RYK VAN NIEKERK: Welcome to this Financial Advisor podcast, my guest today is Mduduzi Luthuli of Luthuli Capital. Welcome to the show, you’ve only recently started Luthuli Capital, it’s a brave step to start your own business in this sector, when did you start and how successful are you thus far?
MDUDUZI LUTHULI: We officially opened our doors on September 1 this year and it’s the been the best and the worst thing I’ve ever done. It’s been phenomenal because I think anyone who’s ever had the pleasure of starting a business really understands how it becomes a labour of love but because of that at the same time you tend to push yourself to the limit. So it’s been very challenging but also exceptional to take this idea that just existed in your head and actually introducing it into the world and growing it. The response we’ve had from people out there has been phenomenal and I can’t thank my clients enough.
RYK VAN NIEKERK: How difficult is it to establish a financial services or an advice business, in South Africa there are a lot of regulations, a lot of boxes you need to tick, is it that difficult?
MDUDUZI LUTHULI: It is difficult, it’s doable but very difficult because of exactly that, before you can think of anything else there’s obviously the licence application and I can tell you that’s not an easy feat, and so it shouldn’t be because we pride ourselves in always telling our clients that we’re an authorized FSP. So obtaining that licence should actually mean something and it should say something about the code of conduct within the business. So it was a difficult process and the day we did get it champagne was drunk. From there once you’ve got your licence and you say I’m open for business, it then comes down really to how you position yourself in this industry. There are a lot of players, it’s very hard to differentiate yourself and I think what we’ve managed to do very well is when we meet new clients we are able to take a sector or an industry that’s viewed as very technical and be able to translate that to our clients in a very practical manner. I always say to my clients that I can’t ask you to give me your money for five years, ten years, if I can’t build something that you have a vested interest in. So as a client if you are sitting at home and you are looking through your investment statement and to you it’s gibberish, then of course you are not going to stick with me for five years, ten years. So it’s about translating that in a meaningful way.
RYK VAN NIEKERK: What is your differentiating factor, how are you different from other advice firms and what types of clients would you like to see walk through your door?
MDUDUZI LUTHULI: I think from the outset the thing that we were very adamant about is that we always hear about this global village, yet when you meet and speak to clients the majority of their wealth is in the bank and whatever is outside the bank is still held in rands. So what we’ve tried to do is get our clients to be global players through strategic partnerships. I always make the example that if you went to Warren Buffett or Bill Gates and asked them to hold 80% of their wealth in rands, after they have finished laughing at you, well, first they will probably ask you what are rands and then they will laugh at you and say no, thank you. So that’s how I try to be different, is to say to our clients we need to get you to start thinking globally in terms of your investment options and not just what is in South Africa. I know a lot of people are worried about where our country is going and no one really has a good answer for that but I always say that if that is one of your worries then let me show you how you can hedge your bets and make some money at the same time.
RYK VAN NIEKERK: A global approach, there are many investors who do take the global approach but sometimes more to hedge the currency and the exchange rate, which is not the best strategy to follow. If you advise somebody to take money offshore, what investments do you like and which geographies do you like?
MDUDUZI LUTHULI: Always with going offshore the most painful part is obviously the exchange, so when we meet a client it’s first determining what part of the investment journey are they at. So if someone has got R500 a month it’s not advisable or straight from the word go to say let’s go offshore. Always try and get them to grow a pool, so that when we do that exchange exercise you actually still have a decent sum to play with.
RYK VAN NIEKERK: What do you think is the minimum amount you need to take out with one transaction?
MDUDUZI LUTHULI: This is just a preference in terms of my investment strategy but I would say when you’ve got about R100 000 then you need to start thinking about going offshore. Anything before that there are structures available to you but I don’t think you really get the benefits of going offshore. So always try to build a local portfolio, get to about R100 000 and then I say to my clients let’s start having the offshore discussion. There are various vehicles you can use, the most obvious and the most popular is a unit trust or a collective investment. What’s also very popular is structured products, so for people who don’t know what that is it’s an investment vehicle that tries to give you the flexibility of a trading account and what I mean is that what you get out of a trading account is that you get to pick your own stocks, whereas if you are buying into a fund the asset manager does the stock picking.
