Magnus Heystek: Scams, courage and conviction — Investment advice in action

Key topics:.Lessons from SA’s biggest investment scams and regulatory failuresHow offshore moves preserved and multiplied generational wealthWhy good advice is about judgment, timing and backbone.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Magnus Heystek.Media pages are often filled (too often) with reports of investors losing millions—and in some cases billions of rands—in the one or other investment scam.This has been a feature of the investment world ever since I ventured into this often chaotic world, first as a financial journalist in the 80's and thereafter a financial advisor from 1995 onwards.What further motivated me to take a particular interest in investment scams and the lack of protection by the authorities—was that my late father was twice defrauded of what little money he had managed to save during his lifetime. So I was a front-row witness of what financial destruction such investment scams can cause.I remember as a journalist writing about the Masterbonds, the Supreme Bonds, the Newton Investment Scheme, MP Finance as well as the collapse of Sharemax and PIC Investment schemes in the first decade of this century.They all had a familiar theme running through them—-unrealistic returns (well above market returns) being peddled to unsophisticated investors who didn't fully understand the workings of financial markets.Regulatory oversight at the time was very limited, with large gaps in the laws which were exploited by the pedlars of these schemes.The most notable collapses early in this century were two very large property syndication schemes—Sharemax and PIC—both marketed extensively to mostly white, Afrikaans speaking investors who were looking for a seemingly safe and predictable return on their retirement capital.This was a time when thousands of former government and SOE-employees were offered packages to retire early in order to make way for previously disadvantaged employees to be promoted up the ranks.This time around I was more than just a financial commentator. I was already in the advice business and hosting a radio show, first Financially Speaking and thereafter on RSG Geldsake . I was confronted almost daily with people asking whether they should invest in Sharemax or PICvest, th dubious investment scheme ran by the Georgiou Family from Bloemfontein, who had just bought the Fourways Mall, where I had my offices at the time.Privately I could tell potential investors to stay away in great detail, but when I was asked on live radio for my views on either Sharemax or Picvest, I had to be far more circumspect, as I knew the promotors of these schemes and their lawyers were listening very carefully.My diplomatic way of answering the question ( and at the same time trying to warn people) was to say that "if this was my mother's money, I would not invest in one of these schemes".This did not prevent lawyers for Sharemax writing several threatening letters to myself and Ryk van Niekerk, head of RSG Geldsake. Or the head of marketing for PIC screaming red-faced at me in the studio that I was "stupid and didn't understand how these things worked".I took the trouble of reading all of the Sharemax/PIC prospectuses and usually on page 53 or thereabouts I would find disclaimers which flashed bright red for anyone caring to read so far.For instance, with the prospectus for The Fern (a Sharemax syndication of a shopping centre near Dainfern, Gauteng, where I lived) I found a clause which basically stated that investors were essentially making a non secured loan to a developer which was going to buy the shopping centre. Investors were sold the idea that they were investing in "bricks and mortar" and that they would become co-owners of this upmarket shopping complex. Big difference. They owned nothing but a loan account to the developers—-which is very risky,as it soon became evident.I called my friend Jacques Pauw, at the time the head reporter at Rapport and invited him and another of his colleagues for lunch at the half-empty building site.I was trying to make a point that (a) the prospectus and advertising was lying , and (b) that investors were being swindled.Pauw jumped onto the story and on the following Sunday the story was splashed all over the front page of Rapport, effectively ending the Sharemax story, and it soon went into liquidation.I also pointed out that the returns on the PIC Highveld Syndications were "guaranteed" by the promotor of the scheme, the late Georgiou himself! So here we had a "guaranteed investment guaranteed by the person taking up the loan". Still today, the Georgiou family is fighting a losing battle trying to defend itself from the fallout of this failed property scheme-fifteen years later. It has already sold most of its buildings across the country while the banks have taken back their shares in Fourways Mall, probably the ugliest shopping centre in South Africa, where most if not all of these financial problems started. Last week the family lost a High Court case which allowed the Mangaung Municipality to switch off the electricity to Loch Logan, the biggest shopping complex in Bloemfontein, for unpaid rates and taxes amounting to R67million.So, if someone asks me-- as it happened over the festive season-- how my investment advice has made a material difference to the lives of a person or a family, I would probably point to the Sharemax/PICvest stories.I feel very good about the fact that I stopped many more investorsBut my answer didn't satisfy my persistent questioner. "Give me an example or two how your advice has had a direct impact on someone's financial future."I didn't answer at first, as anyone being in the investment advice world for such a long period of would have many examples of their investment advice made a big difference over time. I am sure each and every investment advisor