Financial Mail - Investors Monthly - - Cover Story - In a time of slug­gish re­cov­ery, height­ened in­se­cu­rity and in­creas­ing costs, pri­vate banks and wealth man­agers have their work cut out for them, writes Colin An­thony

Wealth man­agers say there is a marked in­crease in clients, alarmed by po­lit­i­cal rhetoric, in­quir­ing about pro­tect­ing their as­sets, with many want­ing to move them off­shore. That is tied to per­cep­tions of in­creased cor­rup­tion in govern­ment and rad­i­cal rhetoric that is per­ceived to threaten the value of as­sets.

Other press­ing con­cerns for the providers of pri­vate bank­ing and wealth man­age­ment ser­vices are in­creas­ing and costly com­pli­ance bur­dens and a need to stay on the cut­ting edge of tech­nol­ogy — also an ex­pen­sive un­der­tak­ing — to en­sure they pro­vide full value to clients.

“It’s no se­cret that the past 18 months have been ex­tremely dif­fi­cult,” says Brian Butchart, MD of Bren­thurst Wealth Man­age­ment. “Clients are con­cerned in terms of per­for- mance — that’s a big fac­tor.” He notes that re­turns on in­vest­ments are gen­er­ally down to post-2008 lev­els, when mar­kets had been badly af­fected by the global fi­nan­cial cri­sis.

In­vestors are be­ing fur­ther squeezed by ris­ing costs, says Philip Faure, Stan­dard Bank’s global head of wealth ad­vi­sory. “In par­tic­u­lar, the top end is re­ally feel­ing the pinch now with on­go­ing in­creases in the top mar­ginal tax bracket, the in­crease in the ef­fec­tive CGT [cap­i­tal gains tax] rate, the in­crease in div­i­dends tax, the mum­blings about a wealth tax and the on­go­ing dis­in­cen­tives to use trusts through tax­ing of loan ac­counts. Mean­while, pre­tax ben­e­fits such as pen­sion fund and med­i­cal aid de­duc­tions have been de­creas­ing, with the re­sult be­ing ef­fec­tively less in the bank.

“Of course, the real is­sue is con­stantly pay­ing more in tax and re­ceiv­ing very lit­tle ben­e­fit. Wealth­ier clients also tend to have pri­vate se­cu­rity, health care and ed­u­ca­tion, all of which are paid with af­ter-tax money.”

Pri­vate banks and wealth man­age­ment firms are also be­ing squeezed by ris­ing costs — largely re­lated to com­pli­ance is­sues and the need to con­sis­tently in­vest in tech­nol­ogy to stay ahead of the pack — while mar­gins are un­der pres­sure.

The win­ners

In this dif­fi­cult cli­mate, Stan­dard Bank emerges as the top pri­vate bank and wealth man­ager of the year.

Last year’s over­all win­ner, San­lam Pri­vate Wealth, put in an­other strong per­for­mance to se­cure sec­ond place, hold­ing off a strong per­for­mance from Ned­bank Pri­vate Wealth, which re­tains third place. PSG Wealth drops from sec­ond to fourth.

But the eye-open­ing move comes from one of the smaller play­ers. Bren­thurst Wealth Man­age­ment wins the Top Wealth Man­age­ment Bou­tique award and se­cures fifth place in the over­all rank­ings, ahead of some of the big­ger play­ers.

Verso Wealth, in its de­but year of par­tic­i­pa­tion in our sur­vey, wins the Peo­ple’s Choice award as top wealth man­ager. In the pri­vate banks cat­e­gory, In­vestec Pri­vate Bank wins the peo­ple’s choice award for the fifth time — a re­mark­able achieve­ment. It is clearly a cut above the rest when it comes to its abil­ity to sat­isfy clients.

Verso Wealth was formed in 2015 through a merger with Galileo Cap­i­tal Grow, a unit of Galileo Cap­i­tal, which won this same award last year. Clearly, Verso is main­tain­ing the high stan­dards of cus­tomer ser­vice.

This year al­most 6,000 clients par­tic­i­pated in the on­line sur­vey — a huge

This year al­most 6,000 clients par­tic­i­pated in the on­line sur­vey — a huge in­crease on last year when 2,732 clients par­tic­i­pated

in­crease on last year when 2,732 clients par­tic­i­pated. The high num­ber of par­tic­i­pants en­trenches the cred­i­bil­ity of the sur­vey find­ings.

The top three firms over­all, Stan­dard, San­lam and Ned­bank, be­tween them hoovered up all the archetype awards, awarded to firms that best cater to a spe­cific in­come seg­ment.

Stan­dard is par­tic­u­larly strong in cater­ing to the up­per end of the wealth spec­trum. It is the top-ranked firm in the In­ter­na­tion­ally Wealthy Fam­ily and Suc­cess­ful En­tre­pre­neur (tied with San­lam) archetypes and sec­ond in the Wealthy Ex­ec­u­tive archetype.

