Taking Stock of Another Year

-By Sunél Veldtman

 

2018 was a tough year

2018 was one of the toughest years of my career. Not only did we see a decline in global share markets, but safe asset classes did not help portfolios either. Most asset classes declined in unison. But that wasn’t the difficult part – volatility is normal in markets. For our clients, 2018 came after grueling prior years. Years that felt like the negativity resulting in slow growth, led to us going nowhere in portfolios. Since 2014, the average equity unit trust fund has barely been positive; and while the negative political sentiment had a brief reprieve with Ramaphoria, it subsequently plummeted as the land grab issue was debated and the extent of corruption became evident.

Warren Buffett says that the stock market is a device for transferring money from the impatient to the patient. Last year, patience was required to stay invested in the markets. It was challenging to help our clients remember this. But their patience paid off, with world markets recording the best January in 65 years.

 

It wasn’t just the markets

However, even more challenging than the markets, was the real fall out of the prolonged pedestrian economic conditions on real people’s lives. Everyone felt the squeeze on disposable income as incomes stagnated while the cost of living increased substantially. Think of the impact on your own budget with the increase in the petrol price, electricity and water costs, municipal rates and the price of transport and food. This on top of a substantial increase in taxes across the board. The squeeze on our Rands has been very real.

Globally, major shifts in geo-politics resulted in heightened policy uncertainty. What will Donald Trump do next? How will the UK extract themselves from the mess called Brexit? How will China respond to further trade wars when their economy is already slowing?

These tough conditions in people’s business and personal lives have led to elevated stress levels, which in turn leads to heightened tensions in relationships and even knee-jerk decisions.

 

Our portfolios held up well

2018 also sorted the wheat from the chaff in portfolio construction. Poorly diversified portfolios performed badly.  All those portfolios with overexposure to previous winners, such as property, had a terrible time. However, Foundation can look back at a great year from a portfolio construction perspective: our clients’ portfolios remained resilient and they produced top risk adjusted returns relative to the markets and competitors (as measured by risk adjusted returns). In difficult times, portfolio construction is crucial – much like the design and construction of a building during high winds or earthquakes, is paramount for inhabitant’s safety.

Great news was that Portfoliometrix, the discretionary fund manager who manages most of our clients’ money, claimed the Best Discretionary Fund Manager award of 2018 in London.  It has highlighted what our research showed:  they are world class investment managers.

Diversification and rebalancing of the portfolios paid off. The typical pension fund portfolio delivered a return of nearly 1%, compared to the losses suffered of around 8% in the equity market last year.

 

Real advice is crucial

2018 was also one of the most rewarding of my career. You may wonder how I can say this, but in these conditions, people need a sounding board. We have helped so many of our clients navigate these difficult times and changes. This is when real advice is crucial.

Knee-jerk decisions can permanently destroy wealth. We strive to help our clients consider their decisions carefully. Daniel Kahneman, Nobel prize winner and author of Thinking Fast and Slow, says that it is difficult to help oneself think through problems and see one’s own biases or worse, erroneous thinking. He says that others can see it better and therefore recommends that we seek this kind of help.

An experienced advisor – one who is trained to observe thinking – can make a crucial difference during these times. We are continually improving these particular skills at Foundation. Traditional training for financial planners never included these skills, but we have and will continue to do so. We believe that our own continued growth in this area better equips us to help our clients in uncertain times.

 

New ways of financial planning

We introduced new financial planning packages for our prospective clients. These packages were designed with their specific needs in mind. They include packages for young professionals; individuals or families who want better planning for their finances; people going through transitions such as divorce, retrenchment or career changes; and an executive package for those with complex financial affairs.

By structuring our approach to these clients and working to their identifiable needs, we have seen some of these plans deliver effective results in a short time. Satisfying moments include the conclusion of extremely complicated divorce matters; helping a client transition to a brand-new dream job; and seeing couples regain peace of mind because their holistic planning fell into place. Financial planning makes a real difference, and these are the fulfilling moments for the Foundation team!

 

Last year was a good one for our team

Elke Zeki, CFP®, Director, had a baby boy, Aidin, in April – a welcome addition to his 2-year-old sister Luca.

Michelle le Roux, CFP®, Financial Planner, passed her fiduciary board examination is now a qualified Fiducary Practitioner SA, FPSA®.

Thiart van der Merwe, CFP®, finished his supervision period and is now a fully-fledged representative for our firm, as a financial planner.

