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Independent advisors vs ‘tied’ financial organisations

‘Independence allows me the space to find the appropriate solution for a client’ – Craig Gradidge, Gradidge-Mahura Investments.

 

RYK VAN NIEKERK: Welcome to this advisor podcast, my guest today is Craig Gradidge of Gradidge-Mahura Investments. Craig, welcome to the show, we live in an interesting world, we have Trump, we have Zuma, we have unpredictable world markets and things change very quickly. How do you manage people’s money in this environment?

CRAIG GRADIDGE: You are right, it certainly is a more difficult environment in which to manage money for clients. I think the important thing is for me to understand my role as an advisor, I’ve got to work with clients and help clients understand clearly because clients don’t always know what they want. So we help them to understand and articulate their investment objectives and their financial planning objectives and make sure we understand those and then put a strategy in place that will help the client to achieve those objectives. If you’re going to worry about things like market volatility and who’s in charge and all of that then you lose sight of clients’ objectives.

I’ve been in the market for 20 years and uncertainty is an ever-present thing, even in the good times there was uncertainty around. So it shouldn’t be a debilitating thing, it should be something that is part of the package, we operate constantly in a world of uncertainty but it’s how you then structure your clients’ affairs within that. In the worst case scenario clients will have some downside but more often than not it’s about managing client behaviour and not so much about trying to manage markets and trying to manage outcomes.

RYK VAN NIEKERK: You say that clients sometimes do not understand what they want, what is the process you go through to try and ensure that you can formulate the best plan for a client who doesn’t really know what he or she wants?

CRAIG GRADIDGE: It’s not so much that they don’t know what they want, it’s almost articulating it. I think what clients want is high returns and low risk but we’ve got to help them articulate their objectives. If someone comes to me and says I want 20% per annum return and I don’t want any risk, and here’s R5 million. I can either say that’s a R5 million deal, I can walk away or I can sit with the client and say okay, let’s look at your objectives, how realistic is 20%, while the long-term average from the market is 13.5%, your risk profile doesn’t seem to support what you are trying to achieve. A frequent situation we are faced with is I’ve got five years to retirement, what must I do, I’ve only got so much and this is what I need. It’s then getting clients to understand that you want to save for retirement, what does it mean, how much income do you want, when is retirement, you get a lot more detail and a lot less space for misunderstandings.

RYK VAN NIEKERK: In many of these financial advisor interviews, advisors are very set in a certain way in how they structure solutions, it’s a long-term strategy, you are conservative but you adapt the plan according to the risk profile. It seems very set, is there any room for creative advice and creative definitely not in the same light as creative accounting but to become creative and either reduce risk for the same return or actually squeezing out more return for the same risk?

CRAIG GRADIDGE: I think that’s where us being independent helps, I don’t go into a new client meeting with any kind of preconceived ideas about the solution you’re going to put on the table. In fact, if an advisor puts a solution on the table in that first meeting you’ve got to ask yourself am I being sold something here? Our process is you go in, try and understand as much about the client as possible, the person, their balance sheet and their objectives. You’ve got to have a context in which you are going to offer this advice and that advice has to sit easily with the person, it’s got to enhance that existing balance sheet and it’s got to be realistic.

So, again, 20% per annum, I’d walk away from a client who insists on that kind of return because I know it’s going to be a problem client down the line. So as an advisor you’ve got to have that capacity where you’ll be faced with three different clients, three different scenarios, three different balance sheets, three different objectives and you then have to be able to be of value to each of those clients and they must have three distinct plans that you put together. Now, there are only so many products on the market and when I talk about products I’m not talking about funds, I’m talking about your retirement annuity-type products, your flexible investment products, your endowments, all of those. So you’d have your product offering and within there you would structure the portfolios accordingly. So there’s not that much room for creativity,

I think where we do differ is that we do widen the net, so we have offered our clients private equity in the past, we are putting Section 12J on the table for clients at the moment. We looked at 12J when it came out in 2009, we didn’t like it, we didn’t like the risk but since the amendments in 2014 we are a lot more comfortable. So our independence allows us to be able to respond to clients and we’ve seen clients who we put into private equity in 2009 those returns are back-end loaded so they are getting fantastic returns now when the market is actually giving fairly low returns and they were getting fairly low returns a few years ago when the markets were giving them very good returns. So I think it’s just that independence and that capacity to be able to go and look at a broader [spectrum]…so not just unit trust funds, for example.

