I talk with Nick Stewart from Stewart Financial Group about protecting hard earned wealth, de-risking a portfolio of assets, planning for sufficient future cashflow and asset class returns in volatile markets.
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The Ryan Marketing Show
Nick Stewart – Stewart Financial Group – EPISODE 9
Voice over: Ten, nine, eight, seven, six, five, four, three, two, one, fire.
Ryan Jennings: You’re listening to The Ryan Marketing Show and this is episode nine of one hundred. Today joining me is Nick Stewart from Stewart Financial Group. Thanks very much for joining me, Nick.
Nick Stewart: Oh, you’re welcome. Looking forward to it.
RJ: Now, first question up, I thought I’d ask a question about a question: what’s the question that– when people come and have a chat to you, what’s the first thing they want to ask? What’s the first concern they have or the first thing that gets you into a dialogue with some of the people you work with?
NS: They normally want reassurance that they have a high probability of achieving their goals with the amount of capital that they have today, or the amount of capital that they’re going to have in time. So, what’s their life going to look like? That reassurance that they’re making the right decision today.
RJ: And what stage of life does that tend to happen? Is it across the gambit or is it a particular stage where you get the knocks on the door?
NS: There’s normally an event trigger. The event trigger can be a liquidity event in the form of an asset sale, and you can get door knock for an asset sale program at any time; there are people that are having those type of events at forty, fifty, sixty, et cetera. So, that’s across the spectrum, but generally then there’s the life-changing event that happens at maybe illness, job change, et cetera, where people have some type of trigger that makes them want to bring their financial position to the fore.
RJ: Right, so it’s not just a lotto win and how do we manage the millions, it’s a liquidity event as in the selling of a property or selling of shares, or could it be the transfer of wealth between people or company?
NS: It can be, but the typical class are the kind of 80/20 rule, you know, [? 0:02:25.8] would dictate that it’s typically an asset sale program. And the kind of pennies from heaven lotto when– the reality is, I mean, that makes for a nice Hollywood story, but in reality, people’s finances and financial position is hard one; it’s taken a long period of time, and people have often been thinking about a course of events for a very long time. They have a bit of a journey, a little bit of history, and now wanting that reassurance that is their game plan– does it resonate well? Is it actually achievable?
RJ: Do you think some people actually get to that point and go, “Wow, we’ve kind of done it – we set out to be successful, work hard,” and then they get to a point they’ve done it and go, “Whoa, whoa, whoa, we don’t want to lose this. We need some help.” Is that the point?
NS: That can happen, and there are some people that come in and when we run what we call a Monte Carlo probability study about do their assets today and does this bucket of cash flow, is it sufficient to meet all their requirements? Some people the bucket is overflowing. In other words, they have achieved enough thus far in their life to be able to power themselves through the rest of their life without a need or a worry, or without having to take on risk. In other words, they can de-risk their portfolio of assets and go to a very defensive position and still have sufficient cash flow and capital growth long term to meet all their requirements with risk off the table. And it’s amazing when they actually get to that position, because they’ll have often just been on the treadmill – you know, the little hamsters on the treadmill, it’s flicking the wheel around – and then when that liquidity event happens, that opportunity for takeout arrives, they realize that they’ve actually gone– they’re on the curve; they’ve gone way past where they needed to, because they’ve done particularly well. And then you’re talking about things like philanthropy, intergenerational wealth transfer, because it’s no longer about food and a roof over your head; you’re actually able to talk about more altruistic things and the things that resonate with them at a very, very deep values level.
RJ: So, those that have got to a point of being successfully and independently wealthy then have some more options available to them. But I guess just paraphrasing what you’ve said there, they may not know that they’re well past that point now. How does the conversation go when they individually know that they’ve been successful to then outsource the responsibility for the result of their success and managing the finances that have resulted, because if they’ve been working twenty or thirty years, why wouldn’t they just continue managing things as they have?
NS: A lot of people do, because they are DIY, number eight Y-type individuals; that’s just the way they’re built, but the way that we would see it, just because you are great at running a certain type of business, making widgets, that ability to make widgets successfully over a long period of time isn’t the same thing as managing your finances.
RJ: Right, so making money and managing money are very different things, even though they involve the same asset.
