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Structure is the order of the day

19 August 2019 Jonathan Faurie

Outcomes based investing is a relatively new approach to wealth preservation. Outcomes based investing not only generates alpha for clients but works in tandem with financial advisers to ensure that the investments are in line with lifestyle and risk changes as well as different investment goals.

This investment approach is dynamic and is forcing financial advisers to take a step back and relook at their advice models to adapt to changing client demands. This was highlighted during an exclusive interview with Momentum Investments CEO Jeanette Marais. 

Natural conflict

The dynamism that is associated with a new outlook on investing naturally disrupts and may cause some internal conflict in the minds of advisers who have been following a specific business model which has brought them some measure of success for a number of years. 

“The world has changed, and every industry role player (insurers, fund managers and advisers) needs to come to terms with the fact that business models will have to change. Outcomes based investing can add significant benefit to clients. The way that it needs to be positioned is through outcomes-based investing, certainty and predictability will be introduced into their portfolios. If 30% of a client’s investment is dedicated to generating funds that will cater for changing lifestyles and new risks, advisers can then recommend the conventional approach of adding the big-ticket names to the portfolio,” said Marais. 

She added that while outcomes-based investing is a new and exciting approach to investing, the principle is not a foreign concept. “No adviser will put 100% of their client’s money into a single fund. They are already using a core satellite approach. The focus just needs to be shifted a bit,” said Marais. 

Adviser incentive

Most advisers in the industry are probably aware of an outcomes-based approach to investing and are looking to follow this approach. However, there may be a certain measure of reluctance because changing an approach that has worked for so many years can be scary. 

“Insurers are not asking advisers to reinvent the wheel or to radically jettison all that they know about investing. Advisers must not unlearn the fact that for the last decade they have been successfully putting their client’s money into four different balanced funds with successful results. What the industry is asking is that advisers acknowledge that it has been a tough ride for client’s during this decade,” said Marais. 

She added that advisers now have the opportunity to stabilise their client’s investments and determine why it has been so tough for them. 

“If we do not challenge what we have traditionally been taught, we are doing our client’s a disservice. In our experience, client’s leave when it becomes to painful to stay. And loss is painful,” said Marais.

A lot of pain

It seems as if there is a lot of pain to go around. 

Not only has the past decade been rough on clients, advisers are also starting to feel the potholes on the investment road. Young investors are completely rethinking the traditional concept of retirement and with it, the need to pay significant fees if there is no guarantee that they will one day retire with peace of mind. 

In addition, clients are becoming savvier when it comes to their money and are doing their own research into investing and the different approaches that they can possibly undertake to achieve a specific outcome. However, Marais says that advisers need to remain positive. 

“Investments are still sold and not bought. A UK company spent millions of pounds on building a world class robo-advise tool only for the company to not get any clients through it. Client’s still want to hear adviser recommendations or thoughts. The direct/robo approach still has a long way to go before it is a threat to advisers,” said Marais. 

However, advisers do need to up their game. Marais pointed out that the biggest threat to advisers is that together with clients, they have possibly destroyed more value than they have created purely through decisions that were made that have not kept up with changes in lifestyles and risks. 

“Having a structured approach to investing addresses this concern. It acutely highlights the need for advice and eliminates 30% of the guesswork from investing. It allows clients to shift their focus and for advisers to have easier follow up conversations with clients,” said Marais.

Where benefits lie

If an adviser is going to embrace an outcomes-based advice mode, they will question where the benefits in the model lie. 

“Where I think there is incredible value in the outcomes-based model is that if you are in any unit trust fund that tries to beat a benchmark, you still have no idea what your returns will be. You do not know how long you need to stay in the fund to achieve a goal or whether you will get a return of 3% or 18%; you may even end up getting a negative return. Goal based investing is a contract; clients tell advisers that they need a return of CPI + 6 and advisers can tell clients how long they need to be invested in a specific portfolio to achieve that,” said Marais. 

Editor’s Thoughts:
Marais feel that money is the one thing that humans are not rational about. They make emotional decisions and then try to rationalise them. An outcomes-based approach may take the guess work out of investing, but it defiantly introduces a structured approach that can address key lifestyle changes and risks. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Platjie Klaasen, 21 Aug 2019
The other important point not addressed is that NHI aims to reduce the payment to the Dr's that charges exorbitant fee's.The Dr's will not tolerate that and we will see a substantial outflow of quality Dr;s out of RSA. This will adversely affect the medical industry as well.
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