RYK VAN NIEKERK: Just on independence, on your website you are very proud of the fact that you are totally independent and you even set that fact above others, such as boasting about performance, why is it so critical to be independent and why is that an advantage to you?

CRAIG GRADIDGE: Independence allows me the space to go and find the appropriate solution for a client. So if I worked at one company I’d have to force clients into that company’s product offering.

RYK VAN NIEKERK: So if you work for Nedbank you need to go into the Nedbank products and the Old Mutual products, while you can go and cherry-pick from Allan Gray right through to Inkunzi?

CRAIG GRADIDGE: Sure but there are issues of pricing, so Nedbank will have its own governance structures and I’d have very limited room in which I could respond to the client sitting in front of me. So, for example, the Section 12J that we’re using, we would be able to use it in the Nedbank context that you’ve highlighted. We would have limited room in terms of incorporating index tracking solutions or passive solutions next to active solutions like we’ve been doing for the last eight years that we’ve been around. So that independence is critical because I can then say okay, this is what the client needs, who’s got the best products out there for this particular client.

Whereas if I worked [for Nedbank] I’ve got to look within this fairly limited range of options and just understanding the inner workings of tied agent, having worked with many over the years, there are restrictions that come because you’ve got this big machine, you’ve got to manage risk as management of a company like Nedbank, for example. So I think that independence, yes, it does come with its risks because it was largely the independent guys offering Sharemax, for example. So those risk management processes that come with a large corporate, they do have some benefit, they can hamstring on the one hand but there are benefits on the other hand.

But the Financial Planning Institute, we’re a professional practice, there are 13 practices out of the 5 000 practices out there that have this accreditation, so clients can see on the Financial Planning Institute just the process that we went through to get that accreditation, so a due diligence that was done on behalf of clients. The independence I think is critical because you’re then able to be true to your fiduciary responsibility to your client.

RYK VAN NIEKERK: What is the level of understanding among prospective clients of what you’ve just said? Do people understand the benefits and the disadvantages of going within a big corporate group versus a smaller independent outfit like yourself?

CRAIG GRADIDGE: I don’t always think that clients do understand it, I think people do get a sense of comfort from working with someone from a large organisation. Typically a lot of the clients where we have taken over portfolios and that they say I thought so-and-so would look after me, I thought this company would look after me. But ultimately it’s the individual who works for that company, and in the large organisations – they change, and that’s not always communicated to clients. So yes, we do have a responsibility ourselves as a business, the Financial Planning Institute is the institution that represents the interests of independent financial advisors in the market, we’ve just got to focus on delivering to clients and show them that value over time but you can’t manage that entire perception.

RYK VAN NIEKERK: One aspect most investors are more clued up about than others is fee structures and I think a lot is being made in the media about fee structures and the impact on investments. What is your firm’s fee structure and how do you think clients should look at these structures within the context of broader financial advice plan?

CRAIG GRADIDGE: Fees are important, like I said, we’ve been incorporating index tracking solutions because of the fee benefit, not because we thought they’d outperform because we don’t know that they will for sure but definitely the fee benefit that’s guaranteed. So since we’ve been including them in client solutions the total cost or average cost has come down quite significantly. If you look over time you’ll see those funds, if you look along the cost curve of the active managers, you’ll see consistently over time the cheaper-priced funds tend to do better.

Obviously we think that asset allocation is a lot more important, the Allan Gray balanced fund is a case in point where it’s not a cheap fund but because they get asset allocation right, their stock selection right, they are able to justify that fee. So even with the balanced fund outperforming the JSE, you would attract that quite cheaply but you would have underperformed a well put together fund and one that’s managed well on a consistent basis. So, again, this is where our independence is valuable to our clients because some clients prefer to pay an invoice, it’s a professional service we’re offering and they want to know what the cost of that is and they will pay for it separately.

