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Financial affairs: How much should your spouse know?

Richus Nel shares his views on a financial advisor’s role in estate planning, market volatility and the current economic environment.

RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – our weekly podcast where I speak to leading financial advisors. My guest today is Richus Nel: he is the head of the Stellenbosch office of Brenthurst Wealth.

I received a letter from a listener of one of our radio shows, who complained that she didn’t know anything about the family’s financial affairs and when her husband passed away she was left totally in the dark as to where the investments were, which bank accounts contained money and the like. What is the role of a financial advisor in such a situation?

RICHUS NEL: Ryk, I think this is actually quite common, where you see that one spouse is typically more predominant in managing and arranging the financial affairs within a family. What I would say is that it’s actually not that easy from a financial advisor’s point of view to know in this engagement how much the spouse, who’s actually absent in a lot of instances, actually knows about the financial affairs. So whether it should be the responsibility of the financial planner to take that on board and make sure that both spouses are aware of what’s happening and are involved is difficult to say. But what I do as a financial advisor in that relationship is encourage mutual involvement from both spouses. Take note that many spouses actually prefer not to be involved, so it’s almost also a result from that decision and it’s actually not that easy to overcome that.

What I would also do in many instances is to make the individual who you have got this relationship with, that you have got common and frequent contact with, … aware of what are the implications [are] when he or she dies: what the other person will be dealing with and almost preempting, just to overcome that absence of experience and knowledge, making sure that there’s enough liquidity on call and on standby when something happens, make sure that the will has been properly thought through and things like that. So I think it’s coming back to more managing the financial affairs of that individual who you do have this relationship with, in a holistic and prudent manner and making that person understand that there is a role that he or she needs to play to involve the other spouse.

RYK VAN NIEKERK: I would assume it would be easier if one financial advisor takes care of a family’s complete financial planning affairs and estate planning but that’s not always the case. Sometimes you only get a portion of an individual’s financial portfolio.

RICHUS NEL: I think it’s a big problem and that’s typically one of the drawbacks that I indicate to clients if they are splitting their wealth up proportionately and giving it to two or three advisors. They typically don’t share as well into that holistic view as what they could have. So remember that most financial advisors also work on a client segmentation service offering and it makes it pretty difficult to provide a holistic service if you only receive proportional investment capital from which you are remunerated from.

Current investment environment

RYK VAN NIEKERK: Let’s talk about the current investment environment … obviously we’ve seen an improvement in sentiment since Cyril Ramaphosa was elected president, but that has caused the rand to strengthen and we’ve seen quite depressed market conditions on the JSE and other platforms. Have you had a phone call or two from clients saying, ‘Listen, I feel a lot more positive about the country but why is my investment going backwards?’

RICHUS NEL: I think it’s very common and it’s not just since the end of December. The rand started strengthening around March/April 2016 already and it’s actually strengthened significantly – that number by the end of April was something like almost 30% against your prominent currencies worldwide, especially the dollar. So the JSE hasn’t done well for more than probably two years; your foreign investment that you’ve made, whether that’s direct or indirect through the JSE has not done well. So it’s actually been a very difficult investment experience for clients. And, when compared to previous market meltdowns and crashes, it’s actually very difficult when the market is just going sideways, compared to when it’s dropped and started recovering.

So I think the phone calls are mutual; they are coming in but also going out and trying to proactively prepare clients to say that the results are disappointing and almost trying to keep a lid on those emotions that play out in investment decisions. So what we should remind ourselves of is there have been difficult times, there have been prospering times on markets before.

We’ve got 100 to 120 years of financial data which shows that markets sometimes go up, they sometimes go down and sometimes they go sideways.

I’m trying very hard to proactively prepare clients that they are going to see all these cycles and that it’s part of the game plan and when you are in one of those down cycles or sideways cycles you have to stick to your guns – you have to go back to your investment objective that you set initially and stick to that investment position.

RYK VAN NIEKERK: I’ve never had a phone call from my financial advisor telling me, ‘Listen, we are in turbulent times, don’t expect too much’. But I have had those phone calls when things are going well and my advisor told me, ‘Listen, your investments are going up, well done’. What is the attitude from your clients when you phone them with bad news, even if it is proactive?

