I would like to keep my first column practical, considering my 20 years as a Certified Financial Planner® who believes in holistic financial planning. I will leave it to the wealth management thought leaders to detail the theory side of investing and investments.
As a CFP®, let us focus on being the custodians of our clients’ financial plans and focus on the pillars of financial planning and inclusive retirement – tax, risk, education, estate and investment planning. I believe we should not focus per se on being wealth managers and leave the wealth management to specialists. Our duty is to select the funds and wealth managers and allow them to manage our fund selections within their fund mandates actively. We need to focus on the fundamental principles as follows:
It is essential to have a well-diversified portfolio of funds and fund managers to smooth performance over the long term. In the long term, I take a minimum five-year period, but preferable seven years and longer. It depends on the objectives of each client. Still, in the case of retirement funding, which I refer to as compulsory capital, including retirement annuities, preservation funds and company retirement funds, it would be a 20-year-plus view. With voluntary investments like endowments, unit trusts or similar, I would take a five-year perspective.
It is essential to have a well-diversified portfolio of funds and fund managers to smooth performance over the long term.
It must be about spending time in the markets and not timing them with knee-jerk reactions. Over many decades and during various market crashes, it has become apparent that your success rate is very high if you protect wealth while creating wealth, if you do not try to time the markets during market volatility. Paper losses can only become actual losses if the units are sold on the downside. By not timing the markets, the good days will easily outperform the poor days on record.
As a financial planner, I have proven that your success rate increases dramatically when you take a more passive approach to your clients’ investments and leave the active management to your selected fund managers. Let me explain. I would typically select seven fund choices. They would include four to five fund managers, consisting of three to four asset classes.
Passive management as advisors comes into play once you have made your selection. Each fund with its fund managers can move stock selections within their mandated levels.
My only involvement would happen when we have fundamental market changes as observed under Covid-19, where the listed and unlisted property funds were severely impacted, fund managers do not perform or new fund managers come online.
I would typically select seven fund choices. They would include four to five fund managers, consisting of three to four asset classes.
Investing must also be about tax-effectiveness, and with both compulsory and voluntary investments, tax knowledge plays a huge role in wealth protection and creation. The type of investments and products we as financial planners select could not be more pertinent regarding interest earned, income received, capital gains tax and similar. The investments and products must allow for flexibility and liquidity as life happens and we want to prevent unnecessary losses outside of our control.
When it comes to advisors with a younger tenure, investment advice comes with various pitfalls for the advisor and clients. I believe multi-manager funds could play a considerable role in mitigating volatility. A balanced portfolio where there is any uncertainty will never disappoint.
Investing according to a client’s risk profile is essential. It is necessary to review the holistic financial investment portfolio.
Looking at one specific lump sum amount to invest and conducting a risk profile analysis may not have the same outcome if the client has not only one-million to invest but 50-million in their overall portfolio of investments and products if the client is educated on the holistic risk situation.
With the current Ukraine war and a once-in-a-lifetime pandemic, we should all remember the fundamentals of investing and stay calm while taking a long-term view of our clients’ investments and performance.
Column by Kobus Kleyn, CFP®, Tax and Fiduciary Practitioner, Kainos Wealth
Kobus Kleyn has published over 200 articles and authored three books. He is a multiple award-winning professional and holds eight memberships with professional associations. His most recent awards were lifetime achievements awards from the FPI (Harry Brews), The Million Dollar Round Table (Top of the Table Life Membership) and Liberty Group (Life Membership) in 2021/22.