NS: Or the same amount of capital, yeah. But the actual mechanism of how that capital is engaged, that is an entirely different skill set. So, if I was managing a $5 million sheep and beef farm on the Heretaunga Plains, say, that skill set that has allowed me to accumulate or maintain or manage that asset, that is a very different skill set than engaging $5 million of capital on the global markets, and it’s all about being a subject matter expert or utilizing a subject matter expert. And part of the journey is identifying areas where you have skill and where you don’t have skill, because I can tell you, Mr. Market – let’s call the market Mr. Market – dishes out lessons, and they are very, very expensive. So, if you get these sort of things wrong, if the acquisition strategy is not right, if it’s not managed correctly, it’s an expensive lesson, and it’s not worth doing that, hence I don’t do my own tax return. I don’t file my own returns; I use an expert, because it’s a very complicated area. You know the old analogy jack-of-all-trades, master of none – it’s a complicated world out there. I have a regulator that I have to report to, et cetera. It’s not something that’s to be done lightly. I’m a company director, a trustee for a number of people; that’s a serious amount of responsibility with a regulatory overlay. And I engaged with people to help me to meet those obligations who are best in class.
RJ: So, it’s not just Nick Stewart: there’s a whole team around Nick and around Stewart Financial Group that helps steward that wealth?
NS: That is correct. And the days of being a one-man band out there paddling your walker on your own, that’s really hard. It’s difficult to look after a quantum of capital or a professional group of– how would I say it? Let’s say when you’re talking about, say, large trusts, foundations, or companies that engage capital, that has a different compliance level. It’s not just the – please excuse my using this term – but the Mum and Dad investor coming in with, say they might’ve accumulated $300,000, that doesn’t have the same overlay as someone who’s got a trust overlay or a corporate overlay or a philanthropic foundation overlay, because then you’re reporting to a board, and those people are each held accountable. So, when we’re dealing with this larger capital sum, yeah, the regulatory bar, and what is required of us is a lot higher. So, to be out there paddling the walker on your own, I just don’t think you can meet those obligations and requirements. And if you really put your hand on your heart and you looked at all the case studies that have gone though where people have been found wanting in those areas, you just wouldn’t put your hand up and say that you’re a subject matter expert in those areas, when in reality you’re not. So, for us to head down that path, we needed to either bring in the resource and nurture it organically in the company, or we have to use external consultants to help us with that.
RJ: So then going back in time with that type of configuration of intellect and knowledge and expertise, how does an event like 1987 or 2007 where Mr. Market has decided things are going to do a big U-turn, how does an event like that affect wealth, and then how do you plan – make sure you plain sell as well as you can with the funds that you’re managing through those particular events? And then by contrast, what tends to happen in those events if the right expertise and intellect and oversight isn’t there?
NS: Well, let’s deal with the last one there: when these type of events happen, and they always will – that’s just life – I’m looking over here at a chart on the wall, which is the asset class returns back to 1926, so it covers a lot, I was looking at that chart – paid markets will always be volatile; that’s just the nature of the beast. But in terms of having the expertise, knowing that the portfolios, the structuring, has rigor, that it is– there’s empirical evidence, there’s academically tested, that it’s not built on gut emotion and hearsay, that’s just not strong enough, and that’s the way that, say, 1987, back in the day, was built; a lot of rumor, et cetera. And you couldn’t even get robust data back then; the data set was corrupt. The whole back lays index was corrupt in the sense that– well, I mean, the data was corrupt, and that is where companies that died on the index, their data was removed from the index, which means that all you’re ever doing is talking about the remainderment. Well, those are the companies that survived. You actually need to leave the companies that died in the index, otherwise the index looks great. It’d be like if everyone that passes away due to age or illness that in the average of life expectancy stats, you dropped them out – well, of course the average age of a Kiwi’s going to be phenomenal.
RJ: So, they were skewing the data in ’87?
NS: Yeah, the data was totally skewed, so that’s where– a lot of people were quoting index returns back in the day, well that’s because there was this massive survivorship issue in the data. So, anyway, you need that academic testing, and that’s one reason why at Stewart Group, we signed up to a thing called CEFEX through the Canadian Center for Fiduciary Excellence, and it’s a little bit like an ISO standard, so across Stewart Group, we’ve overlaid on the wealth management side, the Center for Fiduciary Excellence across our practice. So, that’s independent audit – our models are just thoroughly, thoroughly road-tested, and that’s part of the global benchmarking order that we put ourselves through, and a lot of that is that kind of shock testing – you know, the ’87s, the bond crisis 1991 through ’94, Asian crisis 2001 – I mean, here I am just rolling out these dates, and this is what happened, of course, and then you got the GFC. But it’s knowing what happened during that period, so when we’re looking at asset classes that have short run data, say someone might want you to go into an asset class that has two years worth of data history, you just can’t do it; it would be a breach of our CEFEX – our audit requirement. We’d have a problem. We wouldn’t be able to use it. There’s got to be pure transparency of data.
