An investment strategy is an important part of an adviser’s offering to their clients, but how hands-on should advisers be? And with so much upheaval and uncertainty should we be looking to adjust the strategy?
A solid investment strategy is not just about the dopamine rush of seeing positive peaks on a graph – there are lives behind those numbers. Healthy investment returns provide peace of mind – both for the client and the adviser. A well-crafted strategy reassures you that you’ve made the best possible decisions to safeguard your clients’ financial futures, even in the face of market uncertainty. It gives the client the assurance that their financial future is in good hands and removes the anxiety that comes from uncertainty.
“Financial advice is more than recommending the correct portfolios for a client. Advisers play a fundamental role in helping clients structure and achieve their goals by using the correct products or solutions, even before investment portfolios are chosen,” says Rita Cool, Head: Individual Consulting Strategy at Alexforbes. “When a client understands how their goals will be achieved through an investment strategy, they are less likely to focus solely on returns and are better equipped to deal with fluctuations in the markets and times of negative returns.”
Crafting the perfect strategy
When designing an investment strategy, it’s essential to start with your client’s needs, says Cool. “A good investment strategy must start with the client’s needs, before being concerned with investment trends, performance, market conditions, and economic noise.”
Cool says the basis for a client’s strategy should be ensuring the correct asset allocation for their goals. “The investment strategy should match the time frame for the goal, for example short-, medium- and long-term goals. The same solution won’t suit different goals. For example, a client who requires a short-term investment should not be in long-term growth portfolios where a sudden upset in the investment market can cause a loss in the short term. Conversely, a client investing over the long term for retirement should not be too conservative as it will not produce inflation beating returns needed to meet retirement targets,” she says.
Diversification is another cornerstone of a strong strategy. By spreading investments across different asset classes as well as geographies, you can help your clients weather various economic conditions. However, Cool advises caution: “Care should be taken that offshore exposure considers the risk attached as well as the reason for the offshore diversification. Although offshore investments have provided excellent returns over time, this is not always the case, and it does not suit every investor equally.”
To follow best practice, Cool recommends taking a comprehensive view of each client’s financial picture, looking at both the overall picture and the specific goals to be achieved. “It helps to explain the reason for the portfolio selection instead of just looking at return profiles that have been achieved. Historical returns are no indicators of future performance, and the client should be made aware that the higher the risk, the higher the volatility can be. While higher risk should give higher returns in the long run, it does have more volatility in the short term.”
A good strategy is one that requires minimal adjustments. It may feel tempting to start tinkering with a client’s investment portfolio in the wake of a dip, and anxious, market-watcher clients may even demand that you do so, but this is not a good idea. “Just as you don’t switch to another sports team after one loss, it is not necessary to switch portfolios after a short-term market loss,” says Cool. “An adviser is there to coach the client through different situations and to recommend changes if necessary. Staying the course is important, and changes to an investment strategy must enhance the outcome for a client.”
An adviser’s role isn’t just about managing money; it’s also about coaching clients to stay focused on their long-term objectives. It’s important that clients understand the reasoning behind their portfolio choices and buy into the strategy. This will go a long way towards alleviating any anxiety they may feel when they see a short-term dip in performance.
Hands-on investing
Naturally, the level of activity required when managing clients’ investments depends on the practice model. “Some practices provide bespoke portfolios, whereas others make use of standard portfolios on a platform,” says Cool. “Others combine portfolios in a range to use for different purposes – for example different risk profiles or Regulation 28 compliant or offshore portfolios. These portfolios could be structured in-house or via a discretionary fund manager (DFM).”
She notes that the practice of using DFMs is becoming more popular among advisers who want to offer tailored solutions to their clients but may not have the knowledge or investment expertise to create portfolio solutions from scratch.
Regardless of which option you go with, though, every decision needs to be intentional, and every change must serve a purpose. “Portfolios must be monitored but do not need to be changed for change’s sake,” says Cool. “A client often only needs to rebalance their portfolios instead of choosing new ones, unless their goals change.”
