RYK VAN NIEKERK: Welcome to this financial advisor podcast, our weekly podcast where I speak to financial advisors. My guest today is Reece Morrison: he is an independent financial advisor at Masthead Financial Planning and he has an advanced certificate in wealth management, as well as a higher certificate in marketing. He has been in the financial services industry for more than seven years and it includes a stint of three years at Liberty as a financial advisor. Reece, welcome to the Moneyweb studio.
You recently wrote a very interesting article that was published on Moneyweb about FundiSA – a savings plan that aims to assist families who earn less than R180 000 per annum to save for their children’s tertiary education. I didn’t know about this scheme. How well known is it and how popular is it?
REECE MORRISON: Ryk, thanks for that introduction. The FundiSA Fund is quite well known and it is utilised by quite a few people. There have been a few changes, as mentioned in the previous article that I wrote, saying that household incomes above R180 000 are no longer allowed to invest in this scheme. That has not changed any previous investors, or kicked out any previous investors – they can still go ahead and invest. …it might be in a different market, or a different income bracket that makes use of it, but it is quite well known out there.
RYK VAN NIEKERK: But that flows into a discussion about the so-called ‘middle class’ … people living in that bracket seem to not take retirement planning too seriously, or are not actually following the guidelines normally set by financial advisors. Just talk about the challenges for these families and how can they appropriately plan for retirement?
REECE MORRISON: Just to wrap up on the FundiSA Fund, just something about that that not many people know: it is for assisting in tertiary education … 25% or up to R600 is allocated per annum, per learner, so that helps already with the middle- to lower-income earners in that they are getting an additional allocation towards their kids, or if they want to sponsor someone towards their tertiary education.
Going back to the middle class earners, this would be a good option for them to look into, because as I was driving here I was listening to a show and basically anyone who is in the tax bracket is now considered or should be considered a middle income earner and obviously [it doesn’t] totally depend on what your income is but various other factors as well.
Middle class financial planning
So coming to the middle class it is getting more and more difficult for them to do sufficient retirement planning, purely because goals are not as attainable as they tend to think. Someone who is maybe earning R25 000 a month wants to earn R25 000 a month in retirement and they don’t understand that, if you look at pound for pound, in order to get R25 000 when you retire you need to put R25 000 away. If you have 20 years left before you retire and you are earning R25 000 and you want to retire for 20 years you need to put R25 000 away; if it’s 40 years until you retire then obviously it’s half of that…obviously not taking into consideration the returns and so on that increase your investment value over time.
But the middle class are battling, the reason being that normally the middle class are looking after other family members. I consider myself middle class and it’s not just myself that I’m looking after or my immediate family: I’m looking after my father and taking care of numerous other family members. So when you look at that you might not even say that I’m middle class, you might say that I’m lower class … someone will say ‘yes but you are earning this much’, but where that money goes to doesn’t allow me to say actually I am middle class. It also affects my own personal retirement planning. Although I am quite stringent and strict on myself – I try to get that across to my clients as well – but sometimes it’s just impossible and you have to go with other ways to reach that goal in retirement planning.
RYK VAN NIEKERK: The same would probably apply for medical aid or life insurance?
REECE MORRISON: Ja, exactly, when it comes to medical aid let’s say there are three siblings and one of them has to fork out medical aid for their parents, the other one must now pay for the funeral expenses for their parents and this is assuming they are all working because the majority of the time only one or two of them are working. So it’s a heavy burden. I don’t want to say ‘burden’ because it’s family but sometimes it is a burden because the children are now looking after a wide range of family members.
RYK VAN NIEKERK: Let’s talk about investment planning, which is the core of your business I assume. What is your philosophy? How do you go about advising clients about how to invest?
REECE MORRISON: The first point of the investment philosophy is I need to get clients to buy into my philosophy and my philosophy is simple: it’s long-term investment planning and that’s what I stick to. It’s what I bought into many years ago and it’s been what I have based my advice on.
What happens with long-term investing is that you choose some good quality funds, you set a good financial plan and, no matter what comes your way, you keep your eye on the prize and don’t listen to all the noise that’s around you (especially to family members and friends who say ‘try this’ or ‘try that’ because there will always be a lot of people around you trying to sway you because they heard something good, without really knowing the facts behind the new investment tool that’s out there. So get yourself a good financial plan, get yourself some good quality funds and stick to that and keep your eye on the prize.
RYK VAN NIEKERK: Do you prefer the established brands in the market like Coronation, Foord, Allan Gray? Obviously they have established funds and the majority of those have performed excellently over the past few years. Or do you sometimes look at the so-called boutique funds?
REECE MORRISON: I normally use not more than eight funds; the reason for this is because more than that and it becomes a strenuous or a tedious process…
RYK VAN NIEKERK: For one client, eight funds?
REECE MORRISON: It depends, so depending on the financial plan that the client has or the financial goal and also the investment value. For example, if I get R1 million it will normally be between three and four funds, sometimes two but if we’re looking at about R15 million it might be a little bit more purely because I try to find diversification.
I do go more with the established funds, especially the more established balanced funds, because within that one fund there’s already quite a bit of diversification because it’s spread across the different asset classes. I have looked at the one or two of the boutique funds but it’s more Allan Gray, Investec, Nedgroup Investments, but not really Foord. Coronation was there at a stage but I’ve put more towards Investec now.
RYK VAN NIEKERK: The retirement annuities obviously need to adhere to Regulation 28, which regulates the asset classes you can invest in. How do you approach the requirements of Regulation 28?