has a good story or two to tell.In the end I related two examples—-probably the ones which still today gives me the most satisfaction, amongst many hundreds of good outcome stories.The first one concerns a family who consulted with the around 2014/15 about a big decision they had to make. The family fortune—for two generations already—was a property portfolio made up of 4 large residential blocks in one of our cities, which generated a very good income , or so it seemed.The family was made an offer of R60m for these 4 buildings and their question to me was, should they sell and reinvest the money elsewhere?I did a deep dive into the long-term financials of these properties and showed clearly that their return on capital had been declining steadily for years and was only earning them about 3% per annum, based on the value offered. In addition, the city was also starting to show serious signs of decay and neglect and which over time has just become worse. It was also the peak of the Zuma/state capture years.My advice was clear: sell the building and secondly, provided you enough income, remit the money offshore soonest.My advice was brutal, but to my surprise they accepted it, sold the buildings and over a two financial years we investe the capital into a 3 ofshore portfolios.Today that R60m has—even with some withdrawals—grown to around $9m dollars, or R145m at today's exchange rate.This is how my advice and the subsequent outcome has changed the lives of this familiy:The one sister could afford to retire in France in a little village, something she always aspired to.The second member has almost $5m in an offshore trust with its sole beneficiary already living abroad and not interested in returning to South Africa. So there is no issue with the winding up of an estate and getting money abroad. It's all been sorted.The third member still lives in South Africa but has a portfolio of $2m and an offshore property worth $1m which gives him and family residency in another country. His daughter could well end up studying and then living in Europe.But that was only half of the story. Some time ago the previous owner of the buildings was approached by the buyer of the buildings in question—asking whether they wanted to buy them back...at R30m!This price was a reflection of the collapse in property values in our cities. Had they NOT acted on my advice, the difference in wealth creation would have been astounding, almost impossible to adjudge. SECOND EXAMPLEThe second example concerns the CEO of a listed who approached me for some advice on his preservation fund, the enormous amount of R52m which he had earned over a 30 year period in executive positions. I gulped when I saw the money and also the enormity of the decision he asked e to make: should he leave it there, as he was advised to do by his incumbent institutional advisor, or should he withdraw it, pay the taxes and move the money offshore.Again, this was in the 2014/15 period, where the political future of SA looked infinitely worse than it does today.It was perhaps fortuitous for this client that I had about a year earlier withdrawn my own preservation fund from the Argus Newspaper, which I had for many years, paid the taxes and used the proceeds (taken out at R7/$) to purchase a flat in Mauritius. Secondly, at the time preservation funds were only allowed 20% offshore exposure, which was a major drag on performance at the time.Pull the money, pay your taxes (R17m) and lets move they money offshore, was my advice.Much to my surprise he called a few days later and said: "Screw it, let's do it!", ala Richard Branson.The after tax payout was about R33m and in two tranches (husband and wife) we moved the money offshore. That money todya is worth $5,2m, he has paid all his taxes and the money is offshore should he decide to emigrate one day in the future. If not him, perhaps one day his son.This move has done the following:Broken the shackles of Regulation 28, which governs offshore/onshore exposure.Freed his capital from SA Reserve Bank controls and intervention.Created absolute freedom for this investor, his family and his money.Ironically enough, now that he has this amount of money offshore, he isn't considering emigrating anymore He is currently still working as a senior executive and intends retiring in the Hermanus when the time comes.These are the two examples of financial advice in action which gives me the most satisfaction. I'm sure most senior financial advisors have similar stories to tell. By and large the legion of investment advisors across the country are adding value tho the lives of their clients. Its just a pity its the few rotten eggs that make the headlines from time to time.PS: There is one other investment story I like to tell.One day, almost 30 years ago I was approached by a mother from Benoni who made an investment for her teenage daughter who had just received a pay-out from a life assurance policy on her late father. It was an amount of R600 000 and it was invested in a good spread of funds.About a year or so later the mother arrived to make a full withdrawal, which by that time had grown to about R900 000 or so.Curious I asked why the money was being withdrawn. Back came the reply:" My daughter is a trying to break into acting in Hollywood and she will need this money to tide her over....."., and off they both went.I mentally made a note of the name of this aspirant actress. Less than a year later she had her first small role in a Hollywood, soon to be followed by bigger and better roles. In 2004 she won an Oscar as Best Actress for her role in the movie Monster. Now that's what I call a good news story to tell the children and grandchildren!.*Magnus Heystek is investment strategist and founder of Brenthurst Wealth.

Magnus Heystek: Scams, courage and conviction — Investment advice in action

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