RJ: And some history there to go with it.
NS: Absolutely. Definitely.
RJ: Now, that will protect them from the money being mishandled or from things not being checked in the right particular way, but it won’t protect them from the actual gyrations of the marketplace. Is, for your clients, those types of gyrations actually an opportunity to buy? Do you look at it the other way around and say, well, some of these assets are now getting actually really good value for money and we should be buying in, or shifting, at least, the waiting between the classes?
NS: That comes down to the rebalancing, and the study that we’ve done shows that rebalancing is one of the areas where there is a premium to be picked up or there is profit to be gained by the investor, but it requires discipline. So, that’s why when you build the portfolios, you have a rebalancing protocol that’s agreed to, because you need it agreed to, because when you go to an investor and say, “Hey, we want to buy emerging markets – it just dropped 15% in the last quarter,” well, most people don’t have the stomach to do that. Most people want to buy the winner, not the loser. But through a pre-agreed robust rebalancing protocol, it’s agreed to that you will rebalance, so you will be selling off last year’s winner and buying last year’s loser. Because I can tell you what, last year’s winner will not always be the next year’s winner, and more often than not, last year’s winner is next year’s loser. And I’m just talking pure asset classes. We actually send out an asset class mosaic to our clients each year, just to remind them of what it looks like, and assets move all over the place. And yeah, occasionally you get an asset class that does two years in a row, where it’s an upper quartile player; it’s done really, really well, and then after that, it normally is down at the bottom. And we’ve got the numbers back to the early ’90s and it’s one thing that does repeat.
RJ: So, is that then communication with your clients quite important to not only show them what’s happening, but almost demystify some of the things that may be more complex than they’re used to in whatever area their expertise is, like a beef or sheep farm? How do they then interpret that or then respond? Is it more like a, good – Stewart Financial Group’s doing a great job, looks like they’re onto it, or is there an open dialogue around rebalancing or changing their priorities?
NS: Yeah. Clients need to be bought in along the journey, because if we were to say that we’ve got [? 0:15:42.9] all covered and the clients can just put it in their bottom drawer and forget it, that means we’re not bringing people along on the journey, and it’s really important that we do that. A little bit like in the– go back to the middle ages where the church had all the knowledge: they knew how to read and write, and all the peasants were told, “Look, this is how it works,” and a small group of individuals held knowledge. Well, that’s really dangerous, because that takes your control, and so for us, we’re actually not wanting to do that; we’re actually wanting people to understand about what’s going on so that they understand the building blocks about how their portfolio, where the rubber meets the road, where their capital is engaged in the market. They can actually see what’s going on; there’s no smoke and mirrors, it’s not overly complex, we’re not going in to asset classes where you need to be a rocket scientist to actually understand what’s going on. That exclusive club kind of– you know, you’ve got to be with the rock stars to actually understand what’s going on, that really scares me. That’s a real concern. I mean, someone should be able to pick up what we do and understand it, and I think that’s really important. I think that’s where a lot of people kind of get things wrong, or their portfolio goes wrong, they go into some opaque fixed interest instrument where they think they kind of understand, but of course when the tide goes out, they run up on the rocks, e.g., the global financial crisis.
RJ: So, we’ve talked a lot about wealth and those that have though their life worked hard and have that wealth to then manage. What about at the other end at the start where someone’s sixteen or twenty-two years old and they’ve got things like loans or overdrafts, they don’t have a house yet or any capital, they’ve got time on their side, they’ve got a career or the ability to work? What advice do you give to someone who has thirty, forty, maybe even fifty years of work in front of them? What type of things can they put in place now so they’re in a similar position to need funds being managed in forty, fifty years’ time?
NS: There are a few things that people can do: the first one is to ensure that, say, they spend less than they earn. Keep debt down to a minimum, because when you’re servicing and paying debt, for most people, it’ll be post-tax. So, in other words, you go out there, earn a dollar, you pay tax, and you’re left with– it’s called eighty cents on the dollar. Well, from the eighty cents, you’ve got to live and service and pay down your debt, and a lot of people aren’t doing this. In 2006 or 2007, New Zealanders on average, we were spending nineteen cents more than we earned.