REECE MORRISON: A lot of the balanced funds are already Regulation 28 compliant, for example, the Allan Gray Balanced … Investec Managed. So because retirement planning is a key focus of my practice, the balanced funds are key for me because they give you that perfect equity, cash and all the other asset classes, property, commodities and so on. It gives you that balance so that you can reap the most reward at the right time. So, for example, Allan Gray Balanced has got about 64% equities and that’s perfect. It’s about 11% below the Regulation 28 requirement, and you mix that up with another balanced fund and you can push it up all the way to the max and benefit greatly. Balanced funds are perfect for retirement planning.
RYK VAN NIEKERK: International exposure?
Selection of asset classes
REECE MORRISON: Normally it’s a bit difficult because of the Regulation 28 Compliance but, again, in the balanced funds there is offshore exposure. It’s normally not more than 15% or so but there is definitely some offshore exposure. When we’re talking about offshore exposure, it’s more in unit trusts where there is no regulations that prevent you from investing.
RYK VAN NIEKERK: There are some financial advisors who actively become involved in the selection of asset classes and you are leaving that to the fund manager whose job and profession it is. In your opinion, how should financial advisors approach this,? Is it an either or, or can you actually swim somewhere in between?
REECE MORRISON: Me personally, I leave the fund managers, the CFAs, the guys who are fund managers and who have been doing this for years to take care of that. I then attend their seminars and go and listen to what it is they have to say and based on that I then do other research on the companies where the funds are invested into. But generally, unless you are going into specialising in investments you can go ahead and do that. But for myself, I would rather focus on creating a good financial plan for my clients and rather rely on the fund managers and the CFAs, who have put these things together, who then give us regular feedback, which I obviously go and do follow-ups on. But to go in and really spend time on that it’s a tedious process and it takes a lot of time.
So I generally look at the companies, see the share price, how it rises and falls, and keep an eye on that and my questions that I send to the fund managers will be based on that, but not putting my own asset classes together because that’s not what I do. I set a plan for a client and I help them maintain that plan along the way.
RYK VAN NIEKERK: How often do you engage fund managers directly?
REECE MORRISON: They normally set up roadshows with us and they chat with us. So normally once a month there’s a different fund manager who sets up a roadshow and then we’ll attend.
Upswing in the market
RYK VAN NIEKERK: Let’s talk about your relationship with clients. Now obviously we are seeing a lot of domestic and international political noise; we are seeing markets at an all-time high, especially offshore – even in South Africa we’ve hit new highs in recent weeks. Do you see clients becoming nervous, because it’s not really correlated to the negative political noise we are seeing? How do you manage that dynamic?
REECE MORRISON: In this type of market we are definitely seeing an upswing and it’s becoming more of a bull market and people do tend to buy more. However, the way I go about doing things is don’t just buy, there might be a slight correction that will be made in the markets – but that shouldn’t prevent you from still investing. If you have additional funds maybe phase it in, which means you put a lump sum in and over a period of three months and up you can then disinvest from a holding fund or a money market, for example, and let that get reinvested or invested into the other funds that you have in your portfolio. So yes, the share price is on the rise, people do want to buy, but I think do it in intervals so that if a correction does happen you benefit either way.
RYK VAN NIEKERK: But your message is stay in the market long term, ignore the noise but it’s not always that easy.
REECE MORRISON: It’s not that easy. Clients panic as soon as they see their money is dropping and at the end of last year there were many clients whose investments were in negative. But things have changed quite a bit over the past few months and clients are smiling now. However, some of them still say they want to disinvest. They don’t take penalties into consideration; they want to put it into the bank where the money is safe and growing a little bit.
But the point is that unless you have a financial plan, you are going to swop and change and you’re going to jump around at every little bit of noise that you hear. So get your financial plan, stick to your financial plan, have a long-term investment goal and just keep track of it on a regular basis.
It doesn’t mean if you buy a fund you forget about the fund. You are going to review it; you’re going to have a look at it; maybe in a year if something drastic happens in the economy or political space or in the markets then you can call your financial advisor and have a chat. But otherwise review and stick to that long-term plan that you have.
RYK VAN NIEKERK: Just lastly, Bitcoin is the flavour of the month. We at Moneyweb have had numerous requests for information on how to invest in Bitcoin. Obviously my perception is that it is a very, very, very risky option and if you don’t understand it fully rather stay away. What is your opinion?
REECE MORRISON: Ja, if you don’t understand it stay away. I also do get questions from my clients about it. It doesn’t correlate to my investment philosophy of long-term investing. So I don’t pay too much attention to it. Yes, you can make a quick buck, but at the same time you can lose all your bucks. There was a story from Sweden that I was reading the other day about tulips, where tulips became the next hype and… it became such a thing to have and everyone was buying and buying tulips…
RYK VAN NIEKERK: That was in the Netherlands many years ago.
REECE MORRISON: Yes, in the Netherlands many, many years ago and they were making a reference to that regarding Bitcoin as well and they said that it just dropped overnight and all these people had worthless tulips. Long-term investing: stick to it and that will give you a greater reward. Some of these investment terms, if you invested in 1999 when the Allan Gray Balanced opened, it’s now almost 18 years, and it’s an annualised return of 17.9% after fees, net of fees, net of expenses. If you are not happy with 17.9% then I don’t know because that’s a very good return.
RYK VAN NIEKERK: So rather get rich slowly than try to get rich quickly…
REECE MORRISON: And stand a chance of losing all your money, exactly.
RYK VAN NIEKERK: Thank you, Reece. That was Reece Morrison – he is an independent financial advisor at Masthead Financial Planning.