RYK VAN NIEKERK: But that’s a South African product.
MDUDUZI LUTHULI: A South African product, yes.
RYK VAN NIEKERK: So you don’t take money offshore, get a broker there and then transact.
MDUDUZI LUTHULI: No, we are taking your money offshore but we are doing the exchange here, if I can put it that way. We’re buying offshore investments through a South African product. So the one I was explaining now, a structured product, it gives you the flexibility of a trading account but you are able to build some sort of capital protection into that because that’s always the fear. Anyone who has a trading accounts feels that they don’t want to wake up tomorrow and there have been two bad days on the market and the money is gone.
RYK VAN NIEKERK: Geographies?
MDUDUZI LUTHULI: North America is the most obvious one, it’s a very established index, probably the best companies in the world are found on the S&P 500, you can’t get away from that. I don’t like the Asia sector because I think it’s too heavily dependent on one country, which is China, and I try and stay away from anything that is too highly dependent on one industry or one country or anything like that. We’ve recently ventured into Australia, it gives you some very nice alternatives in terms of the assets that you can hold in investment and I think it’s a sector of the world that’s a bit overlooked. Now and again we do dabble in Europe but the drawback of Europe is actually its strength as well, in that it’s been there for so long. It’s hard to really find something new, something interesting but I’m sure someone out there could disagree with me.
RYK VAN NIEKERK: What do you think is the quality of financial advice in South Africa? Obviously if you want to establish your own firm you believe you can offer something better than the next advisor, do you think people get good enough advice?
MDUDUZI LUTHULI: I think there is still a huge, huge, huge gap, it’s that old adage of you get what you pay for. I think those who have the money get very good advice and those who don’t have the money unfortunately just run into sales people that sell them a policy and never follow up on them again. I’ve been doing this now for almost seven, eight years and my most loyal clients have been with me…what they’ve told me is not even so much the performance from investment but the mere fact that I do follow up with them, I do check and that there is a plan that we’ve put into place and that we keep tracking because something that simple, that you think is obvious, hardly gets done. I think the quality of advice in South Africa, if you’re looking at is the population getting good quality advice, no, I think a lot of people don’t ever get any sort of advice and a lot of people get very poor advice. We’ve seen some phenomenal growth and I think part of that is because people thought they had good advice and then you sit with them and say but A, B, C, and they say, well, no one has ever discussed this with me.
RYK VAN NIEKERK: I believe the industry is maybe overregulated and that forces many advisors to tick boxes and then go for the Allan Gray balanced fund or go the value fund at Coronation because they are safe, proven funds that will give you in the middle of the bunch, maybe slightly better performance. Can you improve on that?
MDUDUZI LUTHULI: I think it’s one of those damned if you do, damned if you don’t. I can understand that the industry is heavily regulated and I can understand why because every year you have a new scam, a Ponzi scheme or whatever it is and the FSP has to react to that with new legislation. You do have to get creative. I think you need to be careful not to just put your client’s money into something because it’s new and it’s shiny. For me it’s more a matter of asset management, if you get your asset management correct then there are very few things out there that you could offer your clients that are better. All any investor is looking for is performance and then it’s up to me, while sitting with a client, how am I going to get you this performance. But I’ve never sat with a client who has said I would take a trading account over a unit trust if a unit trust is giving more performance. For them it’s not a big deal where the money is invested, it’s always about is it safe obviously and what are we talking about in terms of benchmarking, what’s the performance.
RYK VAN NIEKERK: Let’s talk about fees, sometimes most perspective clients know more about fees than they know about performance of individual investment products, what is your fee structure?
