Advisers need to start becoming their clients hero’s
If we look at the South African economic landscape, we can see that there are many factors contributing towards the current retirement outlook that many South Africans face. The reality is that a comfortable retirement is not an easily achievable goal.
This does not detract from the value that sound financial planning offers to the industry and the role advisers play in ensuring that policyholders work towards a goal which is as close to a comfortable retirement that they can get.
This was the key message given by Discovery Group CEO Adrian Gore at the Discovery Financial Planning Summit which was held at the Sandton Convention Centre last week.
The true state of the industry
Speaking to a packed house of advisers and brokers, both tied and independent, Gore reiterated the importance of what the Financial Services Board labels as one of the most important professions within the financial services industry by painting a realistic picture of the industry.
"Without great financial planning, without great financial planners and without brilliant financial advice, people will fail in their financial affairs,” said Gore.
He adds that although we live in a unique and beautiful country, we cannot overrate how vulnerable we are. "South Africa is one of the most unequal countries in the world with a huge Gini-coefficient. While government should, and will focus its resources on people in need, South Africa's social safety net is less sufficient than that of the UK which offers an extensive social security system, and also the US and even China which have greater forms of social and health support.”
He adds that this contributes to the fear and paranoia which is prevalent in the industry and that while retirement saving is hard to come by, they will always be able to fall back on their children and count on them for support.
This has also contributed to the sandwich generation. The generation of workers who have a retired parent to care for as well as children to care for. Added to this is the fact that this generation must ensure that they plan sufficiently for their own retirement before they perpetuate the cycle.
Are we equipped with the right tools?
Another contributing factor towards the state of the industry is the fact that Gore does not believe that the industry is equipped with the right tools to achieve financial stability.
"We have to look at the tools we are using to calculate financial stability. And I propose that the financial needs analysis is so rational that it is irrational. It ignores the way in which people think about things, and the number that the tool pops out is so scary that it does not evoke change,” said Gore.
He then went on to discuss a behavioural study on how people react to potential losses and potential gains.
The study shows that, in an ideal world, the more your portfolio grows, the more excited you become and the more your portfolio loses, the more concerned you become. However, this is not the case as humans overcompensate when it comes to losses and undercompensate when it comes to gains. Gore adds that we are so scared of losses that it evokes behavioural change.
"If you have a goal, people are very scared to lose it. This is why successful people tend to be goal setters. When people see a number on a sheet of paper, they don't see loss aversion. Advisers need to act as a constant prod to make people understand what their financial position is,” says Gore.
The irresistible force vs the immovable object
The irresistible force paradox is a situation whereby an irresistible force meets an immovable object. It is a paradox in which a stalemate is created because one assumes that the irresistible force and the immovable object are equally strong and will therefore not destroy each other.
Gore feels that this is the situation that the retirement industry currently finds itself it. Hyperbolic discounting, or instant gratification, is the irresistible force. "People discount the future at higher rates of interest than they should. Human beings don't really care about the future. People will rather take R10 today than R11 tomorrow, because its R10 today. They look past the fact that they money is actually growing at 10% over a 24 hour period.”
But then, people are also overly optimistic. Gore points out that if you offered a person R10 today or R11 in a month, they will take the R11 because it is over a longer period of time. And they assume that allot can happen to that money which will give it exponential growth where the possibilities are seemingly endless.
Be your client's hero
According to Gore, while these are not all of the aspects which are influencing the industry, they are the most pertinent. What is interesting to note though is the important role that the adviser plays in the industry.
Advisers have the power to achieve financial prosperity for their client. But with great power comes great responsibility. The adviser in essence has his/her back against the wall because they have to overcome the significant challenge of rewiring the human brain to think rationally.
All of the above behaviours are irrational, and the adviser has to be the true north that brings their clients back on track when they are tempted to be creative and go off it. The only way to achieve this is to build on relationships and to offer state of the art products and services.
Editor's Thoughts:
It is clear that there needs to be a rethink when it comes to retirement planning in that the public needs to come to terms with realities rather than this ideal picture of retirement that they have created. Whether this is a challenge that is easily achievable for advisers is a debate that will perhaps never be resolved. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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