve partnered with what we believe is best-of-breed in terms of offshore managers. We’ve partnered with the Capital Group, which was established in 1931, 10 years before PPS. We found with all the due diligence we did that they best support our entire ethos at PPS, being the largest independent active investment manager in the world, and applying what they call a ‘multi-counsellor approach’ and we call a ‘multi-manager approach’. So we partnered with them.

We’re finding that our wealth clients and members who have moved into their strategies are very comfortable with the approach and what’s available to them in terms of geographical diversification, as well as stock markets and different asset classes.

RYK VAN NIEKERK: How much offshore exposure do you think is appropriate?

LINDA SHERLOCK: This is always a difficult one. We really believe that there isn’t an optimal minimum or maximum because it’s actually at an individual level, keeping in mind that our members, if they participate in any retirement structure – be it a retirement annuity or an employee-led fund – are subject to Regulation 28, and the maximum they can expose offshore is 30%, and that’s rand-denominated.

So we don’t prescribe a percentage of offshore that every portfolio should have. What we rather follow is the goal. What is the outcome you’re looking to achieve? Are you going to be living overseas or staying here? Are you going to repatriate funds or are you going to spend the funds overseas? We look at a whole host of other aspects, and then we find the correct amount for the discretionary money that would best meet that goal, taking everything into account, not just the offshore exposure.

RYK VAN NIEKERK: I think it’s the same type of situation as ‘how much is enough?’ It will differ from family to family.

Just lastly, back to the PPS Wealth Advisory team, how big is your team?

LINDA SHERLOCK: We currently have 14 wealth managers nationally spread around the country, and then we have our wealth assistants who support them. So we’re a total team at the moment of 21 people. We look for CFPs [certified financial planners]. We also look for people who have been established in the wealth-management business. Yes, we’re a growing team. We’re actually looking to bring in additional wealth managers in 2022.

RYK VAN NIEKERK: Linda, thank you so much for your time today and for sharing your insights.

LINDA SHERLOCK: Thank you so much, Ryk, for letting me have this opportunity.

RYK VAN NIEKERK: That was Linda Sherlock. She’s the executive head of PPS Wealth Advisory and Business Development. PPS is of course a licensed insurer and an authorised financial services provider.

Brought to you by PPS Investments.

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