RYK VAN NIEKERK: Welcome to this Financial Advisor podcast, my name is Ryk van Niekerk and my guest today is Martin de Kock, he is one of the co-founders and a director of the Pretoria-based Ascor Wealth Management, he’s a chartered accountant, as well as a certified financial planner. Martin, welcome to the show, there are not many CAs who have become financial planners, why did you turn to financial planning?
MARTIN DE KOCK: Ryk, it actually started with a change in the Companies Act where the requirement for a compulsory audit has fallen away, where the result was that in your small to medium practices you’d find that lots of the audit work has fallen away because companies changed their memorandum of incorporation to not have a compulsory audit. It’s become, especially in small to medium practices, a prerequisite to actually look for alternate sources of income to make up that loss of income that was experienced due to the loss of the compulsory audit.
RYK VAN NIEKERK: I can imagine that it provides you with a lot more insights in, for example, tax planning of an individual as part of a retirement offering?
MARTIN DE KOCK: Yes, my experience is, my partner is a provisional accountant, I’m a chartered accountant, I think it gives us a bit of a head start when compared to other advisors because we have a bigger picture in terms of the businesses we can include and how they form a part of a total estate. So it does give us a bit of an advantage. I think if you look at many brokers today who’ve come through any of the major insurers, the time spent on tax in their training is very limited, so I think it must affect their advice given, especially looking at tax.
RYK VAN NIEKERK: On your website there’s a very interesting quotation and it says the industry has moved away from product pushing to having young advisors who are hungry to move to the next level, raise their qualifications and to be recognised as professionals. Ascor was founded in 2005, has a lot changed over the last ten to 15 in the industry and how advisors actually approach new clients?
MARTIN DE KOCK: I think with the change in legislation and proposed changes with the RDR, there’s a bigger focus on fees and being paid for experience. I think what’s happened in the last few years is there’s been a move towards charging fees for advice and one of the main reasons for that is if I’m charging a fee for my experience and advice, not under pressure to punt a product, to sell a product, because I’m getting paid for my time spent giving advice and we generally split the advice process with the implementation process. So the advice process is when I deliver a financial plan, be it financial planning with estate planning or an investment plan, whatever the case may be, I give a product which is the plan and I charge a fee for that, my time spent. Very often there are products that get sold to implement the advice given but my focus is on giving advice and I’m getting paid for that. If you don’t have the fee model it’s not sustainable because then every time you see a client you need to sell a product or else you’re not making any income.
Diverse fee structure
RYK VAN NIEKERK: Let’s talk about the actual fees, what do you charge for advice for an individual, let’s say they are 25 years old and they’re looking at an investment horizon of 40 years, obviously you will compile a pretty comprehensive plan, what would you charge for that?
MARTIN DE KOCK: You’re speaking about a young individual so the expectation is such an individual wouldn’t have a complex plan, they wouldn’t have companies and trust structures and things like that. So it would be a relatively simple plan, although it would be a long-term plan. So typically we charge a fee and it depends on the level of the provider of the service, so the more experience the advisor has his fee will be higher. Typically in our practice set up, we would allocate somebody like that to one of our more junior planners, not that they deserve less attention but just because it’s a financial impact for the individual. You’d very often find that an individual like that would not have a big purse to actually pay a lump sum fee. So we accommodate that by providing a debit order service in the practice, where a service like that can be paid off over a period of 12 months.
RYK VAN NIEKERK: What would that amount typically be?
MARTIN DE KOCK: Typically from R5 000 to R7 500 depending on the level of the advisor and then also, again, the individual has the choice to actually pay an upfront fee or pay off the fee with a small amount of interest because it’s being subsidised by the company.
RYK VAN NIEKERK: Do you see many of those younger people preferring that option as opposed to going to another provider who offers a free advice service but then you pay ongoing commission on investments?
MARTIN DE KOCK: I think it’s important to understand that the ongoing advice in terms of funds under advice is not given away, we actually take that and the reason we take that is that is the implementation fee and by having funds under advice I accumulate fees, which puts me in a position to next year do a revisit on the plan and reassess and go forward. I very often compare this to a cell phone contract, you have contract customers who pay a monthly fee and we’ll service them on an annual basis and do a review. Then you have pay-as-you-go clients who don’t have any assets under management, where we don’t earn any fees and they will on an annual review pay us an annual fee for their annual review. I think what’s important is we are trying to raise the level of financial advice as a profession and if you look at other professions, other professions charge fees. Looking at engineers, accountants, attorneys, they don’t do work for free and how do you maintain your infrastructure if you are not being paid fees.
RYK VAN NIEKERK: Absolutely, I think people also measure the quality of advice according to the fee structure. But just for the sake of being comprehensive what would the fee be for an older individual with a more complex financial position, let’s say someone in their 40s looking to retire in ten years’ time?
MARTIN DE KOCK: As I said, there are different levels of fees based on the complexity of the plan that is provided. That plan could be anything from R10 000 up to R35 000 depending on the complexity. Again, it does very often depend on the extent of products and of information and complexity for the specific individual, so it will depend. I think what’s important is that at the outset the client needs to be aware of the financial impact, so we’ll have a complimentary – and I specifically stress complimentary, it’s not free – a complimentary first consultation and that’s basically to gather information because without information I’ve got no idea as to how complex the plan will be. Based on that we’ll provide a written quote, which the client then accepts, before we proceed with the planning exercise.
