With so many options available it can be like trying to find a needle in a haystack, but investors aren’t paying for a product – they’re paying for a plan and peace of mind: Adriaan Pask at PSG Wealth.
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CIARAN RYAN: Wealth managers hear this all the time from clients: ‘We want exposure to alternative assets that can lift portfolio returns, but at the same time we want stability’ – which means tried and tested investment solutions.
So there’s pressure to embrace cutting-edge technology and digital delivery, but clients don’t want to lose that personal touch. It’s a balancing act as decisions have to be made. Do you go for high-growth tech or stick with reliable dividend shares, and how do you bring in global strategies while keeping it real for South Africa’s market and regulations? Striking the right balance between risk and reward has never been more nuanced.
We’re joined once again by Adriaan Pask, chief investment officer at PSG Wealth. Hi, Adriaan. Thanks very much again for joining us. Maybe you can help us out here. What is meant by this paradox of choice that I’ve just outlined there?
ADRIAAN PASK: I think in essence what’s happening at the moment is we’re seeing a very fast-developing financial sector pretty much around the globe. At the same time, it’s becoming increasingly competitive between different providers partaking in markets, and there are more and more offerings from product providers as part of this competition.
I think what ultimately happens is there are more and more gearing products for investors – but not all of these necessarily add value to clients.
So the paradox is really to say is more product really better? Does it actually make things overly complicated, or is there actually a point where adding more is actually [where] the marginal utility starts to decline?
CIARAN RYAN: Okay, so it’s clear that just because you have more options doesn’t mean that you’re going to get better outcomes, and not every investment available is going to suit every investor.
Maybe just help us make sense of this. When does having more choice actually work in your favour, and when can it end up doing more harm than good?
ADRIAAN PASK: I think each situation is different, and this paradox of choice really applies to many things – even in the retail or FMCG [fast-moving consumer goods] environment.
We see a plethora of different products on shelves these days; obviously at a certain point it’s great to have more options available, but then at a certain point it just creates more confusion, as I mentioned.
So I think, depending on the product and the objective of the product, it makes a difference as to where that point is, but also in terms of what your real needs are.
It might actually be at a stage more difficult for you to pinpoint the exact thing that might meet your need best. Just given that there are so many options available, it’s a bit like a needle in a haystack.
But I think what’s really important in the current setting is that, given the increased competition that I’ve mentioned, providers are starting to push at the parameters of risk appetites. So do you see an array of products becoming increasingly riskier in nature? We’ve spoken about SPACs [special purpose acquisition companies] before, we’ve spoken about cryptocurrencies before. These types of vehicles are more and more being utilised in the wealth management space, and I have my doubts whether they are really suitable for giving clients the outcomes that they are really after.
CIARAN RYAN: Okay. So, it’s clear that there’s a plethora of products there and it’s very confusing. Markets are awash with capital. Their risk appetites are rising, and there are also more complex products on offer. So how does this impact investors who are trying to plan for the long term?
ADRIAAN PASK: Yes, I think this is a really important part. So, as you’ve mentioned, there are increasing financial conditions that are very loose, and excess capital in markets and the risk appetites are rising. As part of this it’s very difficult to think long term within all of this complexity and it’s really not good for planning – and planning by its nature is a long-term thing.
So how do you even avoid these short-term temptations, I guess you could call them, versus what your long-term needs are?
So I think that’s where at least our vantage point or opinion is – to really try and focus on the things that are more reliable in nature, things that have a little more certainty to them, and those are not necessarily just safer things from an asset-class perspective. They are just things that have been proven over the long term, which have been tried and tested.
Even something like equities is a very old and established asset class. It’s more reliable over longer periods than something like a cryptocurrency, for example. I think that’s the important thing to keep in mind.
CIARAN RYAN: Right. So, at PSG you’ve got to navigate this conundrum and this very noisy investment space. I guess it does come down to a philosophy, and you have to stick with that philosophy. Maybe just go into that in some detail, how you manage that.
ADRIAAN PASK: I think for us what we try to do is we try to put the plan above the product. So ultimately what the plan facilitates is the identification of the right needs and the setting of very clear objectives and things that the client wants to achieve. That’s really the focus point.
We’re not really in the business of just making different products available to clients.
We really want to use product to facilitate the advance advice process for the implementation of a plan. So the product is very much a secondary thing by nature.
That being said, as I mentioned, it needs to be quite reliable because the plan now relies quite heavily on the product for the outcome that it’s achieving. So say, for example, the client has identified that his objectives would be to generate the return of inflation plus 3%, given all of his liabilities, expenses and retirement goals, then you need to make sure that you can find something that will reliably generate that CPI-plus-3% and do so consistently, because if you miss that target over a long period of time you can ultimately end up leaving a massive hole in a client’s plan when there’s not enough funding.
And that’s why that anchoring of objective and the tying down of the product to facilitate that is really so important.
Otherwise, as these new products have become available and launched into the market, investors will be enticed into these things with massive marketing teams that further stimulate demand.
Social media is all over the place. People talk around the fire around the latest, greatest things. But if you’re continuously enticed into these things, there’s a huge risk that you might not actually reach the goals just because you were lured into these tempting types of asset classes.