San­lam dis­plays solid all­round strength, win­ning the Lump-Sum In­vestor and Suc­cess­ful En­tre­pre­neur (tied with Stan­dard) cat­e­gories and scor­ing well in all oth­ers, while Ned­bank wins two cat­e­gories: Up-and-Com­ing Pro­fes­sional and Wealthy Ex­ec­u­tive.

Client con­cerns

In terms of the dif­fi­cult oper­at­ing con­di­tions, Butchart says it is im­por­tant to as­sure clients about their fi­nan­cial plans, go­ing back to the basics and look­ing at long-term is­sues.

But po­lit­i­cal is­sues, he says, are tak­ing their toll. “Talk­ing to clients and an­a­lysts, there’s a sense that [Pres­i­dent Ja­cob] Zuma is not re­ally the is­sue. There is an im­me­di­ate con­cern about whether he goes or stays, but the main con­cern is the rhetoric on rad­i­cal eco­nomic trans­for­ma­tion. I think they’re look­ing more at the fu­ture pol­icy di­rec­tion of the ANC rather than at whether Zuma goes or stays.”

Faure says there’s a sig­nif­i­cant trend to­wards ex­ter­nal­is­ing as­sets off­shore. “From a coun­try per­spec­tive, this is not all bad, as SA will still earn tax on these off­shore as­sets, but the trend of mov­ing cap­i­tal off­shore is not healthy for in­vest­ment in our econ­omy. But glob­ally there’s also sig­nif­i­cant un­cer­tainty with re­cent po­lit­i­cal sur­prises and a lack of growth in gen­eral for de­vel­oped mar­kets.”

Much of the cap­i­tal mov­ing off­shore is be­ing in­vested in cash, which Faure says is not a great sit­u­a­tion. “If the rand doesn’t de­pre­ci­ate by at least 5% to 6%, then you’re ac­tu­ally los­ing money in real terms. Off­shore you’re get­ting an in­ter­est rate of 1% to 2%.”

Clients are also at­tracted to guar­an­teed prod­ucts. “These of­fer some cer­tainty of cap­i­tal be­ing re­turned with some par­tic­i­pa­tion in mar­ket per­for­mance. But there is typ­i­cally a five-year lock-in. These are never the great­est prod­ucts, with prod­uct providers of­ten ben­e­fit­ing the most in fees. But they do pro­vide cer­tainty. And it’s bet­ter than cash in the bank.”

He says in­vestors should be look­ing at global eq­ui­ties, in­clud­ing emerg­ing mar­kets, but this must be with a longterm view. “Global com­pa­nies will con­tinue to find ways to make a profit and, over the longer term, eq­ui­ties pro­vide the best real re­turn over any other as­set class.”

In terms of property in­vest­ments, he says clients con­tinue to be at­tracted to the UK property mar­ket, but this has be­come over­heated. Com­pounded by Brexit is­sues and the pound’s de­pre­ci­a­tion, “the mar­ket has slowed and in­vestors are tak­ing a break”.

Apart from ex­ter­nal­i­sa­tion of as­sets, Faure also notes an in­crease in dis­cus­sions about im­mi­gra­tion and dual cit­i­zen­ship. “We’re see­ing more in­ter­est in res­i­den­tial and in­vest­ment schemes, where cer­tain coun­tries of­fer cit­i­zen­ship on the back of the pur­chase of a property, an in­vest­ment or new busi­ness es­tab­lished in the coun­try,” he says. “It’s not a great sit­u­a­tion for SA be­cause the tax base is so tiny as it is.”

Craig Massey, San­lam Pri­vate Wealth di­rec­tor of branch op­er­a­tions and head of stock­broking, says that in to­day’s “uncer­tain, fluid and volatile geopo­lit­i­cal en­vi­ron­ment”, there are a few key con­sid­er­a­tions for in­vestors:

Geopo­lit­i­cal risk is wide­spread and in­creases short-term un­pre­dictabil­ity. To re­duce the risk as­so­ci­ated with in­creased un­cer­tainty, client port­fo­lios need to be well di­ver­si­fied. The old adage rings true: “Don’t put all your eggs in one bas­ket.” This prin­ci­ple ap­plies to tim­ing as well. Con­sider a phased in­vest­ment ap­proach to re­duce tim­ing risk, par­tic­u­larly when mar­kets are volatile and as­set prices seem stretched.

Don’t be dis­tracted by short­term noise, de­spite the speed at which news trav­els via so­cial me­dia nowa­days. More of­ten than not, geopo­lit­i­cal events do not al­ter the longer-term in­vest­ment land­scape, de­spite the im­pact they have on in­vest­ment emo­tions. Fo­cus on the endgame.

