Financial Mail - Investors Monthly
WHEN ONLY THE BEST WILL DO
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.