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Investment strategies in choppy markets

Come back to the objective and initial reason behind the investment – Magnus Heystek Junior, Brenthurst Wealth.
Magnus Heystek Junior, financial advisor at Brenthurst Wealth

Ryk van Niekerk and Magnus Heystek Junior discuss how to choose investments and how Brenthust Wealth strives to keep its clients informed about the performance of their investments.

RYK VAN NIEKERK: Welcome to this financial advisor podcast. My name is Ryk van Niekerk and in this series of podcasts, I speak to South Africa’s leading financial advisors and we talk about the industry, their personal investment philosophies, how they deal with their clients, and also their views on fees and regulations. And my guest today is Magnus Heystek Junior. He is a financial advisor at Brenthurst Wealth.

Magnus, welcome to the show. When we spoke last year, you made a very interesting comment that it’s very challenging to manage your clients’ unrealistic expectations. Sometimes the clients have seen good growth for a number of years and then when the market pauses for a bit, people expect them, the advisor, to actually change these investments to sustain that growth trajectory.

Recently, we’ve seen a pretty flat market in South Africa. Have you had a few calls from clients with unrealistic expectations?

MAGNUS HEYSTEK JUNIOR: Firstly, thank you for having me. The term unrealistic expectations is a bit unfair from the client’s point of view, but from the advisor’s point of view it’s very difficult because you’re dealing with different personalities, different expectations and there’s unfortunately not a broad spectrum of how you can approach each client individually, and particularly with performance as of recently, it’s a recurring trend that I’m assuming a lot of advisors are facing the same challenge, that they are being questioned on performance and what’s happening with the capital and things like that and that’s when an active management approach does come into play.

But sometimes it’s also the case of explaining the situation to clients; that a lot of investors are in the same boat, the local economy hasn’t done much in the past two years, if you want to look at performance from that point of view and it’s important to give that feedback and always come back to the objective and the initial reason behind the investment.

RYK VAN NIEKERK: But that brings into question, you advise your clients to invest in active fund manager funds, for example Allan Gray or Coronation, and if they don’t get it absolutely right, how many clients hold you responsible for that?

MAGNUS HEYSTEK JUNIOR: That’s a very good point. Obviously there’s a lot of fingers being pointed but from my personal experience, a lot of the times, if you have a plan at hand and you provide communication to clients, so if it’s not just a shock where they get a statement after a certain time period and they look that there’s a big jump in the performance, but if they’d been warned about it and it’s something we’ve been actively doing for, I would say, the past two years.

We’ve been telling clients you can expect lower returns, and that’s something that we’ve really been driving recently and as I said, in the past two years, that going forward in the future, you’re not going to see the type of returns that we saw in 2012 and 2013, where balanced funds were doing roughly between 15% and 20%. Those days are gone, but at the same time you have to come down to the underlying reasons as to why those funds haven’t been performing. And it’s always a case of hindsight is 20:20, it’s always perfect vision, but at the same time, no-one has a crystal ball, no-one knows what the markets are going to do, what the outcome is, and that’s where our investment philosophy ties in.

We have mentioned it in the past, but diversification is very crucial but we always invest, in particular, our client’s capital based on their risk profile. So if they’re a bit more mature, we go a bit more conservative. A bit younger, go a bit more aggressive and we always remind them that volatility can play a big role in their investments.

RYK VAN NIEKERK: How do you communicate with clients? Obviously if you tell somebody, listen, don’t expect fireworks, it’s not a nice message, it’s not typically what you want to tell your clients, but how do you do that and how do you engage if people are not happy with what you’re telling them?

MAGNUS HEYSTEK JUNIOR: A lot of the times, it’s the case of a client might be in a position that where they are currently invested might be the best solution at that time and you indicate to them, we’re not going to make changes for the sake of making changes. That’s very important to remember because you might be selling out of the low point and with the volatility we’ve seen in the markets that could be a detriment to the client’s investment.

So we indicate via phone, e-mails, we’ve got newsletters that we send out from the business itself. We’ve got our seminars; we communicate with clients where we bring in different fund managers and people with different positioning in the financial industry to provide that type of feedback and if the recurring trend is a volatile, low-growth environment. And at the same time, I think there is a little bit of, I don’t want to say… requirement, but the clients also do their own reading, they do their own research and they are up to date with what’s going on in the financial environment.

