Tax, Markets and More: Koda Capital

23 Oct 2018

Alan Kohler recently spoke to Koda CEO Paul Heath to find out more about the firm, Paul’s thoughts on where things are at with the markets, what Koda is advising clients to do with their money and how best to structure portfolios for tax.

Paul Heath is the CEO and Co-Founder of Koda Capital.

The interview came about because of a query from a subscriber who wanted to know more about them and I thought, why not give Paul a call and see what’s going on. Paul spent a long time running JBWere; he was running it when it transitioned into NAB. He left JBWere and took a four people with him who went on to setup Koda Capital. It’s a boutique wealth management firm for high-net worth individuals. High net worth probably means a million dollars…but it’s probably more like $5m.

So, it may not be for you, but if you’ve got $5 million you might want to think about using them because basically what they do is they manage portfolios, not in a pooled fund, but they do bespoke individual portfolios. They structure for tax, they organise philanthropy and charity stuff that you might want to do and they also help families organise their succession and have a division called, what they call, Family Leadership, so an interesting set of services. They also have different ways of charging fees which Paul explains in the interview.

But look, Paul’s been around a long time and he’s got some interesting views on where things are at with the markets and what he’s advising clients to do with their money right now. So, he’s worth listening to on that subject and also on how best to structure your affairs for tax.

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Paul, you came out of JBWere, I think you’d been running JBWere for 10 years. You setup Koda with a group of people from JBWere. Were you trying to create what JBWere should have been or what it might have been?

Neither of those things. We’d identified there was an opportunity in the market, Alan. To understand a little bit about Koda and what we’re trying to do, I’m going to take you a little further back in history and throughout the period, probably the 15 years prior to when I left, a lot of what had happened in the Australian wealth management industry was an aggregation of businesses. If you go back into the 80s and 90s, often private wealth was delivered by smaller, privately owned firms. The move towards scale, wealth services at scale and the kind of aggregation up of all of these companies, where the big vertically integrated firms have both the advisory businesses, the platform businesses and also the asset management businesses within the one house

We thought that had left a gap in the market and that is for a purely boutique advice business. That was the background behind Koda. The catalyst for all of this was probably the GFC. I think there was a change in the consumer mindset following the GFC and the idea that conflict-free advice that was genuinely in the best interest of the client, had started to form in the minds of clients that I was speaking to at the high-net worth end at least and we weren’t able to see anybody who was fulfilling that need. There was a small group of us, the core of the executive team that was supporting JBWere with me along with Steve Tucker who ran NAB wealth, we felt there was a market opportunity and we set out to build Koda to deliver that service to client. Independent, conflict-free advice to high-net worth investors.

When I look on the website under services, top left, which I suppose looks like, number one top left of four panels. You’ve got four services, the top one is structuring and tax. How much of your business is about tax?

Not a huge amount, but an important amount. The origin behind the four key services – with Koda we had a luxury of being able to start with a blank sheet of paper and say, if we were designing a firm for the future and what we really think clients need, what would it look like. We knew that there were lots of organisations out there that would offer investment capability to clients. But we said, what does financial piece of mind look like for a client and we really identified four key areas for that. High net worth investors predominantly are financially secure. What does financial piece of mind look like?

Clients want to know that they’re well organised and structured appropriately. The right assets are in the right entities to minimise leakage for tax, and that they have a good estate plan that will oversee the transition of wealth to future generations. We are unusual in that we are licenced to give tax advice. We don’t do tax returns, we don’t do the compliance work, but that overarching advice about the right assets and the right entities with a wealth transfer plan, that’s a very important part of what we do. The other three services are investment strategy – making sure that money is invested appropriately. In many cases our clients are investing not just for them but for their children and sometimes their children’s children.

That gives them an incredible luxury of a long-term time horizon to invest, so we design investment portfolios that are genuinely long-term. The fourth area of service capability is philanthropy and social capital. Many of our clients are seeking to give back into the communities in which they’ve become successful. The last area of capability, we call family leadership. That’s helping families have a common vision about what they want to do. So many families that where wealth is involved, it kind of tears the family apart. We want to be able to help our clients have a cohesive strategy for long term family vision of what they wanted to do.

