RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – our weekly podcast where I speak to leading financial advisors. My guest today is Magnus Heystek Jnr of Brenthurst Wealth. Magnus, welcome to the show.
Let’s talk about an apparent myth in the retirement world currently: that is you start working, you put down your 15%, contribute towards an RA (retirement annuity) and then you retire at 65, hoping to live happily ever after but that is not happening currently. I think the world has changed and a lot of people just cannot retire comfortably at that age.
MAGNUS HEYSTEK JNR: Thanks for having me on the show. Retirement is always going to be a very controversial topic. You’ll always find people on both sides of the fence: people who have made enough provision and the other side of that is people who haven’t made enough provision. We are seeing, especially from our client base and the potential clients who approach us, [that] they are saying we might not have sufficient capital for retirement.
One of the reasons that I think it’s becoming harder and harder for people to retire is that the expectations are not being adjusted when you approach retirement. We do find cases sometimes when people want to go very aggressive because they want to make up for the poor performance that they’ve seen in the past three, four or five years…. when an advisor steps in and says you’re actually approaching retirement and you cannot afford to lose any capital … and we need to wind down your risk profile and by that we mean going more conservative in the event that at retirement you’ve got the capital that’s been sufficiently managed to try and provide an income.
RYK VAN NIEKERK: But there are a lot of relevant issues and most notably is number one: people don’t save enough early enough in their career. And number two, the investment realities are that you won’t be able to magically increase your eventual capital sum through smart investing anymore. You don’t see those 10% or 15% per year returns constantly enough and that actually just kicks out the option of retirement at that age. How do you engage with your clients to address this? Do you tell your clients often, ‘listen, you need to save more to be able to retire comfortably?’
MAGNUS HEYSTEK JNR: It is a conversation that we have quite often and, this is just my personal opinion, … let’s say 20 or 30 years ago, I think people had a lot less expenditure in their lifestyle. If you look at everything that’s going on today there is so much more that people have to sustain; I’m talking about things like your internet connection, DStv, then you’ve got your hobbies like golfing, cycling, then you have your children, healthcare, all of these things have a material effect on what people are spending. I think the issue is that 30 years ago they might have been saving for that salary level at that time but it hasn’t been adjusted and that’s why it’s so important to – and it’s something that we try to provide for clients – provide a cash flow, to say at retirement or in the next ten to 15 years this is the capital amount you are going to be working with and this is the income that you are going to be receiving.
I think it’s very difficult for people once they reach retirement – and now they’re in a position where their living annuity is providing so much less than what they were getting on a salary – … to try and cut away at those small items that really snowball and add up. I think you have to blame the lifestyles that people have become accustomed to, but I think it’s such a difficult conversation to have with a client to say ‘you don’t have enough income right now and that’s possibly because you haven’t saved enough’. So we are quite stringent with that in that we provide a capital surplus or deficit calculation, as we call it, and say at this age at your current contribution you either have enough or you don’t have enough. It’s difficult to try and change the perceptions, but we have to.
Telling clients the cold hard facts
RYK VAN NIEKERK: But what happens when you need to tell a client, ‘listen, you don’t have enough’, and that client turns around and says, ‘listen, Magnus, it’s your job to make sure that I do have enough’? That is an interesting dynamic.
MAGNUS HEYSTEK JNR: It is an interesting dynamic and we’re also dealing with emotions with clients, and it’s very difficult to sit in front of a client and say, ‘listen, you don’t have enough’ or ‘this is the amount that you have’ and they say, ‘well, it’s not enough to sustain my lifestyle’. From my point of view as well if you look at the younger advisors when they are dealing with older clientele we are entering now in a relationship with that client at a much later stage – we weren’t able to provide the advice we are giving now 20 or 30 years ago.
I have to say in the industry the caliber of advice has definitely improved – I think there is a lot more education being brought about to provide people with the understanding of why it’s so important to try and save. I think you see it all the time; people say ‘I’ll start saving for retirement in two or three years’ time’, and I’m referring to the younger clients, and I think they get to a point and then they start having children and then they want to buy a house and there are all these excess costs and you are putting your retirement savings on the sideline. So it’s always a difficult conversation to have but, as I said, we do try our best to provide the factual information and we never try to sugarcoat it or say it might be enough….
RYK VAN NIEKERK: Why do you say you think financial advice is better today than it was one or two decades ago? Is it the research that’s available? Is it the products that are available? Why do you think it has improved?
MAGNUS HEYSTEK JNR: In my opinion it has definitely improved … look at all the inroads that have been made in terms of regulation…. A basic example is Regulation 28. Although there might be some different opinions on the basis of Regulation 28, from a standpoint it’s to provide protection to investors saving for retirement. If you look at a case of where the rand has gone from 14.30 six months ago to about 11.54 in February, that has hurt a lot of investors with offshore exposure. Now if you look at Regulation 28 it limited it to 25% of the overall investment and that’s just one example. If you look at regulation, education, the environment, the process and regulation for people to become accredited to provide advice…. Obviously I wasn’t around but we speak to other people in the industry and a few decades ago basically anyone could provide advice and that’s what I’m referring to, the type of advice has changed and I really do think it has been for the benefit of investors.