We promoted Melisa Brodie to the Head of Operations and are looking to fill her previous role as administrator of our clients’ affairs.

My eldest daughter finished matric on a high note and left the nest to study further at my alma mater in Stellenbosch.

 

What does the future hold?

Our motto remains: Wealth For Life. We want to continue to help our clients plan and manage their wealth through their lifetime. We want to help them make the money last. But we also want to help them apply that wealth to make their lives worthwhile – to reach their dreams and live purposefully.

This is a challenging motto at a time like this. We are living on the cusp of a new era – potentially, there are huge geo-political shifts ahead. The world as we’ve known it, with the established alliances in the West and contained power in the East, could disappear. Artificial intelligence and the fourth industrial revolution will make today’s top jobs redundant. Global warming will make weather more extreme. Medical science will make breakthroughs that extend lifespans, whilst the stress of modern work life reduces the longevity of corporate careers.

All these factors will play out on our clients’ money and their dreams. How should we react to it?

 

Focus on what we can control

In these uncertain times, we need to focus on the elements of our lives that we can control. We cannot control the sentiment or the stupidity of global politics, but we can control our minute daily choices. We can choose to remain focused on our own goals. We should not give up our dreams because of current sentiment yet, we also need to respond with wisdom.

I am convinced that one of the most important, but neglected, tools of the future for financial planning is personal spending. It is the one area of financial planning that we can respond to immediately and effectively, and allows us to anticipate difficult times – with more impact than changing our income, investments or retirement plans.

We can also control our reaction to the fear whipped up by global uncertainty. We must learn to observe our emotions and then take deliberate action, if any. The temptation is always there to do something about our investment strategy but in most cases, it’s the wrong decision. I wrote about this in more detail last year. Read the article here.

One of the best ways of dealing with uncertainty is scenario planning – there is no one future view for which we can plan. We must plan for different potential outcomes and future plot how we can control our own response to different outcomes.

 

We must become more human

In her talk on artificial intelligence, Dr. Vivienne Ming, asserts that we can best respond to robots by becoming more human. A large part of jobs, even financial planning jobs, will be consumed by artificial intelligence. We know that a big part of what we do now will be replaced by new AI technologies.

However, what will set us apart will be the quality of the conversations we have; whether we get to the real issues behind the money issues. Our clients will continue to need conversations about their wills, their children’s money habits, their retrenchment, divorce or even impending death. They will continue to need advice about their dreams and plans and how it impacts their money. Our clients will, in an increasingly complex world, still need to thrash matters out with us, not only as money experts, but skilled conversationalists.

We plan to further grow our skills and excellence in conversations and coaching.

 

We need resilience

Perhaps the human quality which will be most required from all of us, is resilience – the capacity to recover from difficult times. We will need a certain elasticity in our lives and money, to survive in difficult times. The good news is that resilience can be learnt, even by adults.

We plan to bring resilience expertise to our clients and team this year. Watch out for our upcoming events.

Finally, we mustn’t become too fearful or pessimistic. This doesn’t mean that we need to see the world through rose-colored lenses. But if our optimism is thoroughly checked by reality, we will be most successful – there is a plethora of academic research on the higher likelihood of success of optimists, read the article here.

. We should be careful not to think that the current situation is permanent or pervasive. Especially if this pessimism causes us to follow ‘all or nothing strategies’ – because then, we will we lose out.

We look forward to continuing planning with you.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

Why so blue?

-By Elke Zeki

 

When Ramaphosa narrowly (and to many’s surprise) beat Dlamini Zuma for the ANC’s presidency in 2017, it was a dark time for South Africans.  We were on the verge of being downgraded to junk status and it was impossible to see our way out of the mess Zuma had left us in.

More than a year later, it seems we have made a lot of progress.  We have a new and capable minister of Finance, new boards at all SOE’s (state owned enterprises) and four state “capture” commissions of inquiry to name just a few.

Yet South Africans are still emigrating at a rapid pace and when speaking to our clients the overall mood is bluer than ever before.

We think there are some good reasons for this and see these as key influences behind the uncertainty and fear.

 

The party is still divided

The ANC is still deeply divided, and the Zuma faction will do everything in their power to dispose of Ramaphosa and protect their self-interests.  Talks of nationalising the Reserve Bank and land reform are often controversial topics purposefully brought up to rattle Ramaphosa’s cage and create uncertainty.  If Ramaphosa secures a good result for the ANC in the election this year (>60%), it’s likely that he will act with more authority and direction, which will certainly improve confidence.