Financial peace of mind means you’re structured well, you’re invested sensibly, you’re giving back into the communities in which you’re successful and that you know that the money’s going to be an enabler for your children and not something that will tear the family apart. We think that’s what holistic wealth management looks like and that’s how we built Koda.

You keep talking about high net worth families or individuals. How high are we talking? I imagine you’re probably going to have some sort of hard minimum, but are we talking about $1 million or what?

We don’t have a hard minimum and we think it’s really important because very often clients might want to have accounts setup for their children and things like that. But typically, we have in mind an investor who has about $5 million of assets deployed in investment markets. We design our portfolios with that in mind. We can operate at a much lower level than that, but it’s typically that size and higher. The interesting thing is I think that idea about what holistic wealth looks like and true independence, conflict free advice. You can talk about that a little later. Whilst, at the moment it’s for high net-worth and the sort of market that we’re serving.

There’s no doubt in my mind that ultimately this could be the sort of model for what a future wealth management firm might start to look like in the same way – I know it’s not necessarily a great metaphor – in the same way that technology begins in the luxury end of motor vehicles but eventually finds its way down to all of the motor vehicles. My sense is that post the Royal Commission, clients are looking for advice they know is in their best interest. So, while today Koda is targeting a very specific market segment which we think will pay for that service, I feel ultimately this is kind of the future of where wealth management might head in this country.

How do you charge?

We are really flexible and that’s a very important thing. If you think about those four key service offerings, tax, investment, philanthropy, family – only one of them really lends itself to a fee based off the value of assets. We’ll sit down with a client and work out what the scope of work is and then work out what an appropriate fee is. We have clients who are paying us transactional fees, we have clients who are paying us asset-based fees. A significant portion of our clients are on a fixed annual fee, yet we think that actually genuinely working out, what’s the work we’re going to be doing and calculating that out. One of the things we’re really proud of is the way we can be flexible around the fee arrangements.

You’ll end up with a great relationship with a client if there’s a fair exchange of value and we as a firm feel well rewarded for the work that we do for the client and the client feels as though they’re getting great value for money. That doesn’t mean that you jam a client into a fee schedule. It means you sit down as often as is required and work out what it is that you need to do. By definition in that context, Alan, Koda’s never going to be the largest firm in the market place. We are deliberately and proudly a boutique, but we feel that that’s the level of tailoring, whether it’s an investment strategy, a wealth strategy and even a fee strategy. We think that’s what the clients are looking for and that’s certainly what we feel the gap in the market was that Koda was designed to serve.

Where it’s a percentage asset-based fee, what’s the percentage?

Well, it depends entirely on the size of the portfolio. We are very clear around what we think market rates are. But in a typically vertically integrated firm, there are really three fees that the client might be being charged bundled up into one. There’s the advice fee, there’s the fees for the platform, administration and custody, and there’s often fees that are built into the management of the assets themselves, an MER. In many cases that’s bundled up into one fee. What we do here at Koda is we un-bundle those fees and are completely transparent to the client. Typically, what that means is that the advice component of our fee might be slightly larger than what others are charging, but we then sit with the client and negotiate the lowest possible platform administration fee that we could find.

Koda is platform agnostic. We have assets spread across six different platforms in the market place, depending on what’s the best service for the client. We’ll also then use whatever benefit we can to negotiate the lowest MERs with the manager or the lowest execution fees that we can find in the market and all of that benefit, we pass it through to the client. That’s very important in order to maintain your independence. So, answering a really specific fee question with a number, we would say that our fees are in-line with what clients would typically pay in the marketplace, the composition of those fees are quite different where the advice fee might be higher but all of the other fees, we’d typically negotiate those to a lower point than what could be achieved elsewhere.

I’m sorry to pin you down here, but what do you reckon your advice fee is?

Typically, we would say Koda is designed for clients who feel comfortable paying a minimum of $20,000 a year or more for advice fees. We have clients who pay fees at that amount, we have clients who pay fees significantly higher than that. Typically, for a $5 million portfolio, we would be looking at fees of the advice component, if it’s an asset based fee, somewhere between 65 and 85 basis points depending on how the portfolio is constructed and what is built into that.

That’s good. I presume you’ve got some clients whose money you don’t manage and you just provide tax advice or other types of advice, would that be true?