Cool recalls the old adage: “It is time in the market instead of timing the market that yields the biggest returns in the long term. The correct asset allocation often matters more over time than a specific portfolio.”
Plans should be reviewed annually or when a client’s circumstances change – life events like marriage, the birth of a child and buying a new home could justify a change. However, emotional reactions, like switching out of growth portfolios during downturns, often do more harm than good, cautions Cool. By keeping clients grounded, advisers can help them avoid locking in losses and stay focused on long-term success.
Behind the graphs
2024 has been an eventful year and there are many factors influencing investment performance, both globally and here in South Africa. “One factor is global growth, which initially appeared at risk of faltering completely as recessionary risk expectations took hold,” says Cool. However, growth appears to have stabilised somewhat since the end of Q2. Industrial activity is picking up again, particularly in Asia and the United States, thanks to central banks stepping in with liquidity support.
Global equities: Equity markets are also starting to broaden out. “As performance begins to broaden beyond the magnificent seven, equity markets will be driven more by individual companies rather than specific sectors,” explains Cool. This is good news if you’re looking for more diverse opportunities. Emerging market equities are especially worth keeping on your radar. Cool predicts that as developed markets lose their edge, emerging markets could see a resurgence: “As opportunities fade in developed equity and bond markets, we anticipate the unwinding of under-allocations, driving positive re-ratings in emerging market equities.”
Global bonds: Globally, bonds are holding steady, and Cool notes a clear trend: “As rates continue to ease, the risks associated with short-duration instruments, such as reinvestment risk, will rise, supporting demand for long-duration fixed-income instruments.” Long-duration fixed-income instruments are becoming more attractive, especially in developed markets where high yields are still luring investors to quality credit. “In emerging markets, uncertainty around the inflation outlook and what it could mean for US interest rates will bode well for hard currency bonds as investors seek to minimise return volatility tied to sudden changes in US Fed policy,” adds Cool.
South African equities: On the home front, things are looking a little brighter for South African equities. “Locally, sentiment toward SA equities continues to grow constructive as critical structural pillars, such as a stable energy supply and improving sentiment surrounding South Africa’s reform agenda, grow firmer and remain intact,” notes Cool, adding that several other factors have played a role, too. “Several other factors have influenced the performance of SA equity year to date, such as the outcome of the government of national unity, which sparked a global investor frenzy for SA financials, which have returned the highest of all SA sectors.” But not every sector is celebrating. “Weakening sentiment toward China and its economic malaise have largely dampened the performance of industrial resources such as platinum group metals (PGMs) and iron ore, which has weighed on the SA resource sector’s performance year to date,” notes Cool.
SA fixed income assets: And then, of course, there’s the ever-important topic of interest rates. Locally, we’ve seen some promising signs here too. The South African Reserve Bank revised its CPI inflation forecast downward, projecting 3.6% year on year for Q4 2024 and 3.7% for the first half of 2025. “Lower inflation expectations should anchor interest rate expectations lower, underpinning bond returns. An improved fiscal balance may also lower SA risk premiums, supporting SA bond performance,” says Cool.
Looking ahead, there are a few events to keep an eye on. The US election sparked some volatility, but in its wake, there will be other developments. “We also expect the US Fed’s ongoing easing cycle to mitigate potential market disruptions as investors reposition their portfolios in anticipation of a less restrictive monetary environment,” says Cool. Meanwhile, China’s aggressive stimulus efforts to hit its growth targets might just give South Africa’s resource-driven sectors a bit of a lift.
Advisers as trusted guides
With information abundantly available, it’s easy for clients to become anxious about the impact all these factors could have on their investments – especially when they don’t have the financial savvy to discern fact from fear mongering.
The adviser is the client’s trusted navigator, guiding clients through life’s financial challenges. By understanding their unique needs, staying informed about global and local influences, and maintaining a steady hand, advisers can provide strategies that deliver stability and growth, no matter what the markets throw your way.
As Cool aptly puts it, “A client’s portfolio should continue to be monitored but only adjusted if necessary due to a change in risk and return requirements.” Stick to this principle, and you’ll continue to build trust, deliver value, and help your clients achieve their financial goals.