Monthly Archives: June 2016

Advisor market heats up

While the market for robo-advisors in South Africa is still in its infancy, competition is quickly heating up – in line with global trends.

According to Bloomberg, robo-advisors manage roughly $50bn of assets globally, a figure that is expected to skyrocket to more than $2trn by 2020. Yet, a 2015 report by The Boston Consulting Group puts the global value of “professionally managed assets” at $74 trillion in 2014.

Broadly speaking, robo-advisors are online tools that use software to guide investors to compile an investment portfolio suitable to their specific needs and risk profile, without the help of a traditional human financial advisor. This approach is meant to simplify and reduce the cost of investing, but may not be sophisticated enough to provide guidance with complex investment structures.

Locally a number of players participate in this space (SmartRand and Yellowtail’s Figlo come to mind) and Sygnia has also announced plans to launch a robo-advisor service.

Peter Armitage, CEO of Anchor Capital, expects all the major asset management companies to come to market with various iterations of a technology-based solution, including the likes of Sanlam, Old Mutual and Allan Gray.

“I think the one thing you know for certain is that the whole industry landscape is going to be very different in a year or two’s time. So it is a case of being out there and learning – seeing what others are doing, seeing what consumers want, what works for them [and] where their appetite is,” he says.

Anchor Capital has just been appointed as the asset manager to new robo-advisor service, Bizank. Bizank is majority-owned by its founders, including fintech entrepreneur Adam Oberem. Anchor has a minority stake.

Investors can invest a minimum of a R1 000 a month or a R10 000 lump sum with Bizank.

The whole process is managed online. Bizank would identify appropriate investments for the client in line with his or her risk appetite and invest the money in a range of Anchor products or a segregated portfolio, Armitage says.

Investors would be able to monitor the performance of their portfolios continuously and Bizank will provide updates to show whether clients are meeting their goals. Fees range from 1% to 1.25% per annum (excluding VAT) depending on the underlying investments.

Armitage anticipates that the offering would initially appeal to younger, tech-savvy type investors who are prepared to interact without human intervention.

“I don’t think this is going to have a material impact on the more traditional financial advisor-type space, with much wealthier clients. So I think it is going to be for people who embrace technology and the way it is changing the world and we would anticipate probably the 25 to 35 age group being the initial target market.”

The expansion and growth of the offering will be a combination of learning from local as well as offshore developments.

Armitage says South Africa typically tend to be three or four years behind the rest of the world and local participants can follow trends, new technologies and value-adds emerging internationally.

While he believes the number of clients signing up could be significant, he doesn’t expect it to make a material contribution to Anchor Capital’s assets under management for quite some time.

The expected profile of a Bizank customer is someone with between R10 000 and R100 000 to invest and who it still “early” in his or her investing career.

“I don’t think it is going to be massive numbers right up front, but it is a gradual process. I have got no doubt that technology will change the industry over time and we want to make sure that we are positioned for that growth whenever it happens.”

Asset funds benefited investors

At the end of 1999 asset allocation funds comprised 6% of the unit trust industry. Asset allocation funds are also referred to as multi asset funds. They are funds that invest across the asset classes; equities, cash, bonds, and listed property – be they local or offshore. According to statistics from ASISA (the association for savings and investment South Africa), multi asset class funds comprise over 51% of the industry as at the end of 2015. Inflows into multi asset class funds remain strong which suggests that the trend towards these funds remains firmly in play.

One reason multi asset funds have become popular was the introduction of the FAIS legislation in 2004. Clients could now take incompetent advisers to the authorities and hold them to account for inappropriate and bad advice, including unsuitable asset allocation. Many advisers opted to use funds where the fund manager makes the asset allocation decision, and focused on ensuring that the chosen funds were suitable for clients based on some kind of risk analysis.

Growth oriented multi asset funds

Multi asset class funds suitable for growth investors would be those in the SA-Multi Asset-Flexible, SA-Multi Asset-High Equity, and Worldwide-Multi Asset-Flexible categories. These are the typical balanced and flexible funds. A growth oriented investor is likely to have a big chunk of their portfolio invested in the JSE, so I have compared the performances of these funds (on average) to the JSE. While the JSE has outperformed the three sector averages, it has done so at significantly higher levels of volatility. The Sharpe measure which considers both risk and return metrics shows that the multi asset funds all did a much better job of converting risk into return.

Teach your children about money is important

Unfortunately money is one of those taboo subjects that many people don’t like to talk about, whether they are big earners or small earners, big savers or those that don’t save at all. However, the earlier your children are exposed to the subject of money, the better.

There are a number of financial lessons that you can teach your children that will provide them with the responsibility they need and which won’t come across as “preachy”.

Start by opening bank accounts for them. This gives them the responsibility of managing their own money in a more formal, structured way. It also provides an obstacle to using the money as they will have to withdraw it out of the account.

Secondly, teach them the value of money and the importance of budgeting for how to spend it. A good place to start is that instead of just handing out pocket money assign them chores that earn them certain amounts and pay the income into their bank accounts. They have now earned the money, so it is more meaningful to them and they are less likely to spend it on things they don’t need.

Explain to them that they only have what they have earned and they cannot spend more than this. This is the beginning of teaching them how to budget, and hopefully how to save.

It is also important to teach them the difference between wants and needs. Needs are things you have to have on a daily basis, while a want in teenage terms is instant gratification. Show them the importance of delaying their wants and the benefits of saving and compound growth.

Albert Einstein called compound growth “the greatest mathematical discovery of all time”.  It is something that deserves to be understood.

Compounding is the process of generating earnings on an asset’s reinvested earnings. To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment. The perfect time to start saving and benefiting from compound growth, therefore, is when they are young.

As an example, consider two individuals, John and Jane.

When John was 15 he began investing R500 per month into a unit trust at a growth rate of 9%. For simplicity, let’s assume the growth rate was compounded annually. When John reaches 30, the value of his unit trust investment will be R189 203. Of this, he would have contributed R90 000 and the investment growth would have contributed R99 203.

Jane on the other hand, had the full R90 000 lump sum to invest at the age of 15 into a unit trust. At the same annual growth rate of 9% compounded annually, the value of Jane’s unit trust investment at the age of 30 will be R327 823. That is R237823 more than she put in and R138 593 more than John.

Both examples illustrate that by saving and taking advantage of compound growth, the growth in savings actually ends up creating more for you than the amounts you put in.