Investment goals may be a key priority in 2015
2015 is set to be a landmark year for the South African financial services industry. The Financial Services Board (FSB) is putting to bed the legislative pieces which will all culminate in Destination 2016 where the various pieces will be entrenched in law as the Twin Peaks model is implemented.
The goal the FSB is working towards is a greater sense of clarity in the market whereby advisers are required to be more open with the way in which they do business. The one sector which will be significantly affected is the retirement sector, which is also hanging in limbo as government is finalising its Retirement Reform programme.
Shifting priorities
It may well be a case of you preaching to the choir when you say that it is vital to make saving towards retirement a priority in 2015. It may also be the wrong time of the year to talk about this as people do not want to hear about saving when disposable income is running low in the middle of the month, especially after the festive season. However, South Africa does not have a good savings culture and you as the adviser play an important role in encouraging your clients.
Steven Nathan, Chief Executive of investment firm 10X Investments, suggests that we need to look at the holistic picture rather than focusing on smaller short-term savings goals.
“As a start, clients need to quantify their retirement end-goal: how much money will they need and how much money do they need to set aside in order to achieve a comfortable retirement. Clients should also be encouraged to track their progress at least once a year to see where they stand relative to their goal,” said Nathan.
RDR game changer
Towards the end of 2014, the FSB launched its long awaited white paper regarding the Retail Distribution Review (RDR). The main objective of this document is to qualify the type of fees advisers will be paid in exchange for advice given and the guidelines regarding these payments.
This seems to be a major issue in the retirement space as many clients are not aware of the type of products they are invested in, and the dynamics which drive the fees in these products.
“If a client is paying a total fee above 1% a year over a 40 year period, the likelihood that he will realise his retirement goal is greatly diminished. Engagement with clients on the fee structure needs to be established, bearing in mind that if 1% is spent on fees per annum over 40 years, their final pension amount would increase by about 30%,” said Nathan.
Product clarity
There a number of factors which dictate the type of product a client invests into. Depending on their risk profile, passive investment products look like they are the most popular products in the industry. What if we throw client choice into the mix? The FSB is eager to get clients to know the products they are invested in.
“A simple, transparent solution works in your clients favour when it comes to retirement investing. It improves their understanding of the fund, it enables them to make informed decisions, and it is more cost effective,” continued Nathan.
It is also currently important for clients to know how their fund is performing. “No matter how smart active retirement fund managers might be, realistically, they only have a 20% chance of beating the market return over the long-term. By avoiding actively managed funds and using index funds instead, clients are able to earn the average market return - no more, but more importantly, also no less,” said Nathan.
He added that fund managers should invest strategically rather than tactically. Maintaining an age-appropriate asset mix and adhering to the index return protects clients from making emotional decisions based on past performance or current market trends. “Over time, clients will be rewarded with superior investment returns, after fees, with less risk relative to an active strategy. Coupled with low investment fees, clients stand to gain as much as 60% more over an investment period of 40 years,” he said.
Adviser resilience
There is no doubt that the winds of change are squarely focused in the adviser’s direction. The popular view of many industry stakeholders, and regulators, is that if the adviser does not embrace this change, he will find himself on a very slippery slope.
However, there are ways in which advisers can become more resilient. Michael Davies, Chief Executive Officer (CEO) of ContinuitySA, said that as part of their business continuity management, advisers, tied or independent, need to assess the risks they face, prioritise them and then put mitigation plans in place.
“In addition, I think that we all understand that the risk climate is becoming increasingly more complex, and the chances of a totally unexpected Black Swan event are becoming more likely, that we think companies also need to see risk mitigation as a way to build a business that’s resilient by nature and intrinsically prepared to bounce back from anything. Companies should also become more proactive in avoiding disruptions associated with disasters rather than reacting to them when they occur,” said Davies.
Editor’s Thoughts:
Yes it will be a year of change for advisers, but if they embrace this change, it will be a year for them to remember. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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