Fear and uncertainty dominate the personal financial planning landscape

27 July 2020 Gareth Stokes

The majority of your clients and potential clients have been deeply impacted by the coronavirus pandemic and ensuing national lockdown. One of the standout statistics shared during the 2020 Old Mutual Savings and Investment Monitor launch, held 16 July 2020, was that three in five South African households were earning less in May 2020 than in February. Another shocker is that two thirds of South Africans indicated that they were “constantly worried about losing their job or income”. Presented under the tagline know-better-do-better, the 2020 survey offered an early ‘peek’ into the financial damage caused by pandemic, and government’s response to it, to household finances.

Battling a global storm

South Africa’s financial advisers, financial planners, and personal lines insurance brokers would do well to study the survey findings for a better understanding of how individual citizens have experienced the first half of 2020. Iain Williamson, CEO at Old Mutual opened the webcast with some stark reflections on the status quo. “The pandemic has led to lockdown which has impacted on people’s financial wellbeing,” he said. “This has been a unique year in that it is the first time in our lifetimes that the entire world has been battling the same storm; we grieve, we fear, we feel isolated, and we feel grateful when were hear of someone who has defeated the virus”. 

Izak Odendaal, Investment Strategist at Old Mutual Multi-Managers, observed that the compression in income growth will put pressure on households’ ability to save. The inability to build savings will inevitably lead to difficulty in meeting existing investment and risk commitments as well as a reluctance to purchase new financial products. Odendaal also observed that the expected spike in the country’s unemployment number would become a major constraint on the broader economy. 

Confidence in economy plummets

His colleague, Lynette Nicholson, a research manager at Old Mutual, introduced the 12th edition of the Old Mutual Savings and Investment Monitor as one of the earliest measures of the impact of the COVID-19 pandemic on working South Africans earning more than R5 000 per month. The ‘fieldwork’ was carried out between 29 May and 23 June 2020. Only 34% of respondents indicated that they “agreed” or “strongly agreed” with the statement: “I feel confident about the South African economy”. This is significantly lower than the 40% plus levels recorded in 2018 and 2019 and the 56% achieved in 2015. A similar trend exhibits in the measure of each participant’s satisfaction with their current financial situation, which dropped to a mean score of just 5,3 out of 10 for 2020. 

There was some good news for financial services professionals that target higher earners; because the reduction in monthly income seems inversely correlated to the level of income. Almost half of earners who received R10 000 or more in monthly earnings indicated that their salaries were unchanged in May compared to February versus just 38% of those earning less than R10 000 per month.  The survey showed that between 6% and 11% of participants had lost more than 75% of their monthly income across the salary bands surveyed, leaving 48% of survey participants in a worse financial situation. Of greater concern is that only 27% of respondents felt they had enough in savings to survive for more than three months in the event their lost their jobs. 

The paradox of thrift

Nicholson said there had been a significant uptick in savings levels in the United States and Europe through crisis, as people ended up working from home and being unable to engage in their usual spending activities. This situation, exacerbated by the once-in-a-generation shock of pandemic, contributed to upwards of USD2 trillion streaming into various savings instruments in those markets. The downside of aggressive saving is referred to as the “paradox of thrift”, which holds that the sensible act of saving in response to crisis has the negative outcome of being a drag on economic recovery. Consumer spending remains the engine room of most country GDPs. 

“South Africa came into the crisis with a large budget deficit, meaning that additional support for the economy is quite limited,” said Nicholson. Of greater concern is that the largest portion of our budget deficit looks certain to come from declines in tax revenue rather than a big increase in government spending. Old Mutual warned that South Africa was “constrained fiscally in terms of how [it] could cushion the blow from pandemic because [it] entered the crisis in a weak state”. Another negative consequence of the fiscal and monetary policy interventions taken to avert the economic impact of the crisis is that those who save in bank accounts and money market instruments are now earning significantly lower investment returns due to cuts in interest rates. 

Financial advice to the rescue

John Manyike, Head of Financial Education at Old Mutual, said that the country needed financial advisers more than ever and encouraged affected households to review their life policies and short-term insurance covers with their advisers and brokers. Short-term insurance premiums, in particular, could be reduced due to changed risk profiled during lockdown. “Never underestimate the role played by financial advisers; we are entering a period when we need financial advisers more than ever,” he said. “Review your financial plan with your adviser”.

The adviser plays an important role in addressing consumers’ financial stress, because making important financial decisions while under stress can be catastrophic. The concluding advice was for struggling savers to seek help from their financial adviser, insurance broker, or insurance and investment providers. 

Writer’s thoughts:
One of the major impacts of the current crisis on the personal savings and investment environment is that an increasing number of households are falling behind on their debt repayments. The latest savings monitor shows that 28% of respondents are behind on their credit cards; 30% on store cards; and 26% on rent or home loan repayments. What is best practice for financial advisers and financial planners in guiding clients with serious debt problems? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].

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