|
A self-described “country boy” from Western Australia, Paul Foster began an economics degree when he left school. But the siren call of business was too strong to ignore, and after six months, he dropped out and bought a delicatessen next to the university instead. After 18 months of hard work, he sold it for around five times his purchase price, investing the money in a property and a new business venture.
Keeping a finger on the pulse
Featured in the Financial Planning Magazine
19 August 2010
A self-described “country boy” from Western Australia, Paul Foster began an economics degree when he left school. But the siren call of business was too strong to ignore, and after six months, he dropped out and bought a delicatessen next to the university instead. After 18 months of hard work, he sold it for around five times his purchase price, investing the money in a property and a new business venture. This started a chain of business-building and property investment, until by the time he turned 23, he owned three businesses and three properties without any debt. But having worked 100 hours a week for years, he was burnt out and decided to sell his businesses and take off to Europe.
When he returned to Perth a few years later, Foster needed a financial planner to help manage his money. He was disappointed at what he found.
“I kept getting referred to advisers with high commission products, high fees, and I found that the people didn’t really know what they were recommending,” Foster said.
After going back to study, Foster entered the financial services arena himself, working for KPMG, which he said provided an excellent grounding in tax and dealing with high net worth clients, before striking out on his own in 2000 to establish Addwealth.
Investment philosophy
As a financial planner, Foster did not immediately accept that managed funds were the best way to go. But during his time with KPMG, he had been able to conduct his own research comparing the performance of clients’ investments in direct shares and managed funds, and what he found was that managed fund portfolios generally performed better, because for all sorts of reasons, direct share transactions often were not made at the right time – the client got emotionally attached, or the adviser didn’t think he could sell the shares.
So Foster instead focused his attention on thoroughly researching fund managers.
“I just really wanted to understand who the fund managers were, and in what areas they perform best – whether it would be growth or value markets,” Foster said.
An intense focus on the investment process has paid off for Foster – to the end of December, Addwealth had generated returns of 15 per cent per annum over 10 years for Australian equities, compared with just under 7 per cent for the ASX All Ordinaries Index with dividends. This has been achieved by having, over the decade, nine different fund managers, but making very simple, generally value-driven choices – and though it may sound strange, keeping an eye on changes in the personal circumstances of managers as well as the investment climate and the growth of their funds.
“If we hear a manager is going through marital problems, we won’t be there any more. If a manager is about to have their first child, then we get pretty excited because particularly males are known to perform very well when they have their first children,” Foster said.
He said Addwealth has always taken a very proactive approach to managing clients’ portfolios, not waiting until review time if they felt a change was warranted, and using platforms to exact extra returns through allowing faster transactions.
This approach came into its own as investment markets began to come unstuck ahead of the GFC.
In March 2007, seeing little value in the market and commercial property selling for a lower yield than a term deposit, Addwealth decided to leave all distributions in cash, which by July 2007, meant that most clients had around 25-35 per cent in cash.
“That got us a bit of grief from some clients for a few months, but we weathered that,” Foster said.
In October of that year, Foster travelled to the US to investigate establishing a commodities fund, and was left convinced that there was no value in the market.
“The risk/return trade-off didn’t seem to be there. So in December 2007, we halved our exposure to listed property to about 15 per cent, because that market had run up so high. That was about two weeks before the Centro collapse,” Foster said.
As the situation worsened, Addwealth sold out of another fund due to concerns about its exposure, leaving most of their clients with 60 per cent in cash. It still held Australian share portfolios in strong value-oriented managed funds until the end of September 2008. But with no bank guarantees and the first stimulus package being knocked back by the US Senate, Foster said they had no idea what was going to happen next.
“Our clients were only down about 10 per cent from the highs of the year before and they were mostly retired, so we figured we should give them the opportunity to get out altogether, because if there was a significant rebound, even if they missed out on the first 10-15 per cent, they had most of their money. Whereas if it kept going down hard, their retirements might not be very safe,” Foster said.