RYK VAN NIEKERK: Let’s talk about expectations a bit. We have an inflation rate of between 5% and 6% and if you do contribute towards an investment or a retirement plan what do you think should be your expectation of return? Obviously north of the inflation rate, but a lot of people feel that a 10% return is the bottom level of such an expectation. Is that a fair expectation?
MAGNUS HEYSTEK JNR: I think we are still in for very difficult times, especially with all the volatility in the global markets, local markets. We had a bit of a honeymoon phase at the start of the year; things were looking good. You have to give credit to the government, there has been a change in the government, but it’s going to take time for things to turn around. That’s really the message with investment philosophy at a very basic level: you have to give things time.
In our current environment I think 10% [return] is, I wouldn’t say the bottom out, I would say that’s more the peak of your expectations. I think we are still in for a very, very difficult investment environment for the next two or three years – there’s just so much uncertainty.
If we look at all the different asset classes in the market, there hasn’t really been one single asset class that’s really shined brightly.
Weathering the short-term noise storm
RYK VAN NIEKERK: It is a very difficult prospect and I think also you say advice has improved over the years, but I think it’s also become a lot more difficult for a financial advisor because we have this information overload. We have a lot of political instability, not only in South Africa but around the world. We see this trade war brewing between the nations. That also provides a lot of noise in the short-term environment and as people we are emotional and we would like people to react to the short-term noise, even though you have a long-term objective.
MAGNUS HEYSTEK JNR: The short-term noise is always going to be there – it’s one of those things that if you invest capital you don’t want to see that amount drop down. But you have someone in the background, in this case the advisor, indicating to clients that this is the situation, this is why the investment value has dropped, this is the research that we have done, we’re seeing a turnaround in a specific asset class or those types of situations.
But the advisors are also continually educating themselves and that involves going to tax updates, fund updates, different legislation updates and we use all that information, which might seem excessive to clients but we try to trim it down to provide information that they can really use and understand.
Debt and retirement planning
RYK VAN NIEKERK: One key element of retirement planning is debt and I don’t think it always gets the attention it needs. In theory at least when you retire you need to be debt free. I don’t think that’s always the case and I think South Africans as a rule have too much debt. How do you deal with your clients and how do you take their debt levels into account in formulating a plan?
MAGNUS HEYSTEK JNR: With debt obviously the biggest issue is the different types of debt that you have and the interest rates that are attached to those different types of debt. We always recommend to our clients to try and get rid of those short-term loans and credit card debt, because that will snowball out of control and very, very quickly. We look at structured debt such as your bonds and mortgages for properties – that’s a lot more manageable because you have an agreement with the bank, either fixed or variable interest rates and that’s something that you can work with. In my opinion something that has been so dangerous in this economy are these easy accessible loans that you can get from the banks.
RYK VAN NIEKERK: Personal loans, even the marketing thereof I believe sometimes warrants a type of warning like you get on cigarette packs: ‘listen, short-term loans can become really destructive in a household’. And yet, they are marketed in a way that seems like this is the product that will solve your financial problems.
MAGNUS HEYSTEK JNR: My concern with short-term loans is how easily accessible it is. I do my own personal research and I look at, for example, what is the rate that my bank provides me. I was shocked to see they are providing a 24% interest rate and then the initiation fee was also about 30% of the loan. From what I saw I am basically paying back double the amount of the loan in about a six-month period. My heart goes out to people who are in that position where they say they don’t care about the interest rate, they just need that access to capital. I think if you look at that in the South African market and you compound that by many, many people it’s frightening that there are so many people in that position where they have to pay so much back just to get a small amount in capital. So that’s why we tell people to get rid of those short-term loans. They are so dangerous, especially because they keep rolling over. Some of them do roll over and it’s tricky.
RYK VAN NIEKERK: But it’s difficult to get it. It’s easy to say to someone you need to spend less and pay off your debt – in reality it’s not always that easy and it takes discipline. Do you see in general South Africans having the financial discipline to manage their money affairs adequately?
MAGNUS HEYSTEK JNR: I think that’s a tough question to answer. I think you can’t really paint everyone with the same brush; there are people who have had the diligence to save properly and not get into debt. But, as I said, you come back to that lifestyle element that I was discussing earlier. If you look at all the things that people are buying, I think life in general has just become so much more expensive over time because everyone has an iPad, has an iPhone, cellphones, TVs, computers – those things just snowball. And I blame the marketing from these big companies – they are doing their jobs but I think that’s really one of the issues. The consumer factor is that people want everything new and they want to buy it and I think it’s really put a few people in a [bad] position.
RYK VAN NIEKERK: All it does is it kick the can down the road, so when you retire you’re going to look at the number and you’re not going to be happy.
MAGNUS HEYSTEK JNR: It’s true, but it’s difficult to save in this environment. As I said, it’s a very difficult topic to talk about. People might not want to hear it but you have to talk about it.
RYK VAN NIEKERK: Thank you so much. Magnus Heystek Jnr of Brenthurst Wealth.