There was an 8.3% increase in the number of high net-worth individuals (HNWI) last year.
The 10.9 million dollar millionaires — each with at least $1-million to invest — boast assets in the region of $42.7-trillion. This is according to the World Wealth Report 2011, distributed by Capgemini and Merrill Lynch Global Wealth Management.
The good news for Africa is that our HNWI tally is growing faster than the global average, up by 11% over the same period. The people mentioned in the World Wealth Report didn’t make the ‘rich list’ overnight.
“Wealth accumulation takes place over time,” says Lara Warburton, MD of Imara Asset Management, South Africa. “And it is interesting that wealthy individuals — often financial directors with plenty of money smarts — are happy to trust a professional wealth advisor, while those who know much less about investing prefer to do it themselves.”
The rich become richer because they understand their limitations and focus on making new money rather than on ‘nuts and bolts’ investment decisions. “Investors who build a trusting relationship with an advisor and recalibrate their financial plans to accommodate changes in their lifestyle benefit from a holistic view of their financial needs,” she says.
A wealth manager’s role extends way beyond allocating cash resources to asset classes. “Wealth managers must objectively determine the goals, risk tolerance and time horizon of the private investor,” says Roland Gräbe, Chief Investment Officer at SYm|mETRY multi-manager.
A professional wealth manager must also manage a range of peripheral events not directly related to the investment process. Gräbe mentions tax planning, while Warburton adds a myriad functions, including retirement planning, estate planning, financial products, wealth management structures (especially companies and trusts), offshore investing and tax implications.
An important function of the wealth manager is to strip emotion from the investment decision and to assist individuals in setting goals and building sensible long-term investment plans. These plans must incorporate levels of risk and return appropriate to each investor’s unique circumstances.
“Generally speaking, young investors should focus on capital accumulation,” says Gräbe, “by including equity (and even private equity) in their portfolios.” As investors approach retirement, a trade off develops between ongoing wealth creation strategies and more conservative income and capital preservation strategies.
One of the critical mistakes the industry has made in the past is to consider an investor retiring at age 60 as a short-term investor. The prudent approach is to adopt a balanced combination of equity, bonds, cash, property and alternative assets at this stage. It is only at age 65 and older that the focus should shift from capital accumulation to capital preservation.
At this stage, says Gräbe, the portfolios begin leaning toward cash, local bonds, absolute return funds and perhaps conservative fund of funds or insurance products such as an annuity. The value of equity investment shouldn’t be discounted, regardless of the investor’s life stage.
“Equities have always been the best performer over the long-term,” says Warburton. “People with more time to retirement can therefore take on more risk and have a higher equity weighting.”
But she warns that age shouldn’t be the sole determinant of an investment strategy. “If you are saving to purchase your first home over a short time horizon, a long-term wealth strategy would probably be inappropriate,” she says. And a person with the prospect of a good inheritance will take a different approach to someone who is less fortunate.
It can be argued that long-term wealth accumulation is a function of real return — the amount of money your invested capital generates in excess of inflation. And real return, for the most part, is a function of risk. You have to take risk to generate return, so the big question is how do private investors go about balancing their risk and return expectations?
“One of the unspoken ‘risks’ is that investors who worry too much about risk end up taking on too little,” says Warburton. Young people often err on the side of caution after watching their parents’ mistakes, petrified they won’t be able to secure a comfortable retirement.
Gräbe agrees, adding that investment risk takes many different forms. A young investor who only invests in cash or similar ‘safe’ asset classes runs the very real risk that his retirement assets will not keep up with inflation. “But this investor also accepts the risk that the bank may fail and default on their obligation to return his or her money, with or without interest,” he says.
It is up to the wealth manager or financial advisor to ensure that the investor in question takes an appropriate amount of investment risk and spreads these risks as widely as possible.
South Africa has one of the most dynamic and advanced investment and life assurance industries in the world and local investors benefit from ongoing investment-product innovation. But investors who wish to avail of the many benefits on offer need to make sure they understand what they are being sold.
The “bells and whistles” and other product guarantees carry costs, explicit or hidden. And the impact is often only experienced when the return at maturity disappoints. Aside from market complexity, investors have also had to contend with a growing number of financial frauds in recent years.
The good news is that South Africa’s independent financial advisors are better-skilled today than ever before to provide financial assistance. Today’s advisors and wealth managers are plying their trade in an environment where product transparency and treating customers fairly are the order of the day.
Experts believe that local financial advisors will gradually follow the example set by their UK and Australian counterparts and shift to a fee-based approach. “Seeing these fees, being billed and having to pay them, involves a big shift from the current situation where fees are sourced from the investment and returns are measured net of those fees,” observes Warburton.
But at the end of the day a professional advisor, a well-thought-out and diversified investment strategy and active management of the plan over time should protect the investor from any pitfalls.