MDUDUZI LUTHULI: In terms of the investment fees we charge 1% per annum. We don’t charge an upfront fee and the reason why we don’t charge an upfront fee is that for most of our clients who come to us, they will fit into one of our models. So my job is managing that model portfolio and, hence, the annual fee, that’s what you are paying me for, to manage your investment. But for someone, especially the recurring business, if you are paying me R1000 or R2000 every month it’s hard to then justify that upfront fee all the time because am I really giving you new advice every month. But what we have done, because it’s a two-sided coin, is we also have a consultation fee because we say to clients, come in if you want to have a consultation, we’ll charge you a consultation fee, if you become our client then we waive the fee. If you don’t want to become our client then I still sat with you for two or three hours and given you the advice, it’s your package, go somewhere else and implement it if you want but please pay me for my time. I think that’s what RDR is trying to address is to get us to justify our fees but also to say from an advisor point of view we do understand that you guys spend a lot of time with clients who never become clients.
RYK VAN NIEKERK: But not many advisors do that, obviously if you go and see a lawyer or an accountant or a dentist you pay for the time and, as you say, RDR is moving in that direction, what is your fee for an hour’s advice that you would give someone?
MDUDUZI LUTHULI: If they want a full consultation and want a full plan we charge a once-off fee of R2500 and, like I said, if they become our client then we waive that fee. That’s just broken down in terms of our admin costs and the operational side of things, where we’ve said how much is it actually costing me to sit with a client, as opposed to me being somewhere else.
RYK VAN NIEKERK: You offer a lot of services, one that caught my eye is your model portfolios, tell us about those.
MDUDUZI LUTHULI: So why we introduced the model portfolios was first of all if every time I meet with a client they have new asset allocation or new funds then it begs the question to say do I actually have an investment strategy. So we sat down to say we need to create models, where number one we need to decide which asset managers we want to work with, do we believe in their strategy and then combining the assets to be benchmark linked and what I mean is we have CPI plus 3%, CPI plus 5%, CPI plus 7% and depending on which one of those you fall under will determine your equity allocation. But really besides that the biggest, biggest thinking was also from the administrative point of view to say I’m starting this company because I would like to have 1000 clients one day, 10 000 clients one day. So from a reporting point of view if you have your models you are always, number one, giving the same advice to someone who’s got R10 million, compared to someone who’s got R1000, it’s easier to manage those and just reporting to the client it makes it a lot easier.
RYK VAN NIEKERK: Looking at your portfolios it’s clear that you like passive investments, there are several exchange traded funds included there, what is your position on the active versus passive debate?
MDUDUZI LUTHULI: I’m a huge, huge believer that both have their place in a portfolio. We do blended funds, which is combining active and passive because from a passive fund what you get out of there is obviously a reduction in cost and it makes sure that a client is always actually invested in a sector because sometimes an active manager might decide to hold money as cash. The figures are there, the stats are there that over a long period, we’re talking seven to ten years plus, very few fund managers actually outperform an index. But now the disadvantage of an index is during the poor times you’re stuck in there, you take what you get and it’s now a matter of taking the index and combining it with active mangers that, number one, you don’t get positive correlation, meaning that you are not just replicating the index and exactly that, giving the clients an investment strategy, saying you’ve got the index, let’s combine that with a bit of a momentum-based asset manager, let’s give you a value-based asset manager. Those are the discussions we have with our clients. I think both have a place it’s just about how you combine the two.
RYK VAN NIEKERK: Just lastly, I see you also offer a tax-free savings account. These accounts were very popular when they were launched, many people opened these accounts for their children but I think they have lost a bit of shine. How is your tax-free savings account different?
MDUDUZI LUTHULI: I think the tax-free savings was a bit of a false dawn. I think I like what they are trying to do and I’m hoping that as we go down the road they will increase that tax-free allocation. But in terms of the uptake there was that initial rush but once people understand that you do get a capital gains exemption and really the tax-free savings is for someone who is saying I am in this for 15 years, you need to build up that capital to be able to take advantage of that tax-free portion. Largely what we use it for is a supplementary to your retirement savings. You mentioned that people open it for their children but I always say to clients like that if you are going to open it for your children then make sure it’s for your children, don’t use it because you’ve taken away that option.
RYK VAN NIEKERK: Mduduzi, good luck with your new business and your new career, and I trust it will grow from strength to strength.
MDUDUZI LUTHULI: Thank you very much.
RYK VAN NIEKERK: That was Mduduzi Luthuli of Luthuli Capital.