RYK VAN NIEKERK: That’s my next question. How much – obviously you need to do damage control if your clients do not know or do not read what is going on in the world. There is a lot of uncertainly currently, expectations are not linear, you’re going to get a bumpy ride in the long term. How informed are your clients on average about what is going on and how that impacts on their investments?

MAGNUS HEYSTEK JUNIOR: Generally speaking, my client base, I’m assuming the same for the other advisors in the company, they’re generally very well read. We do provide them with a lot of content, but I always get questions on different shares, different funds, different opportunities and even from an offshore point of view, they would always indicate, I’ve read this on this particular investment or this particular fund, or this particular asset class and generally I have to give them credit that they do understand what’s going on and we provide further peace of mind or, maybe that’s not the right term to use but they do understand South Africa, the economy’s at a very – it’s in a turbulent environment at this point, there’s a lot of uncertainty particularly from the rand and what’s going on.

So I have to say that our clients are generally very well informed but we provide them feedback on more particular performance, what’s the reason behind low level type of performance and maybe we’ll make recommendations based on the individual objectives and their risk profiles.

RYK VAN NIEKERK: So what you’re saying is clients should actually ignore the short-term noise and rather stick to a plan, a long term plan. That seems to be a common position many advisors have. But when do you change it? When do you say, listen this plan is not really working, we need to amend it slightly, how is that decision making process?

MAGNUS HEYSTEK JUNIOR: It comes down to the review process, you communicate with your clients at least once a year. We communicate on a much more regular basis. I mean it’s not just direct communication, its other third party type of communication in the form of our newsletters and things like that. But if we see a particular fund or an asset class where the projections aren’t doing well, then we do make a change. But most of the time, our changes come from more of a policy base, from an internal point of view.

How our philosophy works in Brenthurst, and particularly our fund management for our clients, is that the advisors get together on a monthly basis. We communicate in terms of our monthly status meetings, but we also get together on a bi-annual basis where we have our own in-house forum with all the advisors from all of our branches and we’re opening another branch in Cape Town soon, we’ve got two branches in Johannesburg and one in Pretoria and we all get together, we sit in a room for two days.

We discuss what funds we are using, what funds we are dropping from our house view. That’s what we have really changed in the recent years. So it’s more of a collective investment philosophy for our clients. If we decide we’re dropping a fund, then that will be relayed to the clients and the reasoning behind that as well.

RYK VAN NIEKERK: What do you think is the biggest mistake clients make or prospective investors make?

MAGNUS HEYSTEK JUNIOR: I might get some people who disagree with me but I think it’s panicking, especially in the short term and I’m referring to very short-term fluctuations in the market and rand levels, in particular in the span of a month where they might get a statement and they decide to look at their own statement or they log onto the website. Most companies do provide that solution and they panic. Then they’re saying, that’s a bad investment because there’s been a bit of volatility. I think you always have to come back to objective and I know it’s, as you mentioned, you hear a lot of advisors saying it but we’re living in an information overload society. Everyone has so much access to all different types of information and we do get it from clients a few times where they’ll send me an e-mail from an article that someone in the United States wrote and saying, there’s going to be a big market crash.

It’s that panic that really drives investments sometimes and I think it’s dangerous. Not for everyone, but you have to understand the type of investment vehicle that you’ve gone into, the type of funds, the type of risk you’re taking, the inherent volatility within that investment and you need to understand that volatility can be expected and that’s something we’ve seen a lot more in the past two to three years. That’s from a local point of view and from a global point of view.

RYK VAN NIEKERK: But again, sometimes the most important decision you can make as an investor is the actual advisor you choose. How divergent is financial advice in South Africa? If I go to you, how much different would that advice be from say, another financial advisor? Do you think it’s very homogenous or are there different approaches?

MAGNUS HEYSTEK JUNIOR: I do believe there are different approaches and I would like to commend the FPI on a recent – so the FPI is a Financial Planning Institute of South Africa and they’ve recently made a lot of changes to, I would say, trademark the term Financial Planner. They have started the proceedings to trademark the term Financial Planner and that can only be reserved for people who are fully qualified, certified financial planners and they’re trying to change the understanding of what a financial planner is and someone who perhaps works in a more minimal role within certain bigger companies where they’re basically only selling policies.

