What defines a financial model?
What makes a financial model worthy of endorsing to anyone, or more specifically someone like my mum? These are some questions I had in mind, when commencing my studies at Harbour Wealth in January 2021.
Since joining Harbour Wealth, I have immersed myself in the underlying investment and advice process. Now, less than two short years later I feel qualified to comment. As an experienced campaigner it soon became clear to me, that there is a single, constant rhythm which conducts each new decision – ‘Better Outcomes’. This, in stark contrast to the industry, where profit unfortunately often trumps delivery. This is physically reflected by the relentless search for improved efficiencies, and now I can proudly say that Harbour Wealth’s clients’ costs are less than half the industry average.
Yet, like a wise man once told after my ‘made-in-Cambodia’ hiking poles broke in the Himalayas, ‘goedkoop is duurkoop.’
Can an ‘Aggressively Costed’ model perform as well as an ‘Expensive’ one?
To best answer this question, I need to touch on the rapidly expanding ‘Passive’ investment industry. By this I refer to the growing counters of Exchange Traded Funds (ETFs) and index tracking vehicles available – the bedrock of Harbour Wealth’s modelling process. Passive investing has become increasingly popular over the last decade. According to data from Thomas Reuters, the ETF market is growing by nearly 30% a year. Six years ago, passive strategies were gaining traction yet were still a distant second to the actively managed sector of the industry – share portfolios, unit trusts, collective investment schemes and life funds.
What the data now asserts, with long-term conviction, is that most active managers cannot outperform their benchmarks over longer-periods, being five years and longer. Warren Buffet, the world’s most notorious long-term investor, and one of a few who has managed to buck the trend and outperform the market made a now-legendary bet in 2008. He bet a million dollars that the most brainless, boring investment around (index tracker) would do better than the researched, handpicked investments of some of the smartest and highest paid hedge fund managers in the world. He won the bet and the rest, as they say is history.
Index trackers and ETFs allow investors to gain access to almost any industry in the world, efficiently and highly affordably.
Investing into an ETF takes the stress and guesswork out of predicting the next winner within an industry. Instead of buying a winning manager, or company – which Warren Buffet proved to be a near impossible task – we look to buy into industries and sectors that are offering value or promise. An example of this being our recent inclusion of the Lithium battery ETF into our global investment strategies.
Sourcing, researching and including ‘Passives’ is one thing, the active and proactive decisions on where to be (asset class/sector), is where all of the long-term returns are engineered.
Our investment strategies are transparent, one can effortlessly determine the composition and costing.
We pursue clean pricing from our investment partners. Clean pricing means pricing absent of rebates. A rebate is merely a fancy financial term for a discount passed on to anyone in the chain, other than the client!
The common practice in the industry today, is for an advice company to market a portfolio to a consumer, in which they have vested financial interests. Any such financial incentive immediately renders the advice model flawed and not truly independent. By utilising a simple and clean model approach, Harbour Wealth actively defends independence and transparency. Using scale, we negotiate the best pricing per underlying building block within each model.
Harbour Wealth makes a return by charging an advice fee.
The price we secure is the price to consumer, no rebates, no performance-based fees, merely a model of assets representing our best thinking at any one time, built off the collective wisdom of the market, uncontaminated by undue financial or institutional influence. Harbour Wealth makes a return by charging an advice fee. For an advice fee, a consumer of financial services should expect a conflict-free investment solution.
One of the greatest acquisitions of knowledge, since joining Harbour Wealth, is how our investment strategies are utilised in managing the long-term income growth requirements of our clients.
Instead of completing a risk profile questionnaire (which almost always yields the same response from all investors), we conduct a cash flow analysis with each client. Simply put, we determine a client’s two-year capital requirement. This will include income plus any other monetary needs a client may have. This critical and pre-determined value is invested into the income model, from where income – free of volatility is paid to the investor over the following two years.
Importantly: No growth assets are ever sold to pay income. This is critical, especially when black swans appear out of nowhere, such as the most recent COVID pandemic and Russia’s invasion of Ukraine.
A further two years of income is invested into our conservative model and further two years of income is invested into our balanced model. The result is that a client has six years income supply invested in a manner which mitigates potential capital loss.
The science of this modelling process shows that client capital and income is extended by 25%, on average, during the life cycle of retirement.
What may appear to be simple – the administration of our investment strategies, is in fact deceptively complex. Through the modelling process, each client’s asset allocation is unique and determined solely by his or her unique cash flow requirement. Our investment strategies and a spectrum of unlimited unique asset allocations are like their footprints.
At Harbour Wealth, we all subscribe to the same modelling process. Whether you are dealing with the CEO or someone new like me, the process is the same.
If you can conclude that an advice-only company is only concerned with the integrity of the advice it dispenses, then it is possible that your financial planning experience can migrate from scepticism to faith. When this happens, one is treated to an awakening sense of security which is strange yet comforting, all things considered.
