FANews
FANews
RELATED CATEGORIES
Category Life Insurance

Dump projected values as guide to financial planning – Imara

26 June 2012 Lara Warburton, managing director of Imara Asset Management

Savers and investors should throw away projected and illustrative values if they hope to root their investment planning in reality.

The ‘get-real’ call comes from Lara Warburton, managing director of Imara Asset Management, South Africa, an asset management and financial advisory firm that is frequently consulted by salary-earners requiring a financial planning make-over.

A recurring problem, says Warburton, is the reliance placed by savers on illustrative life policy values that might have been provided years – even decades – previously.

She adds: “I frequently ignore the illustrative values given by product providers. In my experience, they don’t give a reliable snap-shot of future reality and make a poor basis for forward planning.

“The provision of these projections is a regulatory requirement, but little effort is made to educate the consumer in the inherent shortcomings of this type of forecasting.

“A consumer remembers that a value projection of, say, R2 million was given perhaps 10 or even 20 years ago. The policy gathers dust while expectations linger that the consumer will be R2 million richer on maturity date.”

This might be far from the case and urgent action may be necessary to achieve better results. However, a reality-check might be put off for years because of blithe assumptions that a R2 million pay-day is still in prospect.

After 20 years in the financial services industry Warburton has yet to come across a case where illustrative values given during initial product marketing proved to be accurate close to maturity date.

“This makes it vital that consumers undertake a regular review of their savings and investments,” she points out. “Projections should be regularly updated. If they are wide of the mark, new strategies may have to be adopted.”

One problem affecting the planning of older clients was the radical shift in economic fundamentals over the last 25 years.

“Projections given at a time of high inflation and interest rates are obviously obsolete once you enter a period of historically low rates and less severe inflation,” she says.

“Yet the magic figure given in illustrative values from long past will still stick in the memory and delay the transition to more active portfolio management based on current reality.”

She believes projections are innately fallible and almost always flawed.

Warburton explains: “A forecaster is trying to predict the totally unpredictable. No one can say what the interest rate or inflation rate will be next year and for years after that. It can’t be done.

“Consumers should be made aware of this. Perhaps then they would take greater responsibility for ongoing review with their financial planner. The individual has to exercise control and take responsibility first.”

Quick Polls

QUESTION

South Africa went to Davos to pitch itself as an investor-friendly destination, then signed an Expropriation Act. What message does this send to global investors?

ANSWER

Invest at your peril
SA is open for business
Two steps forward, one land grab back
Welcome to Hotel California
fanews magazine
FAnews February 2025 Get the latest issue of FAnews

This month's headlines

Unseen risks: insuring against the impact of AI gone wrong
Machine vs human: finding the balance
Is embedded insurance the end of traditional broker channels?
Client aspirations take centre stage as advisers rethink retirement planning
Maximise TFSA contributions before year-end
Subscribe now