In this feature, we take a look at wealth creation and the protection of high net-worth individuals (HNWI) assets. With so many financial products available both locally and internationally how does one know what to invest in, when to invest and how much of one’s assets should be allocated to a particular investment product?

There are equities, bonds, cash, funds, private equity funds and property, among others, to invest in and a host of investment platforms or wrappers through which to invest – such as unit trusts, endowments, trusts, section 12J investments, structured products, cash, money market instruments and the like – some more tax efficient than others.

This feature also takes a look at trusts; offshore investing; estate planning; minimising tax liability; and the issues surrounding advisor fees.

One thing the experts agree on – Finding a trusted financial advisor with a deep understanding of the complex financial landscape is the key to growing and protecting one’s wealth.

Investing – what you need to know

The first things to ask when it comes to investing is what is the purpose of creating and protecting your wealth, what are your long-term investment objectives and what are you trying to achieve?

Steven Nathan, CEO of 10X Investments, says that before investing, investors need to understand their financial needs, their time horizon for investing, how long they want their capital to last, how much they need per year to live on, and what kind of investments will serve their long-term goals.

“If for example, an investor needs R5 million a year to live on, and has R100 million to invest, then a 5% return on investment per year above the rate of inflation is required. An investor then needs to look at optimising his/her portfolio to meet that need, deciding what proportion of assets should be allocated to shares, property, bonds or cash. The decision to invest in higher or lower-risk investments or a combination of both depends on his/her investment objective.”

“It is much more challenging today to achieve similar returns to what one could achieve before the 2008  global financial crisis”, says Reyneke van Wyk, Stonehage Fleming Head of Investment Management South Africa. “Today one needs to assume a much higher degree of risk to achieve the same returns,” he says adding that protecting the purchasing power of capital over the long term is best achieved through investing in inflation-beating assets like equities, while one can mitigate against short-term volatility by investing in lower-risk cash and fixed income asset classes.

Nathan adds that if one’s investment horizon is five years or longer, then one’s portfolio should own a high proportion of growth assets like equity and property as these offer higher returns while being more volatile in the shorter term. “There is lower downside risk with growth assets in longer-term because equity markets tend to give good returns over the longer term.”

Asset diversification and positioning your portfolio more conservatively is the way to protect against short-term volatility, says Bryn Hatty, Stonehage Fleming Chief Investment Officer – South Africa. “A proper risk analysis is essential to ensure that investors understand their risk needs and tolerance.”

Daniel Kibel, Founder of CM Trading, says a well-diversified portfolio should have investments in a wide array of industries from online trading, through bitcoin to gold.

Tax efficiency, says Vimal Chagan, Divisional Director: Investment Propositions, Individual Arrangements at Liberty Group, can be achieved through determining the appropriate  wrapper or legal structure investors should use for their investments, which also determines access to these. For example, an endowment is a tax-efficient investment wrapper for high-income earners. Upon death, the money is passed directly on to one’s beneficiaries and doesn’t go through the estate, so does not attract executor fees. “On the downside, endowments are a minimum five-year structure, so it is not good for people who need access to their money in the short-term.”

Sheldon Friedericksen, Fedgroup’s Chief Financial Officer, says during times of economic downturn, one should invest in sectors that have the best chance of recovery and offer the potential of a good return on investment in the longer term.

Nathan adds that investors would do well to avoid advisors who try and convince them to invest in speculative investments or investments they don’t understand.

Citadel Wealth Management chief economist Maarten Ackerman says during times of uncertainty and negative news reports, investors often get nervous and make the mistake of selling their investments instead of taking the time to look at the reality of the fundamentals, whether in the market or the economy. Ackerman adds that after the long bull run we’ve had, it’s time for investors to add some more protected investments to their portfolios. Hedge funds, he says, are good at protecting against volatility.

Finding the right financial advisor is key

To help navigate through the minefield of investing, choosing the right financial advisor that understands your risk tolerance and financial needs is critical, says Reyneke van Wyk of Stonehage Fleming. “Advisor independence is important and it’s critical that the advisor’s interests are aligned with the client interests and that where an investment advisor is incentivised to use certain products, that the conflict of interest is disclosed and well managed.”

With most HNWIs having offshore investments, advisors must have global investment management experience, an international network and preferably a strong offshore presence, says van Wyk. “Also critical is that the advisor aims to reduce the client’s Total Expense Ratio ( the total cost of investing including all charges through the value chain). It helps for an organisation to have the necessary scale to access institution fee classes (a lower fee class for larger amounts invested in a fund). The investment platform an advisor suggests should be safe,  unconstrained to allocate across major asset classes globally, cost-effective and offer a comprehensive service.  An advisor must also ensure that when an investor’s capital is allocated to active managers, best-of-breed global managers with a tried and tested skillset are used. Clients can often end up paying active management fees for managers that largely track the index.”

Steven Nathan, 10X Investments CEO, says financial advisors should have some form of financial planning qualification, at the very least a Certified Financial Planner or Advanced Certified Financial Planner qualification.

Investors also need to decide whether they need an active or passive investment manager, says Craig Turton, Head of the Wealth Creation Team at Chartered Wealth Solutions. “An active manager actively makes investment decisions aimed at beating a market index and looks for investment opportunities. A passive manager mimics/matches a market index.”

Ernest Mazansky, Director: Werksmans Tax, says a financial advisor should be tax aware and have a reasonable grounding in the aspects of tax law that affects off-shore investing and estate planning, even though their speciality is advising on financial strategies and products. “But detailed tax advice should be left to a tax specialist.”

Investment products in the market and what to consider

“There are interesting opportunities available to high net worth investors”, says Reyneke van Wyk of Stonehage Fleming. “We’re seeing larger allocations to private equity funds, less- liquid assets that should produce good long-term growth.”

Citadel Wealth Management chief economist Maarten Ackerman says that in light of the

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Read this Feature on PROTECTING and GROWING YOUR WEALTH by Max Marx, as well as a host of other topical management articles written by professionals, consultants and academics in the October/November 2018 edition of BusinessBrief.

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