 

Unforeseen risks

Land reform is a complex issue that has been neglected by the ANC for decades.  Ramaphosa did not expect it to become a pressing issue, but could not allow the EFF to use it as a campaign against the ANC.  Land reform needs to be addressed in a responsible way that will not impact our economy.  People will remain concerned until formal guidelines have been given and the constitution amended accordingly.

Another unexpected risk is the near collapse of Eskom.  A poorly functioning, mismanaged and heavily indebted Eskom could derail the economy.  This is an ongoing issue impacting all South Africans.  As we stock up on batteries and candles, we wait for a workable long-term solution.

 

We are not an island

It feels bad here at home, but the mood is actually a little blue everywhere.

We are experiencing unprecedented levels of policy uncertainty around the world, which is mainly driven by two things:

  • Trade wars between the US and China: this affects us because we have a small, open economy.
  • Monetary policy uncertainty: the US monetary policy committee (MPC) have been hiking rates in the US, but suddenly signaled that they might pause. This affects us because opportunistic funds flow to counties with higher interest rates and liquid currencies (like South Africa). These funds create even more uncertainty because it can flow out as quickly and unexpectedly as it flows in.

 

Source: Stanlib

 

The world is also slowing down.

  • US economic data is starting to show signs of weaker growth.
  • China is slowing.
  • Europe is hovering near a recession, magnified by uncertainties around Brexit.

It is very difficult for a country like South Africa to grow in an environment like this and the global uncertainties make it even harder to achieve growth targets.

 

Our brains do interesting things

Cognitive scientist and public intellectual Steven Pinker, urges us in his book Enlightenment Now, to step back from negative news and headlines as it plays to our cognitive biases.  He argues that the media exaggerate negative news and this distortion makes us think the world is getting worse.

The notion of cognitive bias was introduced by Amos Tversky and Daniel Kahneman in 1972.  It refers to those glitches in our thinking that cause us to make questionable decisions, and reach the wrong conclusions.

A good example is recency bias, where we make decisions about the future using only the recent past as reference.   South Africans have experienced returns much lower than long term expectations for the past 5 years. The average return over this period is close to zero % and almost unprecedented.

 

Source: Coronation

 

This has strongly influenced sentiment and behaviour.  Coronation and Stanlib recently stated that their strongest flows for 2018 were into income type funds.  Investors are therefore expecting the same going forward and opting for lower risk investments.  This is not necessarily the right approach as markets can easily move quickly and strongly.  If you get the timing wrong, you can destroy capital for ever.

Another example is confirmation bias.  We often make decisions first and then do the research to support this decision.  It’s because of this bias that negative news headlines support our gloomy view.

 

We are all guilty of these biases and experience shows us that you can protect yourself against them by:

  • Diversifying your investments.
  • Focusing on your long-term goals and objectives. This often means staying invested through uncomfortable times.
  • Opening yourself up to the chance that you might be wrong.

After considering all these factors you’re probably thinking it feels so bad, because it is so bad.  If uncertainty prevails for a long time, it can be very damaging to a country and this is exactly what’s happening here.

 

Source: Stanlib

 

SA business confidence has been below average for more than a decade.

However, we believe that with better leadership in place, we stand a better chance of recovery. The election is key and after the election we will be looking out for the following:

  • Signs of prosecution,
  • That the SOE’s operational management improves,
  • More business-friendly policies.
  • Certainty on land reform.
  • Fewer parliamentarians.

These actions will send powerful signals to business and the world that the government means business.  South Africa is hoping to recover while the world is slowing down.  It would be challenging and slow, but not impossible. 

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

How do I know my advisor makes the best decisions for me?

-By Michelle le Roux

 

Let’s play a game. I have R10 000 000 that I would like to invest. I don’t know much about the investment world, but I want the best possible return on my funds. Yet I’m worried because stories of scams, dishonest people and fake news are a real and daily occurrence.

Further to this, markets have not performed well over the last three years, investors are feeling deflated, and surveys show that confidence in the financial planning industry now ranks in some of the lowest ranges.

How do I know whom to trust for advice?

Building the basic framework

As Certified Financial Planners (CFP®), we spend years studying, doing our articles, and gaining experience in our fields of expertise. By the time we are in a position to give financial advice to a client, we have convinced our regulators, our compliance officers and are confident ourselves, that we are fit to make investment recommendations.

