Navigating wealth: Beyond products to purpose

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CIARAN RYAN: Investors today have more choice than ever before. There’s a constant stream of new funds; there are investment products all modelled around particular themes and strategies competing for our attention. And they’re often accompanied by some impressive recent performance or a compelling marketing story.

But does having more choice actually make us better investors? And should the starting point, when managing wealth, be finding the best investment product – or working out what you actually want your money to achieve?

The argument from PSG Wealth is that the product is not the plan. Products are simply tools and good wealth management starts with the investor’s goals, circumstances, time horizon – and obviously, appetite for risk.

Well, to look into this in more detail, we’re joined once again by Adriaan Pask, chief investment officer at PSG Wealth. Hi Adriaan, thanks again for your time. Let’s start with this idea that the product is not the plan. What do you mean by this and what’s the difference between a product-led approach and an advice-led approach to managing wealth?

ADRIAAN PASK: Hi Ciaran, thanks for having me on the podcast. I think the differences to the layman might seem somewhat superficial, but I think they are incredibly important.

So, if you talk about a product-led approach, it really focuses on a very narrow subset of the range of things that can be done in terms of wealth management and financial planning.

And it focuses purely on the product side of things. So there is very little engagement in terms of what it is that you actually want to achieve.

It’s purely just ‘Dear financial intermediary, I would like to invest in said product and please help me facilitate the transaction’.

Conversely, the advisor might follow the same approach, so it’s not necessarily a client mistake.

It might come from an advisor where the client goes to an advisor and says ‘I think I need to invest in this’, and the advisor says ‘Sure, let’s get the ball rolling’ – where[as] advice is a far more comprehensive way of looking at things.

It’s where you actually stand back from the product decision and say ‘Before we go into solutions mode, let’s find out what it is that you would like to achieve. Where are you at the moment? Where is it that you would like to go? And then what sort of solution do you need to get you from point A to B in as efficient manner as possible, and where does that potentially actually differ from what you had in mind initially, and why the alternative approach could be more beneficial to you?’

So it’s a far more comprehensive and holistic discussion. And in that whole discussion you derive value beyond what can be derived from a product alone. I think that’s really the key message.

CIARAN RYAN: Yes. Investors are always or constantly being presented with a new fund, there’s a new investment theme, or there’s a product – often after [it] has performed particularly well. Should we be wary of chasing what’s new and what has recently been quite successful in the market?

ADRIAAN PASK: Yes, I think that’s 100% right. These days there are thousands of different things you could possibly invest in or utilise for investment purposes, and not necessarily all of them are suitable for your specific needs as a client.

And it doesn’t make that specific product necessarily a bad product. It just means that it’s not suitable for your specific needs.

So, in particular, if we look at typical marketing, you only have so much time to introduce a new offering into the market. A product banner at the airport, for example, doesn’t come with: ‘Who are you, what do you need, what is your financial situation, what do you want to do with your estate?’

So I think inadvertently there’s some harm being done there because often people will just talk about the returns – get X amount of returns, or double your money, or things like that.

And I think those things can actually be very harmful, because that speaks to the approach – and I think it’s a culture thing really, where certain businesses adopt a culture of sort of promoting product in that way, whereas for us what we like to do and think is right is to rather approach clients in a way that we can understand your needs better.

And once we’ve got all the necessary context, then we can start solutioning for how we walk a path together.

CIARAN RYAN: Now, you mentioned thousands of products, and we tend to assume that that’s a good thing because you’ve got more choice and it’s good for consumers. But you argue that that actually can be a bit of a bad thing; there’s too much choice. Why would you say that?

ADRIAAN PASK: Yes, on the surface it looks like things like innovation and new product types and those kind of things are beneficial. It means the industry is evolving, it’s developing, et cetera.

But at the same time, there are certain unintended consequences that come with it. There are so many things it’s very difficult for clients to really understand every intricacy of every product that’s out there.

But that’s really what’s necessary before you start investing in something – you need to have a very good understanding of what you’re getting yourself into, because if this is going to be the primary tool for making sure that you reach the goals that you have, a very good understanding of what you might expect from that product is really important – and it stretches way beyond just performance numbers.

It stretches into things like what happens if things go horribly wrong? What are the potential negatives of this specific product or asset class or anything of that nature?

I think that’s also an important distinction to keep in mind.

The other thing that happens with all this product is you often get to a point where there’s a bit of analysis paralysis taking place, where there are so many options to consider that it actually creates delays and people postpone and become rather inactive or overwhelmed …

Whereas I think sometimes the real value is just once you’ve set your goals down, and you know what the strategy is that you need to adopt and what’s important to you and you’ve thought this out properly, actually what you’ve done is you’ve created a framework for yourself of what resonates well with what you want to achieve.