RYK VAN NIEKERK: As opposed to an annual percentage fee?

CRAIG GRADIDGE: No, for the initial analysis and set up and implementation.

RYK VAN NIEKERK: How much would such an invoice be?

CRAIG GRADIDGE: It depends on the amount of work, we’ve invoiced over R50 000 in some cases where it’s a lot of work, so you’re dealing with a much bigger balance sheet and you’ve got to restructure the balance sheet almost.

RYK VAN NIEKERK: But for a normal 30-something person in a job?

CRAIG GRADIDGE: The average is R10 000 to R15 000. Obviously it’s gone up over the years but our rate is R1 400 per hour. The typical 30-something year old, you’re looking at about ten or 12 hours of work, so that’s collecting all the information, doing the analysis, coming up with a recommendation, typing up a report with all your analysis and your recommendations, so that your client can see this is the analysis and this is the recommendation, this is why these are the funds, this the cost and so on.

RYK VAN NIEKERK: Do you see that trend picking up, where people are prepared to pay for a professional service like you would for a doctor or a lawyer or an accountant? It’s not been the norm in the past but you see it a lot more.

CRAIG GRADIDGE: Ja, we do see it a lot more, I think as clients are starting to recognize the value of good financial advice that it’s not just about choosing three funds and investing, it’s really about understanding the client and looking at their balance sheet and saying we can’t give you this because you’ve already got that in your balance sheet or if we gave you this we’d be doubling up on risk and so on.

So we always start our analysis as much as possible by looking at the client’s balance sheet and getting an understanding and helping the clients to understand because clients don’t always have their balance sheets ready, so we’ve got to help them put that together. So when clients then get this report they can then see the value and realise this is not just about choosing three funds and they have a much better understanding of their balance sheet. So ultimately it’s the balance sheet that carries the client, not the return of those three funds that you’ve chosen. So they see the value and they are prepared to pay for it.

RYK VAN NIEKERK: But how do you pick the best financial advisor? You’re not going to pay R10 000 to go and see different financial advisors and then pick the best plan, how should an investor approach this?

CRAIG GRADIDGE: As an investor you’ve got to do your homework on the advisor and then you’ve got to trust that the criteria that you’ve put in place will then lead you to a good advisor. I think this concept of best is a moving [thing], the best fund last year will probably be the worst-performing fund last year, so that does change. But what you want to see is process, you want to understand that this person has a structured process that they are going to follow, you want to see capacity that the person you are dealing with has flexibility in the mental capacity to put a solution together for you specifically and then you want to see some kind of track record, you’d like to see something like the FPI professional practice accreditation, you want to see the CFP, you’d like to see other qualifications and then you’d want to understand their pricing, like we’ve had clients requesting referrals.

That’s a lot of work for people to do, so typically people would take a referral, who’s your advisor, has he done a good job for you, okay, give me his details. We’ve had a few clients who have been very thorough, where they say where have you studied, what did you study, where have you worked, how long have you been doing this and so on. I think clients would have to have their selection criteria in place and then they would start that process…because you’re not going to compare plans because that’s going to be a very expensive way of choosing an advisor and, in fact, you could just then take all of that and go and do it yourself. If the analysis is done properly and thoroughly then you could go and implement yourself and advisors know this.

RYK VAN NIEKERK: Robo-advisors?

CRAIG GRADIDGE: I think robo-advisors have their place but it’s a case at the moment of garbage in, garbage out. I’ve been on a few robo-advisor sites and I’ve put stuff in and where I did a presentation at the Moneyweb Money Expo last year on robo-advisors and I got given two different solutions. But also from my own experience dealing with clients, where a client from within the industry came to me and said I need A, B and C, and after the conversation he walked away with D, E and F because he didn’t understand the pecking order and the importance…

RYK VAN NIEKERK: It’s what you said at the beginning of this interview, people don’t really understand what they need.