So what we’ve really tried to do is to make sure that whatever we put down in that process to facilitate the investment plan will be reliable – and then the chances of failure are extremely remote.
That’s why what is always astonishing to me is that, regardless of Bitcoin – where it will be a success or failure over the long term – how do you put that in a client’s plan and then feel comfortable at night that the client is going to achieve his goals, because ultimately no one really knows, whereas if we say we use the solution that’s going to generate inflation-plus-3%, we’re pretty sure that that’s going to be the case.
So we’ve tested our products, and we use our actuarial team to make sure that, when we stress this, they can achieve these goals. That’s sort of the way that we want to approach it.
CIARAN RYAN: It does come down to a bit of a forecasting risk involved here if you’ve got this wide, wide range of products and you’re not particularly certain about the outcomes; that introduces risk as well. You could have a blowout result one year followed by a terrible year the following year.
So, this forecasting risk is quite a big issue. How is that managed?
ADRIAAN PASK: I think that’s exactly right. So often the way that we view asset classes – from cash to bonds to equities – is seen as risky all the way up, where equities are the riskiest asset class.
But if you look at the long-term results of equities over time, they actually quite consistently generate a return of inflation plus 6% or 7% over the long term. It’s a very narrow range that they operate in if you use them for the correct period of time – and therein lies another trick. But at least if you have that in a plan, the advisor’s role then moves into making sure that the client stays on course, which is a different job.
But if you start to use things that have a lot of forecasting risk, [go] back to the crypto example. How do you hang your hat on that plan, what did you put into the plan as a reliable return from that investment – even over the very long term? So, it’s very, very difficult if you can’t forecast properly.
This is the same battle that actuaries fight when they are asked by big companies to forecast things.
We sort of approach our financial planning strategy from a quasi-actuarial point of view, where we try and establish very high certainties, even though we still facilitate a high element of growth assets. But there are certain things that can simply not be justified because this forecasting risk is just too high. So that’s sort of the way that we summarise it.
CIARAN RYAN: All right Adriaan, a final question. I guess most people are dealing with wealth managers when they’re doing their investments; how do they make sure that their plans stay on track and are truly tailored to their needs, given this complexity of choice that we’ve been talking about?
ADRIAAN PASK: I think it’s a tricky one. It’s regulation to say that you’ve got at least to have a review with the client once a year to ensure that you’re staying on track. At times I think it’s quite short, because obviously there are things like equities in a portfolio that won’t perform well over a 12-month rolling period year in, year out. They need more time.
But I think some of the things that you can ask your financial planner – hopefully more at the time of implementation of a plan, but even if you’ve got a long-standing relationship with a wealth manager – is to ask them: ‘Given what we’ve used in my financial plan to achieve my goals, how comfortable are we that this mix of assets or products will deliver what we need, and can you show me some evidence of this?’
So, for your own peace of mind remember the client pays for a plan and peace of mind – not a product. So if you have a plan and you need more peace of mind, then ask for it. And if [the advisor] can show you that there is research done to say these lists of securities or products being used have been used in portfolios over a long period of time, and they are actually quite reliable, there is your peace of mind. You needn’t worry. Just stick to the plan and think long term. You’ll be fine. I’m going to be next to you, by your side to coach you through this process as we go.
Where I get concerned is where I hear of things that are being used in clients’ portfolios that haven’t been tested.
So, if you if you use that example that I’ve given you in terms of how you could potentially navigate that conversation as a client with your wealth manager, how do you have that debate? The easy example is always cryptocurrency – but there are many other things that are maybe not as obvious that’ll sometimes be used from what we observe by looking at what’s happening in the industry.
But if you ask an advisor ‘Why is there 5% cryptocurrency in my portfolio? How comfortable are you that that will achieve my long-term objectives?’ – I can’t see how anybody can answer that question truthfully, which is sort of our quality control check.
When we put something in a plan it’s something that’s tried and tested and quite reliable in nature, which we feel comfortable is going to make the client more comfortable, make the advice process more reliable – and give you a high level of comfort to both the advisor and the client that goals will be achieved.
I think too often these days advisors just want to keep the client happy. If the client wants 5% or 10% or 20% in cryptocurrency, they will give it to them. To my mind that’s not the job.
If the client comes to you for a plan and peace of mind and some reliability around that, if the introduction of whatever asset or product you included in the portfolio resulted in him not achieving his goals over the long term, just because you weren’t able to have the discussion, it would be a travesty. And that for me is a mistake on the part of a financial planner, not of a client.
So I think also advising into that discussion and asking those questions that I’ve mentioned to get that peace of mind, you should feel quite comfortable that you have a very strong plan and very reliable products or asset classes that will get you there.
CIARAN RYAN: Very good. Thank you, Adriaan Pask, chief investment officer at PSG Wealth. I think we have a clearer understanding of what influences wealth managers’ decisions, and how to navigate through those complex range of products that everybody’s confronted with.
Thanks very much again, Adriaan, for your time.
ADRIAAN PASK: Thanks, Ciaran, and thanks to everybody listening in. I hope you find it useful. It’s complicated out there, so let’s try and keep things simple.
Brought to you by PSG Wealth.
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