But how do we convince the client of that? That they can trust us to give sound financial advice.

Qualifications and great track-records go a long way, but what happens behind the scenes – in the mind of the advisor? Specifically, how do we at Foundation Family Wealth make our decisions and how do we decide on what the best advice is?

A client’s circumstances and investment-related fees are a clear initial guideline or starting point for advice.

Secondly, independent firms, such as Foundation, are in the advantageous position of being able to use any provider or product covered by its operating license. In contrast, corporate houses (such as the wealth management division in a bank) tend to use their own products and funds.

So, let’s assume we’ve done the initial work and determined the client’s risk appetite, the investment term and investment goal for the capital. We are now faced with a decision between two products, or even two providers. What do we do?

The answer is simple: we listen to our inner voice.  Not just a random voice, but a highly qualified, practiced one.

The role of ethics

In our line of business, “ethics” is a term that is as common as a regular cup of morning coffee. We need the necessary credentials to do our jobs, but we also have to apply a strong dose of ethics every day. We inherently know when something is right or wrong for our client, but sometimes we have to make a decision between two options where there is no definitive “best” solution.

We then have to rely on our internal inner-checks and balances!

Ethical tests

There is no single test to measure a financial planner’s approach when they are faced with a difficult choice or ethical dilemma. The most obvious and important one would be to ask whether something is against the law, but we are also trained to apply the following[1]:

  • The utilitarian principle – choosing the option that offers the greatest good for the greatest number of people.
  • Kant’s categorical imperative – acting in such a way that the action taken could be a universal law or general rule for specific circumstances.
  • The professional ethic – carrying out only those actions that a disinterested panel of professional colleagues would view as proper.
  • The golden rule – treating other people as you would expect them to treat you.
  • The television test – would you feel comfortable explaining your actions to a national television audience?
  • The family test – would you be comfortable explain your actions to your spouse, your children and your parents?

Ethical regulation

The Financial Planning Institute (FPI) is the professional body that governs Certified Financial Planners®. The FPI stipulates that every CFP® professional must spend a minimum of 36 hours per year towards professional training and development.

The hours spent in training and development activities are tracked and verified, and should you not comply with the minimum, your CFP® designation is withdrawn.

In addition, we have the Financial Sector Conduct Authority (FSCA) as our industry regulator. It has prescribed rules that we have to comply with which includes the setting up and running of our business; what our qualifications need to be; how we handle client interactions (and complaints), and ultimately what constitutes ethical behaviour and contraventions.

The FSCA prescribes that serious ethical transgressions can lead to a fine, a suspension of membership, or even a life-long termination of membership – to be avoided at all costs!

The Foundation Approach

Think of your past financial planners or advisors. Can you think of a bad experience you’ve had? Did you ever terminate a relationship with a financial planner because you felt you’ve been “done in”? Poor advice, fees that weren’t disclosed, lack of accuracy or interaction, any basic breach of trust?

Not surprisingly, most of the clients that walk through our doors have had previous planners or advisors. We see the effect of poor planning on a regular basis. Some are minor setbacks, but others have caused serious financial losses; or portfolios that are structured so inefficiently that it will eventually become an estate administration nightmare.

But here at Foundation, we do planning differently. Our goal is to provide excellent advice with integrity. We do this in the following ways:

  • We ensure that all our financial advisors are CFP® professionals, qualified to provide first-class financial planning. We invest in the continuous training and development of our team.
  • We are independent advisors, we don’t get any fees or remuneration to recommend a specific product or provider.
  • Our fee policy is transparent. We don’t charge upfront fees, transactional fees, or commissions. There is no incentive for us to give anything other than the most appropriate advice.
  • We want to build long-term relationships. We want to be the sounding board for both individuals and families and help to make the best financial decisions for life. Every client has a different story and we customise our advice based on every individual situation.

For the Foundation Team the real measuring stick is the way our clients feel after we’ve left a meeting or ended a conversation. We know that relationships are everything and we value trust above everything else – we understand that how we go about our planning tasks affects this.

We aspire to be planners that stretch beyond a single generation. Eventually, the children of clients become clients themselves – because of the value we added to their parents’ lives.

Our approach is, after all, the foundation of our motto: Wealth for Life!

Contact us if you would like to discuss your current financial plan.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

[1] University of the Free State. School of Financial Planning Law. 2018. Regulatory Environment. Bloemfontein.