By James Hartland
Finance is a vital part of our everyday lives. Whether you’re a doctor, an engineer, a teacher, an IT professional, an artist, or an OFW, you will need to have at least the basic knowledge in finance and money management. However, finance and investments are generally overwhelming topics to talk about. In the Philippines, people tend to avoid finance-related discussions, and some professionals even disregard the importance of saving and investing for their future. With this kind of mindset, it will be challenging for our country to experience financial inclusivity and develop into a sophisticated economy.
Fortunately, because of the rise of technology and globalization, there is now a massive opportunity for Filipinos to follow the best investment practices internationally with the help of a qualified financial advisor. Having an advisor proactively going through an exercise of discovery with you helps build a robust financial plan that will consider your many goals and will adapt as you move from one stage to another. This can save you time and give you peace of mind, knowing a professional has thoroughly considered the outcomes you are trying to reach and is actively managing your portfolio to your personal goals and within your risk tolerance.
Having an advisor/coach/wealth manager does involve a cost as it adds holistic value. To help clients see the added value, we will cover three key aspects of the relationship between the client and the wealth manager to demonstrate the ‘added value’.
1. Portfolio Value
This involves detailed conversations between the client and the wealth manager to make sure the client’s investments are best positioned based on their needs. This will involve a detailed discussion around a suitable risk profile based on the client’s attitude to risk. Consideration will also be given to time horizons and geography of where the client currently lives and if they intend to retire in another country.
It is important to be able to discuss with an expert how to build a well-diversified portfolio that will generate better returns considering risks, taxes, and other fees. An international financial advisor will normally consider a vast range of global funds based on their historical and potential performances. This strategy will eliminate home bias and single-stock risk.
For purposes of discussion, we checked the performance of the top five mutual funds in the Philippines for 2020 and compared it with the global funds that we recommend to our clients. The figures show that international funds, whether in equities or balanced, generated relatively higher returns than the local funds. It is also evident that local funds garnered negative5-year, 3-year, and year-to-date returns.
Assuming you invested USD 10,000 (approx. PHP 500,000) to Philippine mutual funds in 2016, your money’s value in equity funds would have decreased by 5.07% every year and its worth after five years would become USD 7,709.34 (having a total loss of approx. PHP 114,533). Using the same example in terms of the balanced funds (combination of equities and bonds), you would essentially have a total loss of around USD 325.66 (approx. PHP 16,283.24). On the other hand, if you invested USD 10,000 in 2016 to global equity and balanced funds through Astra, your money’s worth after five years would have grown to USD 19,611.45 and USD 14,302.95 respectively (gaining approx. PHP 480,572.50 and PHP 215,147.50 of total additional earnings respectively).
This implies that when a client is heavily invested in local funds, the exposure to losses is very high. To solve this, diversifying to a broad range of offshore funds and retaining around 10-15% of your portfolio to good local funds is advisable.
2. Financial Value
In the Philippines, the more sophisticated investor would probably use a private bank locally or may even have their own wealth manager in Singapore or Hong Kong.
These wealth managers generally don’t provide a financial plan, ongoing service, or guidance. In most cases, they just give the investor the option of choosing from a pre-selected list of funds, provide annual statements and a phone number to call in case of questions. Moreover, the person answering the investor’s call would typically have a standard set of responses to common questions. That would be fine if all investors were alike.
But each investor has their own set of goals, circumstances, and preferences. And that is why we believe the customized client experience that a wealth manager can offer has significant value.
Over the past 15 years where we have experienced the global financial crisis and now Covid, the role of the wealth manager has become more complex as clients need help and coaching to understand how changes in the world and markets affect them. Clients are no longer looking for just a broker to place deals for them but they are looking for a more holistic approach that gives them confidence and trust in what they are doing.
Recent research has shown that investors are more willing to work with advisors who have a deep understanding of their individual circumstances and financial goals. This is where independent advisors have the edge over private bankers. Investors may start a business, get married, buy a home, raise children, save for their children’s educations, care for elderly parents, sell a business, receive an inheritance, and prepare for or manage their retirement.
Having a wise, independent advisor by their side in navigating these life-defining moments can bring tremendous value to investors and mean they have a far higher probability of achieving their financial goals.
3. Emotional Value
There is no question that 2020 was a wild ride. Many investors were tempted to flee for the exit in mid-March when the S&P 500 Index registered its largest weekly decline since 2008. In fact, between February 19, when the index closed at a record high, and March 23, the S&P 500 Index fell by 33.8%.
This is where the value of a wealth manager in terms of providing behavioral guidance really comes into focus. Investors who remained invested would have seen the index rebound 17.6% in the following three days, and then not only fully recover, but actually return 18% by the end of the year.
Without an advisor’s guidance, many investors would have sold low in March. In fact, $335.6 billion was pulled out of U.S. equities in that month. The reality is those investors have had to buy much higher as the markets steadily recovered throughout the end of the year. Or they would have been forced to remain in cash until a better entry point appeared, a risky and unpredictable strategy.
Statistically, the average equity investor’s inclination to buy high and sell low cost them 2.02% annually in the 36-year period from 1984–2020. We believe there is good value in a wealth manager's ability to help clients stick to their long-term financial plan and avoid the behavioral mistakes that may have them miss out on the market’s best days.
The above review has covered three key aspects showing where a wealth manager can not only justify their annual fees but also demonstrate added value. Perhaps the biggest surprise from the survey is the significance of the ‘emotional value’ in the relationship. This alone is worth over 2% per annum in added value to a client and in surveys, clients stressed the importance they attached to trust and the importance of the personal relationship they had with their wealth manager.
In an ever-changing and volatile world where things change rapidly, having a wealth manager to hold your hand and exchange ideas has never been so important. For clients whose lives are more complex due to living or working abroad or personal reasons, having a ‘mentor’ or wealth manager is invaluable.
Covid will rumble on for years and as this happens, governments all over the world will cleverly plan to get back the trillions they have wasted on this pandemic due to their poor governance and bad decision making. This will come in the form of both direct and indirect taxes and a wealth manager can add further value by helping clients understand how this might affect them.
The Philippines, as a developing country, has a lot of room to grow and a great potential that needs to be explored in terms of the global investment paradigm. When guided properly, Filipino investors would be able to maximize the potential of their hard-earned money.
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