Yes, that’s right. For example, we have two clients within the business who are professional fund managers. They’re not looking for investment advice from us, but we provide that sort of family office type service to them in terms of supporting all of the structures that they have, coordinating with their accountants, their legal team, ensuring that estate plans are all lined up. They manage the money themselves, we provide that overarching administration. The important thing is we do it in the context of investment. Typically, an accounting firm or a legal firm will look at a specific accounting problem or a legal problem without having that investment context and we think that makes a difference. So, we do have clients who pay us fees on the philanthropy side, on the family side and on the tax side without having any investment assets with us at all.

Since you don’t pool your assets into a sort of a pooled fund, you manage individual accounts. It’s probably difficult for you to come up with a performance number, but can you give us a sense of what your performance might have been over the last five years since you started?

The way that we do this, Alan, is we run what we call reference portfolios, and they’re reference portfolios because our advisers use those as a starting point or a reference point for building bespoke portfolios for clients. Those reference portfolios range from our lowest risk, which might be 10% in growth assets and 90% in defensive assets, all the way through to the highest risk, 90/10. Typically, the 70/30 portfolio, 70% growth assets, 30% defensive assets, is our most popular reference portfolio and I think that’s a combination of the market conditions that we have been in. I also think it’s as much a result of the fact that most of our clients are investing with a genuinely long-term time horizon. For those portfolios we’ve been able to run those since inception.

The 70/30 reference portfolio has delivered about 13% return since 2015, and most importantly it’s done that with much lower volatility than the market. We’re able to do that because we look after high net worth investors, because we are able to genuinely diversify portfolios. We try very hard to build portfolios that they have a lot of idiosyncratic or uncorrelated risks in them, so a diversity of strategies all over the globe. One of the opportunities in a modern context is a firm like Koda can access an amazing universe of global fund managers. We have got a very strong global bias to our portfolios and maybe 10 or 15 years ago it wasn’t easy necessarily for an Australian wealth management firm operating at our size to get access to really fantastic global managers.

The changes in technology, changes in the ability of platforms to hold a greater sweet of assets, that’s what’s also enabled us to do that. I suspect that over the long-term that’s going to all go really well for Australian investors who are going to be able to see a genuine universe of investment opportunities, not necessarily just what typically has been available to an Australian investor.

Just on the subject of global investing, do you get a sense that we’re late cycle now globally and if so, or if not, how does that affect your positioning?

Koda’s overarching market view at the moment is that we have to be closer to the end of the cycle than the beginning. That’s a statement of the obvious. But we’ve been saying for some time now that the real risk we think in this cycle, that it could run for a lot longer than people think. Of course, any comparisons to where you’re at on a clock or whatever, the problem is investment cycles don’t have a time horizon, they can run for a long time. The very unusual thing about this cycle is the dispersion between the parts of the market that are really expensive and the parts of the market that we still think offer significant value. Our investment thesis for clients at the moment is to stay fully invested but to make sure that portfolios are invested in parts of the market that represent better value. For example, parts of the market that have been under a bit of pressure of late, areas such as China, emerging markets. We look at the valuation of companies in those markets and think that they aren’t anywhere near say for example, a very stretched level that large cap US equities are at and particularly large cap technology stocks in the US. We’ve been spending a lot of time over the last two to three years continuing to diversify not just into parts of the market where we think we can see value, but importantly, into parts of the market that derive their value from non-traditional sources of growth.

For example, water trading where the economic returns are driven by weather patterns or catastrophe reinsurance where economic returns are driven by weather patterns. They are uncorrelated returns and the more you can build those into the portfolio, it means that you’re probably less concerned about where you are in the cycle and how late the cycle is and you’re more interested in making sure that you’re in areas that either represent value or are uncorrelated. There’s no question that with interest rates rising across the world, it’s time to be very cautious, but we don’t yet see the pre-conditions for a major market pull back, notwithstanding really what’s happened over the last week, we think the last couple of weeks have just been a normal correction in the cycle but it is very late stage. Not the right time for sit and forget strategies.

It’s quite a strong bounce on Wall Street last night talking about the last week. I mean it’s hard to know what’s going on really.