NS: So, at the start – I want to get political on this, but I just remember seeing it expressed in these terms – at the start of the labor government, we were spending– actually, when Jenny Shipley was leaving, I think we were at about $1.05, so five cents over. Well, and then at the peak of the happy days era of 2005-2006, she was up to kicking out $1.20, and that’s scary. So, in other words, a lot of people out there were spending way more than they earned, drawing down a lot of debt. That’s tough, because you need massive asset inflation to actually burn that off, so people borrow in the hope that the asset class will inflation itself and will grow by capital growth, and that’s a bit of a concern. I know that it’s come back of late, but I don’t have the number off the top of my head, but it has shrunk. But yeah, so spending– definitely those old, common money traits.
RJ: So, it’s actually not that complex: it’s if you’ve got debt, get rid of it, then secondly, spend less than you earn, then third, your problem is you’ve got some money and you’ve got to work out how to invest it. Would you say to people at that age, have a play around yourself with different shares or put some cash in the bank, or should they all just put it in KiwiSaver and they’ll be looked after? What’s the…?
NS: KiwiSaver’s clearly – that was going to be the ones I was going to bring up – that’s absolutely one of the things that everyone should have, because it’s got a tax kicker in it.
RJ: So, it’s money for free?
NS: Yeah. Well, I mean, hey, if you put $1000 into the– let’s say you’re self-employed and you dropped in the minimum $1040 and the government chips in $520 as a bit of a thanks for coming, a 15% return on your asset, irrespective of investment return, so that’s phenomenal; that’s never happened in this country – well, a long, long time ago before I was born. That should just be from the get-go that everyone should be in that, and yet not everyone is. It’s kind of bizarre. Yeah, I kind of get those things occasionally where I have a chat to people and they go, “Well, yeah, I’ve thought about it, but I really can’t be bothered getting around to it, and it’s not really worth my time.” Well, when there was $1000 incentive, which has now been removed, but when that was in there, we calculated that someone who had five years to retirement, with the signature of a pen and they signed the application form, got it away, that was about a $2500 decision. So, when someone would say to me they don’t have time or they’re not interested, that just kind of gives you an idea of the apathy and the lack of understanding.
RJ: So, KiwiSaver a definite if you’re whatever age–
NS: It’s a definite. It’s a no-brainer.
RJ: — make sure you’re in there.
NS: Yeah. And the other is making sure you’ve got a risk plan, like an insurance schedule in place so that, hey, if something happens to you or you’re incapacitated in any way or you leave the planet, that there’s something there for everything to be cleaned up and that it’s tidy and you’ve left in a way that you’ve left a bit of a legacy, if that’s what you want to do.
RJ: I guess that’s the other side of your business, isn’t it? The wealth is only part of it. The other side’s more mitigating risk of life events. How do you go about marketing something like that where it’s– none of us really want to talk about the inevitable is that we’re– none of us are going to be immortal on the planet? How do you get that message out there but in a way that’s– how does that work? Everyone would like to have some amount of wealth and be able to leave something behind, whereas on the risk side of it, how does that get communicated to the market?
NS: For some people, it’s with difficulty, because a lot of people, they don’t have an advisor; they never have. Unfortunately they may not overtime, so probably all they will get is from– maybe when they take out some debt at the bank or they may pick up some– via their employer, they may get some insurance. But for us in communicating it, it comes down to if the client has a certain journey they wish to live in life for them and their family, then we need to protect the downside. So, it’s a question of saying, hey, this is what you would like. Things hopefully won’t go wrong, but occasionally the probability is that for X amount of people, there may be an issue, and these people – clients, friends, and family – they don’t want to have that type of issue where their needs and wants, both while they’re on the planet and after they’ve left, they really want to see those things happen. But someone that doesn’t wish to engage in that type of risk management discussion, that’s really hard, and there are people out there who deem themselves to be bullet proof.
RJ: Well, it’s more of an emotion thing, I think, maybe than a logical thing, and the emotive side goes, “I don’t want to even think about that.”
NS: Yeah, that’s true. But there are others as well that have that kind of thing where– what’s that old [? 0:24:22.8] that everyone’s in above average [? 0:24:27.0], right? If you ask them. Well, that’s a little bit like saying, so you’re going to be– in the X percentage that has a health issue and they’re like, “No way, I’m amazing. I’m bullet proof.” And there are some people who will affectively self-insure, but you’ve got to have a lot money to do that.