CRAIG GRADIDGE: Exactly, so what we realised after a few engagements was that the client had a special needs child and he didn’t think that that was an important piece of information to give us and when he gave it to us we had to then go and amend his estate plan. So sometimes clients say that’s not important. I had another client recently who didn’t disclose rental properties and they said, well, I’m doing that myself, so the advisor doesn’t need to know about that. But it impacted on tax position, so I then had to go and amend the plan again and say but I’m going to be creating tax liability for you here, we need to do this thing differently.

RYK VAN NIEKERK: Just lastly, Gradidge-Mahura Investments, you were founded in 2008, so next year would be your tenth birthday, 2008 was not a good year for financial services around the world, it was maybe a dangerous year to start. Obviously you’ve come through that initial volatile period, what are currently your strongest offerings? I see on your website you have wide range of fiduciary services, what is your core competency?

CRAIG GRADIDGE: The way we’ve set up the business, I am the retirement and investment planning specialist. My business partner, Kagisho Mahura, does a lot more integrated planning, so where we are dealing with a client who has a family trust and a business, for example, integrating, making sure those three things talk to each other and then he’ll do any kind of requirements on the business side, setting up an employee benefits structure and things like that. Then our other partner, Virath Juggai, is more of a risk specialist, so your life, disability, dread disease, probably one of the most technically competent advisors in that space and then also short-term medical aid.

Then we’ve got two general advisors and one of our advisors who’s a generalist had a big investment, so I pretty much ran that with him so that he got the depth of having an investment specialist. A few months before that, he had a big client where there was a big need for risk cover and one of the other partners then held his hand through all of that. So in some cases you would have all three of us working on a particular client, so you get the depth of a specialist, as well as the continuity of having a number of advisors. We’ve got a philosophy that runs through the organisation, so irrespective of which advisor you deal with you’ll get the same solution at the end of it and what we’ve done to ensure that happens is we’ve started to build the middle office where a lot of that analysis takes place and making sure that that’s done properly.

RYK VAN NIEKERK: Thank you, Craig. That was Craig Gradidge of Gradidge-Mahura Investments.

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Listening to this as someone very involved in the insurance world, i note a few point made and have a comment or two myself. Firstly, this drive for independence and been tied or not, it begs the question of why have two distribution channels? Currently commissions earned by advisors/ agents / broker and tied agents are been blamed.I have continuously asked whether the removals of commissions paid for products sold will change the integrity of the insurance industry? There are too many opinions offered to ever have one size fits all solutions. Remember that commissions are paid by the clients and built into the product costings. It is facilitated by the insurance companies( product providers) and paid to the agents and monitored by means of commission clawbacks and other methods should the product be cancelled, changed, altered or any reductions made. The policyholder thus pays the commissions and fees! Now, secondly, should the fee only option be implemented, will the product providers ( insurers) drop the premiums accordingly? I bet my whole salary this will not happen! All that is going to happen is that the man in the street will now have to pay Craig R10 k to R20 k for a financial plan ( 100 pages of figure and guessing) and then still pay the insurer / asset manager the full costings. This is going to make it more expensive to invest and sorry guys, if we listen to the FSB / Treasury/ FPI and compliance companies, then the idea of every man in the street who should have a plan, will not be able to afford this and still purchase the product to satisfy the need identified! In the late 1990 in America a survey was done in all the States regarding implementation of financial products. The major point that came out was the two States who applied fees versus commission, and in those States where fees were taken for planning, they were the lowest implementation / least products sold States.Why? Well for the commission earner there was a incentive to ensure that the plan was implemented as they were paid a commission for the product suggested. Those where fees were taken the incentive to implement the plan was far less making this a bigger risk to the clients and making them more expensive if products were in fact taken out to satisfy the identified need.
My last comment, is that as someone who belongs to all the organisations mentioned in this article, i lost my faith in them as they have taken no steps to remove or sensor those members who sold Sharemax, Bluezone, PIC etc. Those members are still part of all these organisations and are still running around selling products who are designed to maximise the profitability of the product provider offering the product!
My conclusion is that no one solution ( and i agree here with Craig) can be offered for this complex issue.If we are trying to simplify the financial planning environment, start with a simple plan: Reduce the options ( and here i speak about Unit trusts) and streamline the life products to eliminate obscurity within the products. Pay the person who does the work a fair fee and audit everyone selling and providing advice annually to ensure that financial plans offered are in accordance with what is implemented.