And certain things might look interesting, but you will notice that they don’t really overlap with what you had in mind.

It’s really important to be able to say ‘Although I can see how this is may be appealing to someone [with] my specific needs, I don’t think this is the best way to go about it’.

So it’s not just whether you can sort of objectively say ‘It looks reasonable’. It’s about, is this really suitable for me? Is this the best that I can do? Is it reliable in terms of going to increase the likelihood of my future success of what I would like to achieve?

It involves different kinds of questions and it’s really important that you have that framework in place or that you and your advisor are aligned on what that framework is, which type of product will work well for you, and which ones don’t.

I think superficially we touch on it when people go through things like risk profiles and they set a guardrail there and they understand that certain things are maybe too volatile for them.

But it goes much further than just understanding the volatility mechanics. There are other things that are just more suitable for ticking a specific box in terms of what the characteristics are that you’re after.

So, a long story short, I think it just introduces a lot of inertia and it makes things very complicated where what we’re actually trying to do in our advice process is narrow things down to only the things that are really suitable and really reliable.

That becomes a bit more complex than just evaluating performance, for example.

CIARAN RYAN: Now, that brings us to the value of financial advice. If it isn’t simply about picking the best-performing fund or predicting the next market move, where does a good wealth manager actually add value?

ADRIAAN PASK: I think you can hear sort of where our thinking is in terms of the engagement with the client – really understanding what the client needs to achieve and making sure you put the best possible solution down for achieving their specific goals.

If that theory is correct, you should see people reaching their goals and wealth managers adding value well beyond just a specific product.

And luckily there are some research studies that we can lean on that substantiate that. There have been studies done by Vanguard in the US, and Morningstar has done similar studies where they try and quantify how wealth managers typically add value to a client.

And if you look at the product component in terms of fund selection or security or stock selection, that kind of thing, it’s actually relatively small. The majority of the benefit actually comes through from looking holistically at a client’s balance sheet and needs, making sure things are in place in terms of [their] estate.

Are things structured tax efficiently? Are they making use of the various savings incentives like RAs [retirement annuities] and tax-free savings and those kind of things?

And by adopting that approach and trying to lean into the other skill sets of a wealth manager beyond just ‘give me a product and help me facilitate that transaction’, you can actually extract the most value out of your wealth manager expertise well beyond, as I said, what the product typically provides.

What we do also see – and this is something we’ve discussed before – is some of these other things that are more difficult to measure.

A financial advisor’s ability to keep an investor calm in a situation of chaos when markets selloff, for example; that’s typically when there’s lots of volatility, and volatility invites mistakes.

Having someone there by your side, understanding what your real needs are, and reminding you of what your needs are, why those products are in your portfolio, and why you should see through the noise – those are all very important conversations to have.

Which is sad in relation to someone who just spoke about a product and just achieving the maximum return – because now all of a sudden you’ve got nothing to lean on.

The product doesn’t have any context anymore, it doesn’t fit into a pre-discussed and agreed plan. And obviously the likelihood that you make a mistake then is significantly higher.

So, if you look at those studies, they break it down into tax structures or helping you on the behavioural side, putting specific wrappers in place that are more beneficial for your offshore investments, for example; those kind of things.

And that’s really 80% of the value that can be derived from a really healthy wealth manager advisor relationship.

In our view, advisors who purely act and transact on a client’s request without engaging in a conversation is really not helping the client.

It might be the shortest path and the quickest path in the moment, but you’re leaving so much extra value on the table and – that’s for us a really important component because that also, from what we’ve seen, is it really anchors long-term relationships.

Advisors try to start to value the other value-adds that come through that advice process, and I think that puts a wealth manager on a stronger footing as well in terms of client retention, because there’s trust built up through that process.

The client understands that the wealth manager has knowledge in areas where they can get benefit from utilising the services where, if you purely focus on the product specifically, and just facilitating transactions, you are really commoditising your services as a financial advisor.

That’s not what financial advice is about. In many cases, these guys, these clients, can self-transact, facilitate transactions themselves with technology that’s available.

So that’s not really a sustainable model for the advisor in terms of the service offering and it’s also not beneficial to the client in terms of outcomes.

I think therefore, for us, it’s important that people start to move away from this environment where the market is becoming more and more about product and advice, and the real value of advice is not fully understood.

And I think that’s really the point of the discussion.

CIARAN RYAN: All right, we’re going to leave it there. That was Adriaan Pask, chief investment officer at PSG Wealth. Thanks very much for your time, Adriaan.

ADRIAAN PASK: Thanks, Ciaran.

Brought to you by PSG Wealth.

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