Stay true to the in­vest­ment phi­los­o­phy that matches your

From this year’s sur­vey we no­ticed many firms are beef­ing up their ca­pac­ity in art in­vest­ments

risk ap­petite. Don’t for­get the three Ps: price, pat­tern and per­spec­tive.

Fees can have a sig­nif­i­cant im­pact on your long-term re­turns. Make sure that the fees you pay rep­re­sent value for the ser­vice you get. Ig­nore the power of com­pound­ing at your peril.

In the slug­gish eco­nomic re­cov­ery un­der way glob­ally, sin­gle-digit re­turns across most as­set classes are likely to be the norm. Ad­just ex­pec­ta­tions and pro­jec­tions ac­cord­ingly.

In­dus­try per­spec­tive

Each year, sur­vey re­sponses by par­tic­i­pants make it clear that in this in­dus­try, sit­ting still means you’re los­ing ground. All firms are con­stantly adapt­ing, hon­ing prod­ucts and ser­vices and striv­ing to im­prove their value to clients. This year, while the dif­fi­cult po­lit­i­cal and in­vest­ment en­vi­ron­ments are af­fect­ing the way firms are oper­at­ing, in­dus­try-spe­cific is­sues are also driv­ing change.

There are two con­stants: tech­no­log­i­cal de­vel­op­ment and an in­creas­ing com­pli­ance bur­den. Com­pa­nies sim­ply have to be to­tally com­mit­ted to both is­sues.

For the smaller bou­tique op­er­a­tors, costs are al­ways top of mind, says Butchart. “You have to in­vest in IT sys­tems, in qual­ity staff and in com­pli­ance is­sues — it all comes at a cost.”

Faure says digi­ti­sa­tion — a never-end­ing process in­volv­ing clients, ad­vis­ers, in­ter­nal sys­tems and pro­cesses — is par­tic­u­larly im­por­tant to younger clients. “There’s lots of fo­cus on mov­ing to dig­i­tal — it’s an on­go­ing process: we have 154 years of IT ar­chi­tec­ture we have to adapt to newer tech­nol­ogy. So, there’s big in­vest­ment in tech­nol­ogy by all banks. It’s a re­ally big is­sue.”

An­other huge chal­lenge — and op­por­tu­nity — is leg­is­la­tion. He points to an enor­mous amount of leg­is­la­tion to cope with: the Pro­tec­tion of Per­sonal In­for­ma­tion Act, Treat­ing Cus­tomers Fairly and money-laun­der­ing laws, among oth­ers. Add to that the pend­ing Re­tail Dis­tri­bu­tion Re­view (RDR), which gov­erns the way fi­nan­cial ad­vis­ers charge clients.

“The world­wide com­pli­ance re­quire­ments on banks and ad­vis­ers are enor­mous and have a sig­nif­i­cant cost,” Faure says. “The in­dus­try needs to be squeaky clean when it comes to com­ply­ing with leg­is­la­tion to avoid large fines.”

But, he says, for those get­ting it right, it’s a big op­por­tu­nity. RDR, for ex­am­ple, “is chang­ing the fi­nan­cial ad­vi­sory game” and the big­ger in­sti­tu­tions that get their pro­cesses right, demon­strat­ing value on an on­go­ing ba­sis, will do well. “The days of bro­ker kick­backs, big com­mis­sions and poor ad­vice are num­bered. The ones that are pre­pared and ready can re­ally do well. There’s a lot of en­ergy go­ing into RDR from ev­ery­body.”

One fi­nal con­cern comes from Butchart, who says the chal­lenge for reg­u­la­tors, clients and the ad­viser fra­ter­nity is to en­sure costs aren’t cut at the cost of qual­ity ad­vice.

Com­pli­ance and digi­ti­sa­tion rep­re­sent huge but nec­es­sary bur­dens for in­dus­try play­ers. The chal­lenge is for them to pur­sue those goals with­out sac­ri­fic­ing qual­ity, as Butchart says.

Clients of pri­vate banks and wealth man­agers needn’t be too con­cerned on that front: the stan­dard of en­tries in the top pri­vate banks and wealth man­agers sur­vey im­proves year af­ter year. Even in is­sues not in­volv­ing com­pli­ance or tech­nol­ogy, com­pa­nies are striv­ing for im­prove­ment.

An ex­am­ple from this year’s sur­vey is that we no­ticed many firms are beef­ing up their ca­pac­ity in art in­vest­ments. This is a di­rect re­sult of client de­mand: more in­vestors fear not only SA’s par­tic­u­lar set of po­lit­i­cal and in­vest­ment mar­ket con­cerns, but also those glob­ally, and are thus show­ing more in­ter­est in al­ter­na­tive in­vest­ments.

That shows the com­pa­nies are in tune with their clients and do­ing what it takes to en­sure they pro­vide a com­pelling value propo­si­tion.

Brian Butchart, MD of Bren­thurst

Philip Faure of Stan­dard Bank

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