Can the article please detail how much (i.e. rand per hour) the rate is for good independent advice?

The rate listed by Craig (R1,400 p/h) is about norm for top end planners providing independent advice – we on a similar hourly rate for our practice.

Some practices have a minimum of R30,000 fee for initial plan and implementation. Keep in mind that there would still be an ongoing % based asset fee for the ongoing advice and reviews.

Thanks Charles, missed it in the article.

R1400.00 p/h??? crazy!!! DIY!!! best financial plan – increase your pension fund contribution to 27.5%!!!

Financial Advisors are an unnecessary burden on society. Independence is not the answer, neither is index tracking or CFP’s. Financial planning has been complicated by the industry itself. Here’s your financial plan- I’ll save you the R10k Craig is asking for. 1. Get a decent health plan, get some quotes from different companies and select. 2.Work out how much life and disease cover you need based on your current debt and requirements. Phone three life companies and get quotes. Go through the quotes and select the one you like. 3. Read Moneyweb’s Budget analysis and then maximize your tax efficient investments by maxing out your TFSA and your RA/provi fund. Invest in multi-asset funds where asset allocation is being done for you. You don’t have the time to do this but there are experts who do this for a living. 4. Work out a plan to pay off your debts as soon as possible and get to it. Also set up an emergency account of 3 months salary. 5. Once you are debt free invest any extra money in a diversified stream of cash flows like property, stocks, bonds, businesses. 6. Stay debt free and adjust your portfolio based on changes in your life cover needs, the budget speech, your income and your health. This plan, once implemented, just needs slight adjusting annually or as needed.

Just got statements on my RA’s with the 2 superstars down in Slaapstad AG and Coronation.A cool 1% growth on both of them over a 14 month period.Not that I should complain,at least there’s a tax break and big green’s RA has gone up a cool 8k despite paying in another 15k.I wait in trepidation for results from Liberty in Joburg.Now if I had paid R1400 per hour for this advice I would really be down the tubes although I’m sure a good financial advisor would have told me not to go near the JSE over the last year or so!

So seems like you invested in the wrong product,mate.You meant to take a long term view on r.as ,which means that their will be periods of underperformance.Just a gentle reminder.Whats the 5 year performance like?

Complexity creates exploitation opportunities.

FAs, independent or product-linked, capitalize on their victim’s ignorance or laziness to do the calculations and so charge these outrageous fees.

Learn how to do some fundamental research, make the effort to do the calculations, and there you are. It’s like tax: if the system was simple, such as flat rates, there would be no requirement for tax advisers.

well over the years I have found that the most independent and cheapest investment advisor I could find was me! and yes I have beaten the relevant index in most (but not all) years! refuse to pay someone to look after MY money!

Financial planners deliver on 3 services. 1. They give advice 2. They are distrubition channels for various product providers 3. They give on going advice to their clients and offer their intermediary services on a ongoing basis to various product providers.
Financial planning if done by a professional and compentant person can add tremendous value to a person’s financial well being. We need to understand the services being offered highlighted in the 3 points raised, and be willing to pay for them.
RDR was implented in the uk and clients are now willing to pay fees for professional services given by financial planners. The argument is would this hourly fee work in south africa?? To an extent it should work, however giving clients various options on how to pay these fees would leave the choice to be made with the client. A good example of an alternative option is a contingency fee. For example if a financial planner presented a financial plan to a client, in which the plan makes recommendations on how to restructure the clients portfolio in order to pay less tax legally. If for example a this financial plan suggests a tax saving of R100 000 if the recommendations are implemented. The client could then have a choice to pay an flat hourly rate… or pay a contengicy fee in terms of a % on how much the recommendations made would save the client in taxes etc

Any added thoughts on this comment, would be much appreciated

End of comments.

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