The first lesson I learnt regarding retirement risk and reward was at university. Our professor taught us that retirement savings should always be considered longterm investments, and a client’s assets must match his/her liabilities. This is in stark contrast to prevailing industry trends, where advisers and planners try to earn the highest returns possible, often with little consideration for the associated risks.
Retirement savings are structured over a longer period of time to minimise the risk, and ensure a return to secure a client’s future when they retire. Today’s society, however, is driven by instant gratification. This means active investors react to prevailing market trends, while passive investors push their financial advisers to deliver larger shortterm returns. Advisers capitulate, and focus on the highest returns for their clients, often without explaining the risks involved.
We can only use past performance to evaluate opportunities, and for this reason it is vital that financial advisers base retirement planning on long-term trends. While short-term trends may repeat themselves, there is no guarantee of returns, which is why a lower risk strategy over the longer term remains the prudent option.
Living for today
Changing trends in the workplace are also driving a shift in retirement planning requirements. Previous generations would work at a company for long periods of time, often for an entire career. During that time, their retirement annuity contributions matched their income and the investment vehicle used was low risk. This meant that most people who reached retirement age in the last decade are now taken care of.
Today, however, many companies do not offer retirement packages as part of their employee benefits, so there is no forced saving imposed on a large portion of the population. People also change jobs regularly, every three to four years on average, and often use their provident fund pay-outs to pay down debt or on discretionary spending. This money is seldom reinvested for retirement, which sets a person’s retirement investment horizon back even further. It is for these reasons why government’s proposed forced preservation is an important step in the right direction. Forced participation is also an issue government is keen to implement.
Lending a helping hand
But in the absence of forced savings, it falls to financial advisers to help their clients build capital over time by making decisions that are based on sound advice, like not using retirement savings for speculative investing or discretionary spending. In addition, advisers should not be swayed by impressive sounding performance, which they feel may help to sell policies, as it ultimately puts their clients’ hard-earned retirement savings at risk.
Another disturbing trend in the financial adviser market is that of “life staging” – getting clients to take on more risk when they are younger. Investment savings should always be conservative, regardless of age. And an adviser should never put a client’s capital at risk, regardless of whether he/she starts saving early or late. The approach to retirement saving should always be the same.
Playing an important balancing act
As such, suitable retirement savings plans should balance risk through investments with some equity and property exposure, and access to money markets and interest bearing instruments. Always balance asset classes with low risk savings instruments. Funds should also be pooled so that the money invested attracts an asset management fee that is appropriate for this form of saving.
Lastly, advisers should also be proactive. Engage with a client regularly to track funds and make informed decisions about changing fee structures and risk profiles. Certain sectors in the economy also have cyclical performance and experience, so their approach to investing should change accordingly to achieve inflationand performance, and create real value.
To remain relevant and effective, financial advisers can no longer merely sell retirement products. They need to be long-term advisers who help their clients achieve their retirement savings goal.