And in particular the type of work that the advisors at Brenthurst do, is that it’s evolved much more than just placing a person’s capital in a few funds. It comes down to ensuring that proper tax advice is given and how to minimise your tax implications, obviously within a legal manner and it’s evolved much more into building relationships with clients, assisting them with their investments, maybe providing them with other feedback on areas that they haven’t thought of and that’s something that we do on a regular basis. Someone might approach us for retirement planning but we might indicate, well have you thought of investing in a tax-free savings account for your children or even for yourself?

RYK VAN NIEKERK: To come back to that question, how would a perspective investor pick the “best” financial advisor, how would, what should the process be for that prospective investor to select an advisor?

MAGNUS HEYSTEK JUNIOR: There’s lots of areas – word of mouth. We, in some cases, we might see the mother and the father and then they recommend the children, and they recommend their brothers, so I think word of mouth plays a very large role. And investors need to realise that not every advisor’s going to suit them, but in the same breath, not many clients will always suit the advisor as well.

But my suggestion would be, go and see different people. From a fundamental point of view, we don’t charge anyone anything to come and see us. That’s something that we really feel strongly about. We let everyone meet with us for an hour, it’s free of charge and we can provide them an opportunity to discuss our investment philosophy and a lot of the things that I’ve mentioned now is what we talk about with our clients and potential clients. We say, this is our investment philosophy, this is the work we do, this is how we can assist you and if they don’t like that they can always go and see someone else. It’s a very big market, I think there are a lot of advisors out there willing to assist, so that’s where I would start.

RYK VAN NIEKERK: We live in a very regulated financial advice environment. We have new financial regulations kicking in later this year with the Twin Peaks model. Do you feel restricted by the financial regulations that apply to your role?

MAGNUS HEYSTEK JUNIOR: In some ways I would say its restricting, but bear in mind those regulations have been brought onto the table because of bad advice that’s been given in the past, because of scams and people losing money because they were investing into unregulated type of investments. So we do follow regulation very strictly. We see our compliance officer on a quarterly basis. They provide us with feedback and areas to look out for and it comes about providing good advice to clients. I think there’s a lot of policy structures that have taken place over the past couple of years from a regulatory point of view and I think the clients don’t always understand the work that really goes on behind the scenes to ensure that we’re always up to date – it’s difficult to say, oh no, we are up to date or we are compliant but at the end of the day, your business can only benefit from being 100% compliant. If you’re trying to cut corners it will catch up to you unfortunately. And I feel very strongly about that.

RYK VAN NIEKERK: Thank you Magnus, that was Magnus Heystek Junior, a financial advisor at Brenthurst Wealth.

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MHJnr – many people on this site consider your dad and me to be the “terrible” twins. I repeat what I have said to him many times – its one thing to get your funds off-shore – my goal was to do that AND get my family off-shore as well! as regards where funds should go – there is only one game in town – that’s NYSE. all my investment funds are there and doing incredibly well. unfortunately the Aus$ has not fallen at all – which I had expected.

JSE listed industrial companies (in terms of the US Dollar) outperformed the Dow Jones Industrial Index from 2002 until the end of 2015. Out of a period of 15 years, you have been correct for 1 year. If your fund manager had such a track record you would fire him. Your advice is based on sentiment and not on fact.

The JSE is the best-regulated exchange – and the banking system is one of the strongest in the world. The ANC is in a death-spiral, the darkest hour is behind us. Parliament rejected the EFF motion for expropriation without compensation with a wide margin. Now is the time for the smart money to move into South Africa.

You know, at a certain age, a lack of testosterone tends to cloud ones view of reality.

@Sensei.: I hope you are correct…….but where are the signs?

It does well until it doesn’t. At current valuations in the US you are assured to lose money. For now cash is king.

Bob – you’re wrong. You made a mistake in taking your money out of ZA and JSE. Over the longer term (your life) you should have stayed invested in ZA. Smart money is now in ZA, moving to ZA. Facts, not sentiment.

Please elaborate on all this money moving to SA.

Still think uncle bob is wrong?

The Heysteck’s and Brenthurst Wealth is the best contraindicator to the direction of the ZAR. Sensei is correct, they advise on sentiment, not reason.

End of comments.

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