It’s at times like these, when financial markets are choppy and investors jittery, that the savvy investor appreciates the true value of a professional financial planner.
Personal Finance reported on the current market turbulence and asset managers’ recommendations to investors (“Market turmoil: stay anchored to your plan”, August 29, 2015) and now we examine the planner’s role in keeping you anchored and on course to meet your investment goals by consulting the top three financial planners in the country: the winner and two runners-up in the prestigious Financial Planner of the Year award, hosted by the Financial Planning Institute (FPI) and Personal Finance.
The winner of the award, the 2015 Financial Planner of the Year, is Wouter Fourie, managing director of Ascor Independent Wealth Managers in Pretoria. The runners-up are both Cape Town-based: Bruce Fleming, executive head of private clients (Western Cape) at Consolidated; and Mark MacSymon, a senior wealth manager at Private Client Holdings. Fourie, Fleming and MacSymon are all members of the FPI and hold the highly regarded international Certified Financial Planner accreditation (see their profiles, right).
GOT THE JITTERS?
The planners say that a well-constructed financial plan, based on long-term objectives, takes market volatility into account, and if everything has been well explained to you, you should not be feeling uncomfortable right now.
“At Ascor,” Fourie says, “we assist our clients to understand and quantify what their objectives are, and to construct their portfolios to achieve those objectives. Understanding the process enables them to trust their plan and how their portfolios are protected when markets go through rough patches. It also helps them to understand that volatile markets offer asset managers buying opportunities.
“When you understand that volatility in the markets is not risk, and that not meeting your retirement goals is the real problem, the whole approach to risk management changes.”
Essentially, the planner-client relationship is about trust, Fourie says.
Fleming says that volatility is part and parcel of any investment. “By correctly positioning the volatility with clients upfront, they are generally fairly comfortable with how they are invested during times like these. They generally don’t react negatively to the pessimism out there, but rather anticipate it and accept it,” he says.
MacSymon says the underwhelming performance that has characterised the local market did not come as a surprise. He says the diversification of investments is essential to a good wealth management strategy. “Readers who are seeing their portfolios producing lower returns or losing value should consider whether or not their investments are appropriately diversified, both locally and abroad. Concentrated asset class exposures, lack of diversification and poor investment planning are key factors that give rise to panic and drive speculation on market movements,” he says.
DRAWING AN INCOME
Volatile markets are particularly tough for those people, many retired, who are drawing an income from their investments, but, even in this situation, a solid plan should see you through the dark times.
“People drawing income from their investments need to hang tight through this agonising period,” Fleming says. “The worst thing they can do now is panic, reduce their risk and transfer their assets into more conservative investments, as they will be selling in a depressed market and will lose out when the market recovers. The key is to maintain a long-term perspective.
“What we do advise, however, is to either reduce your withdrawals, if it is financially viable, or hold back on any withdrawals increases during a bear market. It is also advisable to hold off on any major capital purchases until the bear market has run its course.”
MacSymon says that, given asset class returns this year to date, the reality is that many people drawing an income from a living annuity or from discretionary assets are, in fact, drawing down on capital. “These certainly are worrying times for pensioners, as income-producing assets continue to deliver very little, if any real after-tax returns. The lacklustre performance of local equities, which have, on average, contributed negatively to portfolio performance this year, will have resulted in fluctuating incomes for pensioners drawing a fixed percentage from a living annuity.
“I think it’s important that readers who are battling need to revisit their budgets and be certain that the level of income they are drawing from their investments is likely to last over a conservative retirement planning period – that is, longer than you expect to live. This is not a time to put your head in the sand. If necessary, draw on the expertise and guidance of a CFP professional, who will construct a forward-looking cash-flow exercise that will guide your spending habits.”
Fourie says your portfolio should be structured so that the part of it that is providing an income is protected. “Your capital is allocated to different portfolios with an optimal level of risk based on the timing of your income needs. We use different risk portfolios to address different time and income goals. Short-term investments will have less equity exposure than long-term investments, and income-providing investments even less equity exposure than short-term investments.
“Clients often err on the side of caution, resulting in an overly conservative investment portfolio. This ensures you will probably not lose capital over the short term, but may very well live longer than your capital lasts,” he says.
ASSET ALLOCATION
Don’t expect your planner to radically adjust your portfolio when market circumstances change. A planner may make prudent adjustments here and there, and will rebalance your exposure to the different asset classes as your investment horizon shortens or your personal circumstances change. But, as Fleming says, you and your planner should “not take your eye off the ball” of your long-term objectives.
Fourie says his company’s investment approach is the same as a year ago, “but we have increased our foreign exposure in our equity portfolios, and our clients have benefited from this rebalance. I do, however, need to caution investors: foreign exposure does not guarantee greater returns.”
MacSymon sees many benefits in offshore exposure, “not least of which are better investment opportunities, improved portfolio diversification and a hedge against the weak rand”. He says your offshore portfolio could combine low-cost tracker funds and listed shares, or, depending on your risk profile, multi-manager unit trust funds. You could consider the offshore offerings of local fund managers you have come to know and trust.
ROOM FOR OPTIMISM
In this type of market it is easy to be blinded by all the sentiment and short-term volatility in the system, MacSymon says. “This has the potential to dissuade you from pursuing relatively attractive long-term investment opportunities. Thus, contrary to current consensus, you wouldn’t have to search too long and hard to find some good investment opportunities – you just have to take a more rational view.”
Fourie sees long-term oppurtunities in offshore exposure, but says you need a professional to guide you. “Looking at the big picture, you need to ask yourself, why has the JSE performed so well in the past 24 months compared to our economic growth, which is performing at less than two percent? The answer is in the fact that many of the top 40 companies on the JSE have predominantly offshore earnings. Remember: steady plodding, not hasty speculation, brings prosperity.”
Fleming says: “We all know that the sun will come up tomorrow. We also know that the markets will recover at some stage. If you have a solid financial plan that is targeting a return in line with your lifestyle objectives, stick to it and don’t listen to the short-term noise.
“As [American investment guru] Warren Buffett famously said, ‘someone is sitting in the shade today because someone planted a tree a long time ago’.”