RYK VAN NIEKERK: Welcome to this Financial Advisor podcast, my guest today is
Sonia du Plessis of Brenthurst Wealth. Sonia, welcome to this podcast.
SONIA DU PLESSIS: Thanks for having me, Ryk.
RYK VAN NIEKERK: Well, we certainly live in an interesting world, when we woke up on Monday morning the rand was at its strongest in many years 12.25/$, then the rumours became apparent that the president has recalled the Minister of Finance, Pravin Gordhan, and his deputy, Mcebisi Jonas, from the UK. Everybody is now thinking a Cabinet reshuffle is on the cards, the markets have reacted quite aggressively, as you would expect. You’re a financial advisor, you’ve been in this game for a few years, when does the phone start ringing, when do clients actually pick up the phone and say how will this impact my investment?
SONIA DU PLESSIS: Ryk, things can change very quickly and I think that’s part of living in South Africa and part of what we are trying to tell clients is that things can change very, very quickly. We try to keep clients updated quite a bit and obviously is something dramatic like this happens it does spark a lot of uncertainty. A weakening in the rand can be good and bad but yes, we’ve got to constantly reassure clients, telling them that their portfolios are properly diversified and that it’s all part of the bigger picture and it’s all normal. We’ve also got to constantly remind clients to look at the long-term strategy and not to overreact if something like this happens.
RYK VAN NIEKERK: But Brenthurst have been beating the drum of take your money offshore if you can because the rand in the long term will depreciate and obviously foreign investment in that scenario would be better. But over the last, say, two years, 18 months, we saw the significant devaluation of the rand after Nenegate, then we saw the rand actually strengthening until now and R12.25 has actually been very strong. Obviously clients would say I took out money at R14, R15, R15, now the rand is so strong, how do you manage that type of inquiry from clients?
SONIA DU PLESSIS: There are two types of clients here, we’ve got the clients who took money offshore three or four years ago and they’re still happy because the rand is weaker than when we took it off at R7 or R8. Now, obviously, the clients who took the money offshore last year, in 2016, where the rand strengthened from R16, R17 to current levels, they are a bit jittery. The question now is, is the rand going to strengthen more or is it going to weaken again? As you know, the currency is one of the most difficult things to forecast. So what we do, and we are very specific about this, when we meet a client we look at his financials holistically and we ask him what he wants to do. If we see that there’s no offshore exposure in the client’s portfolio then we would always recommend that he takes money offshore but we would make it very clear about the risk attached to it. Last year in dollar terms the funds did very well, so you’ve got to go back to also what’s the objective of the investment and if there was dollar growth then the investment is doing well. If you look at it over a longer-term period, not just over six months or a year and maybe in five years’ time or ten years’ time from now where we all believe that the rand will be weaker again. So we’ve got to just explain very carefully to the client what the objective is with the investment and what’s the term attached to it.
RYK VAN NIEKERK: Yes but with many clients you can ask them what do you want and they don’t know what they want, they trust you, as the financial advisor, to provide the best possible solution and now you give in the short term ‘wrong advice’ because you said take money out at R14, now the rand is at R12.50. That relationship must be carefully managed, how do you manage that?
SONIA DU PLESSIS: It really depends on person to person, so if it’s an older gentleman and he’s close to retirement then obviously the risky assets will be less in his overall portfolio. So there the recommendation of having offshore assets will less. If it’s a younger person or someone who has still got 20 or 30 years over to work, there we can increase the offshore exposure. We’ve also got to look at the plans of this person if they are planning to emigrate to Canada or Australia in two years’ time then obviously we’ve got to gear their assets to offshore now. We also look at guidelines, we’ve got the Prudential guidelines there, especially if it’s pension money or living annuity money, we try and stick to those guidelines and not overexpose a client’s money to risky assets and currency is quite a risky asset. We look at it person to person, what their personal circumstances are, what is their tolerance towards risk and so on. We often also get clients saying I see what’s happening in the economy, I want to take all my money offshore. Then we say no, you still live in South Africa, you need rands to live off and we tell them that there’s got to be diversification.
RYK VAN NIEKERK: But the message is invest for the long term but ignore the short-term volatile events like we are seeing now but it’s difficult to ignore the short-term noise. You and I can agree that in 20 years’ time the rand will be a lot weaker than it currently is today just because of the inflation differential.
SONIA DU PLESSIS: It is difficult, I will be honest, we do get a lot of queries, we get a lot of emails, we get a lot of phone calls and we get a lot of nervousness. So there you’ve got to talk to the client again and say are you prepared for this rand to weaken possibly again in a years’ time, two years’ time? If not, we’ve got to adjust the risk downwards and if that means bringing some of the offshore assets back then we do that. But we also look at things realistically, the short-term view is that the rand is most likely to go stronger from these levels but the long-term trend is for a weaker rand. As we go towards the end of the year we most likely are going to see slightly weaker rand but we can’t call it.
RYK VAN NIEKERK: It’s very difficult.
SONIA DU PLESSIS: It’s very difficult.
RYK VAN NIEKERK: Brenthurst is an established financial advisory firm in South Africa and you have been a financial advisor since 2004, so that’s almost 15 years, what mistakes do you think advisors should avoid and what happens too frequently?
SONIA DU PLESSIS: I think one of the aspects we’ve just spoken about now, often mistakes that we see is clients looking at short-term noise, so this rand scenario is a typical example of clients wanting to react emotionally. Another thing that we often still see is that clients are just not saving enough for retirement and we’re seeing that coming through more and more these days where clients are sitting at 65 or 70 years old and they are just not coming out with their pension. So if there’s one clear message that we try to get out is to try and start saving as early as possible so that you’ve got time on your side and that compounding effect can help your investments and boost it over a period of time.