RICHUS NEL: I think it’s very appreciative, that’s the feedback I’m getting. So it doesn’t mean that the message needs always to be favourable to communicate. I think that communication means a lot more when the chips are down and the news is not that good. It’s typically a time when you need to move a little bit closer to your clients, hold their hands and make sure that they don’t react emotionally. I think that what is perhaps underestimated is how emotional clients feel and how anxious clients actually feel in times like these, unless the client gets reassurance from their financial advisors that they are top of mind, that their affairs are managed properly and that they are doing everything that they can in the best interests of that client. So I try not to start being silent or refrain from communicating, even if I don’t have only good news. That communication in my experience is a lot more credible and worthwhile than just communicating good news.

Retiring during a dip in the market

RYK VAN NIEKERK: There’s an interesting principle, especially for younger investors for their retirement, and that is if the markets go down it’s actually not to their detriment because if you have a fixed amount you pay every month towards an RA (retirement annuity) or a pension then you would get more units of the underlying fund. The reality is you only need the market to be at its peak when you actually retire one day.

RICHUS NEL: It depends on what you are retiring into. So I always give the example of if you are in the market and the market drops and you need to retire for whatever reason and you are moving that capital into a market-linked investment, then surely you regain that benefit when the market recovers. So what you would lose out on is obviously the withdrawals that you’ve made during a time when the markets are down. So what I would do is almost like taking a step back and say you are not going to be able to time the market.

There’s a big sin in our industry of where commentators and financial advisors and asset managers are trying to look better informed and prepared than others and trying to forecast what’s going to happen. It is a fact that it is impossible to say what’s going to happen and as soon as someone makes peace with that, they will realise that if they can’t control markets they would rather spend their energy focusing on things that they can control.

Now let’s look at that because one aspect, which you mentioned now, is when do you actually invest, on a continuous basis or not? You can control how much you are spending, how much you’re saving and whether you save that on a continuous basis or whether you are waiting for markets to look favourable, compared to when they look more volatile and dangerous.

Another point to make is that the most returns are made when markets are volatile. So the point you’re making is you’re getting more units in these volatile markets for the same rand amount, so as soon as people realise that it’s actually not bad to have volatility. So the engagement with markets in my mind is a constant and should be a continuous discipline for investors and that they shouldn’t withhold investment capital during volatile markets or when things are looking more dangerous than not.

Bear in mind your risk on financial markets is at the highest point when everyone is rather complacent about the market risk, when everything seems to be aligned and where very little risk is identifiable.

RYK VAN NIEKERK: Over the past few weeks I have spoken to several fund managers and I get a sense that there is a bit of nervousness in the air, especially about international valuations, and that some of the fund managers are trying to be a bit more conservative, moving money into bonds that currently yield in South Africa 7%, 8%, which I think under circumstances is not that bad. Are you concerned about the market and are you maybe also trying to make portfolios a bit more conservative?

RICHUS NEL: First of all if I do that it means that I’m forecasting what’s going to happen. There are two ways of positioning and the one that I, as a financial advisor, typically look after is the strategic long-term positioning of a client. So we’ll go and work out what is someone’s risk tolerance, meaning what is their risk appetite, what are they comfortable with, what is the risk capacity that they can take up, how much risk can they deal with. We’ll look at time horizon and we’ll look at return expectation. That gives me a balance of what is someone’s log-term strategic asset allocation and investment positioning. Within that, that creates a framework typically for your asset manager, which does the actual capital allocation, which is what you just indicated: looking at either bonds or equities or cash or whatever the case might be.

But take note that they actually do these allocations not based on what they are actually thinking the market is going to do … they are weighing up what is the value of those instruments based on and comparing that to the current price. So typically what would end up happening is when prices are elevated – and that’s what you referred to – asset managers typically find less opportunities in either equities or listed property and if they don’t find opportunities that capital typically remains in cash or they’ll utilise other asset allocation. So that to me is a tactical allocation and it’s not based on what they preempt the market to do, it’s a result of where they find value or after considering and evaluating the price of those instruments.

So those are the two legs and I’m trying to not steer positions when things look more risky, to rather stick to a long-term strategic allocation and let the fund managers do their tactical allocation.

RYK VAN NIEKERK: Let the fund manager with their big research teams take care of the asset allocation. That was Richus Nel, he is the head of the Stellenbosch office of Brenthurst Wealth.

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