You can’t pick every year’s winner
RYK VAN NIEKERK: One of the other core themes I see from financial advisors is that client expectations need to be managed very carefully, many clients just want to see a 10% real return every year and they are pretty upset if this is not achieved, as we saw over the past few years, especially in the stock market, how do you manage those expectations?
MARTIN DE KOCK: I think one of the themes that have developed over the past few years in the financial planning industry is investor behaviour, there’s been a big focus on investor behaviour and in this investor behaviour you have to deal with managing clients’ expectations. I always tell clients that probably 50% of my job as a good advisor is to actually help the client manage their emotions around their money.
I think Warren Ingram has previously stated on 702 that always at the initial consultation he tells clients, ‘at some stage I will lose money’. That is just to explain to the client that because we are in investments that are linked to the markets, the markets don’t go up in a straight line, there are corrections and with such corrections over a short term there might be capital loss but, as I stress, it’s over the short term.
Again, I think the last year or two has been a good example where clients have come and said to us, but if I had been in cash I would have made 6% or 7% but now I’ve made 1% or 2% on my balanced portfolio. My answer to a client who makes that comment is who rings the bell to tell you that the market has changed so that your equities are going to grow better than cash. I think looking at South Africa in the last 15 years there hasn’t been one year where cash has outperformed all the other asset classes. I stand to be corrected but bonds have been the best performer twice in that 15 years, property once or twice and then equities, and that is on an annual basis. So, again, you can’t pick every year’s winner. If you also have a look at annual returns, if you pick the previous year’s winner you’re bound to lose. So we say get a balanced portfolio and get a strategy and stick to your strategy.
RYK VAN NIEKERK: Many advisors leave it up to fund managers to do their asset allocation, are you actually quite involved in the asset allocation at the advice level?
MARTIN DE KOCK: No, at the approach that we take at our practice we leave the asset allocation to the fund managers. We do quite extensive research in determining which asset managers we will use and we don’t make the asset allocation call.
RYK VAN NIEKERK: Who are those asset managers you really like or channel your clients’ money into?
MARTIN DE KOCK: We look particularly at the bigger asset managers and one of our criteria in terms of selecting asset managers is track record. So an asset manager with a one or two-year track record is not sufficient because they haven’t gone through various market cycles. Typically, we’d look at bigger asset managers and what is important, one of the underlying things we look at is process, there is no point in selecting an asset manager based on his process that he uses to manage money and depending on how the markets react he changes his process because then you have got no substantial continuity to work with because you select an asset manager based on the correlation to other asset managers. If I’ve got two or three asset managers that manage money exactly the same way you don’t get any diversification benefit when you combine these two or three asset managers in the same portfolio. So it’s very important to take that into account.
RYK VAN NIEKERK: But that may fuel the argument that some of the boutique managers, with totally different approaches, would also be attractive?
MARTIN DE KOCK: Again you’ve got a good point but many of your boutique managers, there are some with longer track records, but most of the boutique managers that have come into being in the last two or three years are smaller, so they have access to move funds much quicker. But in the same argument you don’t know what their approach would be had they been through different market cycles and because we don’t have that experience it’s difficult to include that type. We can, if the client does propose that we could have a look at that and maybe put a small portion of a portfolio into that but in general that’s not the way we allocate funds.
Medical aid for middle class families
RYK VAN NIEKERK: Lastly, one of the topics at Moneyweb that seems to get a lot of attention from our listeners and readers is medical aid and it seems like medical aids are becoming unaffordable for many middle class families. Are you seeing this? What is your advice to young families and older families regarding medical insurance?
MARTIN DE KOCK: Unfortunately, what you are saying is very true and medical aids are gradually becoming very expensive and if you look at your medical aid inflation rate its round about between 9% and 10% compared to your average inflation rate, which is high fives, maybe low sixes, and that variance is detrimental to your annual budget because your medical aid is growing quicker than your salary is growing.
Unfortunately that is one of the things and another thing that’s been happening in the market is you’ve had medical aids increasing premiums but reducing benefits, which is also a problem. I’ve got personal experience from a client who brought his parents to come and see me and one of the first things I recommended was please get them medical insurance, even if it’s a hospital plan. A year later the lady had a heart bypass operation where there were complications and she landed up in ICU for six weeks. When the client came back to me after that experience he said that was the best piece of advice I had ever given him is to get a medical aid. There are many options and, again, look at all the benefits. Our experience from clients being unhappy with medical aids is most clients don’t understand what the benefits are that are covered by the specific medical aid.
RYK VAN NIEKERK: But this has a massive long-term impact on a retirement plan because post 65 you are more prone to medical conditions and those premiums are rising at a faster rate than your income would. Do you take that into account currently when providing financial advice?
MARTIN DE KOCK: Yes, we do, if you look at most advisors in terms of providing for retirement, they provide for retirement income that increases annually with inflation. Quite extensive research has been done in America that as you grow older in retirement your monthly income needs decreases, I’m not talking medical aid but normal income needs because of your levels of energy that reduces, you’re not going to be doing as much travel and that decrease in your other expenses is very often offset by the abnormally high increases in your medical aid. So if you look at an income that’s being provided for that grows with inflation, although your normal income would maybe be decreasing as you go further into retirement that is being offset by the bigger rise in your medical aid fund. So I think inadvertently we are taking that into account when we provide for retirement income that increases with inflation.
RYK VAN NIEKERK: Thank you, Martin. That was Martin de Kock of Ascor Wealth Management.