RYK VAN NIEKERK: How financially literate are many of your clients? Obviously you focus on the high net worth individuals but sometimes a professional person, doctors or lawyers or the like but sometimes they have a pile of cash in a bank account or they have a pile of debt and they really don’t manage their portfolio as they should be, how often do you see those types of clients?
SONIA DU PLESSIS: There’s a whole range, you see clients who are very professional in their work environment but they really just neglect their finances. I think they get so caught up with their work and their profession that they forget about their money. Now, for us it’s also a process of educating those clients, I want to say 50/50, you get your doctors who are very financial literate and you get those who really do not look at their finances at all. We try and educate our clients as much as possible with newsletters, regular communication and even with our seminars and we try to make this a little bit easier for them. It’s also important for the general man on the street to know about finances, to know what is an equity market, what’s a unit trust, what is an RA and so on. It’s in your own best interest.
Poor financial literacy
RYK VAN NIEKERK: But the level of financial literacy is not that high in South Africa, including the affluent.
SONIA DU PLESSIS: Yes, it’s not that high I would agree with you, it’s something maybe that the schools can look at, educating the children a bit more about it. It’s also very, very important for our older clients or listeners to educate their children and to make them aware of how important it is to start reading the financial side of the newspaper and look at more financial news.
RYK VAN NIEKERK: As you said earlier, the earlier you start the better but many people don’t understand that they need to start earlier when it’s too late.
SONIA DU PLESSIS: Yes, ideally you want to start as soon as you get your first salary. If you think about it and if you’ve finished varsity and you get your first job, your income that you get you can use it very usefully. If you start by earning a salary of R3000 or R4000 per month and you haven’t had any expenses up until then it’s easy for you to commit and put R500 in an RA. The most important part is to get into that routine of saving from a very early age and then just sticking to it because often when you get to your 30s and 40s when you’ve got all the expenses with children and debt that you’re servicing that’s often when savings start to take a bit of a dip but if you’re in that routine for the last ten or 15 years then we see clients tend to stick with that.
RYK VAN NIEKERK: How many people do start to save when they get their first pay cheque?
SONIA DU PLESSIS: It’s very little, if you look at it statistically it is very little. So for us what we try and do with our clients is we even had seminars where we invite the children to the seminar, so we try and educate our clients and try to bring the picture home to say how important it is to educate the younger ones.
Structuring an investment plan
RYK VAN NIEKERK: You referred to it earlier as well, the structure of an investment plan, how predictable is it? How homogenous is it compared to the options available through various financial advisors or let me put it differently, would the plan you propose be a lot different to the plan somebody else would propose? I can imagine you are going to have R2000 a month for a debit order coming in, you’re going to put R600 in a value fund, R1000 in a growth fund and then the balance in a property fund, is it as structured as that? Can you manoeuvre things at the beginning to ensure that you maybe have more risk and a higher return in the end?
SONIA DU PLESSIS: If I understand the question correctly, structuring products all depends on that relationship between the advisor and the client and we do all sum up risk differently. Now, if you go and see one of our advisors in Cape Town, Pretoria or Johannesburg, we all work under the same umbrella, so the advice that you would get would be generally the same. Even if you go and see an advisor at another practice there are certain standard things that we do look at, the first priority would be what does the client’s debt level look like, is there any bad debt, credit cards and things like that. That we tend to advise a client to pay of first before you start saving and once the debt is under control – I’m talking now about bad debt now – things like house debt you work into your budget. Then you look at retirement savings that would be the second priority, is this person saving for retirement, at least 15%, then you build that in. If the client or the person is saving 15% then you can start with discretionary money, so you’re starting to get the building blocks correct and then from there on you start to structure the asset classes, if that makes sense.
RYK VAN NIEKERK: But can the structure of such a savings product be fundamentally different between person A and person B?
SONIA DU PLESSIS: It can be because it all depends on risk at the end of the day. If it’s, for example, retirement products it can’t be because there you’ve got to comply with Regulation 28, so it will automatically fall in there.
RYK VAN NIEKERK: The reason why I’m asking that question is I sometimes feel that due to the high levels of regulations in the industry you have the check-box approach. This is a model that seems to be working, it’s very conservative, you’ve invested in the bigger funds and I don’t see often a lot of differentiation between the advice of one advisor as opposed to another.
SONIA DU PLESSIS: At Brenthurst we work a bit differently, so we work under one umbrella and we’ve got our funds that we use that we’ve done our compliance and due diligence on and then it’s up to the individual advisor to stick to the house view, we’ve got a house view, or unless the client specifically says they want more offshore assets because they’re emigrating or they’re fine to take on more risk because maybe they come from a wealthy background or something to that effect. So we do have leeway to tailor-make a client’s portfolio and we do definitely take that into consideration because there are no two people the same. You can’t just have a check-box approach for every client.
RYK VAN NIEKERK: Do you think the financial regulations work to the benefit of clients or do you think sometimes that the industry is overregulated?
SONIA DU PLESSIS: In some way I think the reason why there’s regulation is for the greater good of the client at the end of the day. We come from an environment where there were quite a few dodgy advisors out there, many moons ago, so we come from that era where we try and give the best advice to a client. All industries are regulated. If you take something like Regulation 28, it is a good regulation but if you look at it for younger clients in their 20s automatically you don’t want the 75% equity limitation, there you maybe want to expose their money to 100% equity. So it depends on person to person but I think overall it has done well for the industry, it’s not too draconian.
RYK VAN NIEKERK: Thank you, Sonia. That was Sonia du Plessis of Brenthurst Wealth.