Accommodating savers and investors

Marketing companies use countless methodologies to segment consumers. South Africa’s favourite is the Living Standard Measure (LSM) that divides the population into 10 distinct groups based on discernible living standards. The highest LSM score is 10, with one the lowest.

"Financial and risk advisors who traditionally source their clients in LSM categories eight or higher are missing fantastic opportunities,” says Gavin Came, Chair of the Financial Planning Executive Committee at the Financial Intermediaries Association of Southern Africa (FIA). He believes that financial services consumers can be segmented into two groups regardless of LSM score – savers and investors.

Savers do not have large ‘once off’ capital sums to invest. A saver will therefore set aside a manageable monthly amount towards long-term financial goals such as education, family holidays or a deposit on a house or car. Investors, on the other hand, have large pots of capital that must be optimally deployed.

The financial needs and investment objectives of savers and investors differ substantially. Savers favour recurring contribution retirement annuities, endowment policies and unit trusts to meet their investment needs. As ‘asset poor’ families they supplement these investments with appropriate risk products such as life and disability insurance to provide for their dependents.

Investors on the other hand favour share portfolios, linked investment service providers, direct investments in property and opportunities offshore.

"Savers will make up the biggest market for financial and risk advisors going forward,” says Came. "Unfortunately the focus of some practices has become elitist and shifted from managing monthly savings to handling large capital lump sums, thereby neglecting the lot of citizens in lower LSMs”.

How can financial and risk advisors make inroads into the ‘savers’ market? Step one is to adjust their selling strategies to accommodate the challenges facing this consumer category. Financial advisors must pay special attention to the investment vehicles that they steer ‘savers’ into and should encourage savers to invest in inflation-beating growth assets wherever possible – especially over longer time frames.

"The vast majority of financial advisors are already doing a fantastic job of steering ‘savers’ away from consumption into appropriate recurring premium investment vehicles,” says Came. According to the Association for Savings and Investment South Africa (ASISA) advisors assisted ‘savers’ to invest into more than 360 000 endowment products worth a staggering R3.4 billion in 2012.

Came says that stakeholders in the financial services industry could help ‘savers’ by lobbying National Treasury to soften the taxation treatment of endowments. There is currently an excessively high internal tax rate on the endowment investment vehicle of 30% versus the actual marginal tax rate of most endowment holders of around 20%. The impact of proposed retirement reforms on savers must also be carefully weighed up. "Although it is still early days we expect Treasury’s desire to restate retirement fund contributions as a fringe benefit to have significant implications,” he says.

Previously, provident fund contributions did not appear on pay slip as they were applied pre-tax. An individual earning R10 000 and contributing R2 000 to a provident fund would ‘see’ a gross taxable salary of R8 000. If reforms go ahead the individual would see R10 000 gross on his payslip, fully taxed, and with the provident deducted afterwards.

As a result salary earners receiving between R5 000 and R12 000 per month might ‘see’ a bigger salary than before; but larger deductions will create the impression they are actually taking home less. What will happen when unionised workers misinterpret this change?

Ill-thought reforms could lead to labour unrest, dissatisfaction among employees and – in the ‘worst case’ scenario – dissaving. It will take a concerted effort from financial advisors, employers and the regulator to ensure that savers emerge from this process in a better overall financial position.