Well, you’ve been around for long enough to that it’s also symptomatic of late stage of cycles that you see this increased volatility. You know, more and more there are times when the market is going to be driven by either fear or greed, more so than the fundamentals and we think that’s certainly the case today. Markets are skittish, they’re reacting to noise, the challenge for a good adviser is to make sure that you’ll look through the risks that sit in client’s portfolios and that they’re appropriate. You’re not trying to hang on for the last couple of per cent in an over-valued area.

We think for example, large cap equities, particularly US large cap equities, we don’t know that that’s a place where you’d want to be. We haven’t been in sovereign bonds in any meaningful way, almost in the history of Koda because we haven’t been able to see value there. But of course, as interest rates begin to rise, value will start to emerge in those parts of the market. Really, that goes back to our philosophy, Alan, that if our clients are investing genuinely for the long term, not just for them but for their children and possibly even generations beyond that. The trick is not to time your moves in and out of the market, the trick is to make sure that you’re invested in the appropriate parts of the market for the cycle that you’re in.

To perhaps over-simplify your thinking, your response to being late cycled at the moment this time is not to be in cash but to switch to value from growth?

Absolutely, yes. It’s more complex than that but in a nutshell that’s it. There will come a time when the rising cash rate cycle would suggest that having more money in cash makes sense. But interest rates, still globally are very low. They’re very low, monetary policy is still accommodative versus historical areas and so we don’t think now’s the right time to be switching into things like cash, but we do see plenty of opportunities in the world, emerging markets, Asian markets, markets that have been battered. But you need to work really hard to find those and also you need to be prepared to see through volatility, because we think that volatility is on the increase and the events in the last couple of weeks have really – this is what we think the market is more likely to be like, jagged moves rather than smooth lines, but we’ve seeing plenty of smooth lines over the last five years, I think it’s more jagged from here.

Just to move you onto tax, with our tax practise, if I can put it that way, is your starting point instruction for tax superannuation?

Typically, a client will use a range of different structures to – most of our clients will have at least three structures. Superannuation is a really important part of what they do, there’s no question. Self-managed superannuation funds are a significant portion of where our clients have their wealth. Despite lots of the changes to super over time, it still remains the most tax effective place to build wealth in the context of what’s there. Most of our clients will use family trust structures and many of our clients will use corporate structures.

The other area that we’re seeing a significant increase in the use of a vehicle, is in private ancillary funds. Many of our clients who have been successful, have a philanthropic motive, they want to give back and using a structure like a private foundation is an increasingly important part of wealth management strategy. Family trusts, corporate structures, superannuation – of course, clients will have assets in their own names and increasingly private ancillary funds. They would be the big vehicles that we see for the structures for holding wealth assets.

And probably no change to that, I suppose. Superannuation, unless it really changes, will stay the most important structure.

Yeah, I think that’s right, and there’s always concern from clients that government will want to fiddle with those tax incentives that you create for savings. If it’s stuff at the margins and we don’t think anything major will happen in taxation around superannuation, it still remains a very tax effective savings vehicle. The ability to have franking credits within that environment, the ability to shift into pension phase at a later stage, even though that’s now capped. The reason why that service for our clients is so important is that investment returns are a very important part of building wealth, arguably the most important part of building wealth. But minimising your tax leakage is another really important part of that, as is making sure that you’re not paying fees for services that are inappropriate or overcharging for what you get. It’s those three things in combination that are really important for wealth accumulation for individuals over the long term. We want to think that we’re paying attention to all three of them.

What do you think of the Labor Party’s dividend and franking policy, and its negative gearing policy for that matter, and capital gains tax…?

Well, putting up different ideas about the composition of the tax take is something that I think is going to happen over the long term. I think that the realities for franking credits themselves, there are arguments for why zero tax payers, perhaps that should be reviewed. But I think it’s such an important part of the fabric of the investment market and it’s an important part of encouraging Australians to save, that I’d be surprised if there weren’t significant changes to any of these policies between the way that they’re announced and when ultimately they become implemented. And so, we would be saying that we would keep an eye on those things but we’ll react to the piece of legislation if it is finally passed in what form it is. Fair enough.

Great to talk to you, Paul, thanks.

I appreciate the call, Alan. Good luck.


That was Paul Heath, the CEO and Co-Founder of Koda Capital.


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