RJ: I guess on the risk side of it, you see the stats and the graphs and say, well, not everyone can buck the trend, because the trend is the trend.
NS: Yeah. Well, it’s a little bit like I just said, that you need a lot of money to self-insure. I know I’ve met people who talk about self-insuring for health insurance. Well, I mean, you’re a kind of reserve fund for health insurance – you’d only want to have one knee reconstruction, and that’s gone. And it’s all about off-lying risk. The [right ones? 0:25:16.0] were off-lying risk or insurance back in the day, because the cost of having a funeral was really, really expensive, and so they had these kind of funds that people would contribute towards, so that the community shared the risk, because no one wanted to be buried as a pauper in a common grave, I guess. Back then, you know, this was thousands of years ago, and that’s where the concept came. Off-lying risk.
RJ: So, moving forward to risk now in 2016, I don’t read a lot in the financial side of things but one thing that’s been popping up is this negative interest rates in banks and how that if you play this out, that instead of people demanding they get paid in thirty days or sixty days, they’ll want to be demanding that they get their– they pay straightaway – like, it turns the whole value structure around, because money’s worth less if you hold onto it.
NS: Yeah, so you’re talking like the other day when Sweden dropped its interest rates to a negative half percent.
RJ: Yeah, and Switzerland, and the U.S. are looking at it with interest, but this has always been a theoretical thing, and now it’s playing out.
NS: Here we are, yeah, and this is not banana republic stuff, this is a developed world.
RJ: Yeah, like the rational decision should be take the money out of the bank, because if it’s under your mattress, you’ll make more than if it’s in the bank and they’re charging you to hold onto it, but no one seems to have done that. Is this going to come to New Zealand at some point or what’s…?
NS: Well, we’ve got a long way that– we’ve got a couple hundred basis points up our sleeve for that not to happen. I’d be surprised but hey, I’m not in to forecasting these things, but hey, you know, if you’d asked me in 2007 when we had interest rates of 8.25% on call, would we be down in the 2%? I would’ve said not a hope, because we’d never done it before, but here we are. We’re here now.
RJ: So, what does a negative half percent– what does that mean to manage money as an investor?
NS: Well, what it means is you just simply don’t want to have money on call. So, look, all of this, this is central banks saying, “We want the capital engaged,” because you’ve got to remember, money sitting in check accounts and just money on call doesn’t work very hard.
RJ: So, they’ve printed a whole lot, people are holding onto it, they’re now putting negative interest rates in place to say, go and make it work–
NS: Well, they want people to spend it.
RJ: — put it in places.
NS: Engage the capital. Either spend it– and in other words, spend it on investment, or go out and spend it. That’s what the central banks sending the signal. Yeah, and in places like Japan, people still won’t spend, because that’s like in their DNA. But people will do that – they will go out and invest. I mean, even if you went out and bought a T-bill – a treasury bill – at least the capital is engaged. Because you think about if you’re a lender and you’ve got $100 million in your bank sits on call, right? You actually want people to say, “Actually, I don’t want to have it on call. I actually want to lock it up in a two-year-term deposit,” because at least then, the bank, the lending institution, can use the capital to go away and lend to other people for up to two years. But when it’s on call, you can’t do it.
RJ: It’s almost wasted money on either side: it’s not earning anything, but it’s not being loaned out either.
NS: Yeah, well, I mean, they can lend out on short dated facilities, et cetera, or call facilities, but it can’t be really engaged, which is what the central banks wish to encourage. But hey, it’s a brave new world. Exciting times. And I love that old– the Chinese saying that– and my dad often tells me it – I’m going to butcher it – but it’s in every crisis, there’s an opportunity, and there is. It’s just the way you think about it.
RJ: Well, it’s been great talking with you today, Nick, about all things finance and wealth and risk, and look forward to seeing how this year pans out for both the markets, and it looks like you guys are well positioned to not only manage people’s funds, but to navigate some of the things that are inevitable with markets: they go up, they go down, they go up again.
NS: Yeah, they certainly do. It’s amazing how history repeats, but those who have the sound, robust strategy long term, they can sleep at night and get on with things that they can control and not what they can’t and have a great life.
RJ: And that’s what we’re all here for, right?
NS: Yeah, too right.
RJ: Thanks, Nick.