So they began calling clients over a two-day period, enlisting the help of one of their planners who was in London at the time.
“We reached about 95 per cent of our clients, and probably 98 per cent said yes to selling, and then two days later, the market fell 10 per cent and just kept tumbling thereafter,” he said. Foster believes it is the responsibility of dealer groups to keep their finger on the pulse of investment markets so they can provide better direction on investment, and admits it is very difficult for most individual planners to be tuned in to this extent.
“I only look after five clients personally, and that is so that I can stay in touch with what the planners have to face. I get up at 4am and look at what’s going on in the US, I am an avid reader and get through four to seven books a week. We built our business around preparedness and flexibility.”
Finding quality planners
When he started Addwealth in 2000, Foster hired a couple of paraplanners to assist him. The business has now grown to 28 authorised representatives – of those, seven are financial planners who deal with clients on the frontline, while another 10 provide support. The remaining 11 staff are mortgage brokers who have recently joined Addwealth to provide some risk insurance and superannuation. They are currently receiving training and mentoring to bring them up to speed.
Foster has built the business by concentrating on providing his planners with everything they need to be in front of clients more often – from paraplanning and administration to mentoring. “What we are really looking for are planners with $50-300 million under advice, who have hit a wall from a growth or management point of view and want some assistance, or who want us to generate some leads for them, or who are doing everything right but just cannot get the investment piece correct,” Foster said.
He also looks for planners who have the right attitude for self-employment, but who might benefit from the extra support Addwealth can provide.
“If one of our planners wants to go on an extended holiday or take some leave, one of the other planners can step in for them. One of our planners was off for three months and his clients were still reviewed regularly. They were all looked after as if he was there,” Foster said.
Social responsibility
Addwealth recently won the 2009 Telstra Business Award for Social Responsibility in Western Australia. This award not only recognised Addwealth’s environmental consience (its office is as paperless as possible and safe, sustainable materials were used in its fitout), but also its commitment to looking after staff and its contribution to the community.
“Every staff member has some sort of community involvement, and I have always been involved in charities and the community. I think it comes from being from the country. I am president of the Cottesloe Business Association, and we provide 10 hours of labour through one of our staff a week,” Foster said.
Recently, Addwealth was approached by Strike a Chord for Cancer to help underwrite a celebrity charity visit to Australia. Foster agreed – if Strike A Chord could secure Sir Richard Branson.
“He agreed to come, which is the first time he has done that for a charity other than Virgin Unite. On the day, we raised over $800,000, and half went to Virgin Unite and half went to Strike A Chord. It was just a fantastic day. We had people come to Cottesloe Beach, we had clients and invited guests, and all up on the day over 2000 people were at different events with Branson. It cost us nothing in the end, just the willingness to back it,” Foster said.
Looking ahead
As for what’s ahead for the industry, Foster believes that the demand for advice will continue to grow, but with the number of planners remaining static for the next 20 years, the ability to deliver that advice will not, and existing planners will become more pressured.
From an investment perspective, while he believes ETFs, SMAs, and IMAs will see a rush of popularity as people look for a new solution, ultimately these will not deliver the answer because “people aren’t that good at investing”. Instead, he predicts passive, index-based investing will dominate, giving good fund managers an opportunity to continue to outperform. When it comes to rebuilding trust in the industry, “I think we need to be more proactive in identifying where there is good and bad advice”.
For new planners, Foster believes psychology training would be worthwhile to provide them with a better footing on which to serve their clients.
“I think equipping young advisers with the tools to understand the person on the other side of the table really well, and understand what that person really needs would be very valuable. Then the technical side can come, but you need to drill down and say, ‘Actually you need to do this, and then you will be able to retire comfortably one day’, rather than just giving the client whatever the client thinks they need. It’s about knowing your client, but also know yourself and know your weaknesses.”
|
