Clients depend on advisers more than they realise. In a world where risk is having an increasingly significant impact on their lives, risk management is where advisers show their value.
Clients need to manage this risk while saving for their retirement. The statistics, when it comes to comfortable retirements in South Africa, are low but the situation can be remedied through professional advice.
Wholesome advice
We are used to the basic maths formula that one plus one equals two, that two elements will eventually make up a complete solution when added together. Advisers may be tempted to look at the risk management discussion and the retirement savings discussion as issues that need to be dealt with separately before they can be dealt with together. However, this is a thought pattern that needs to be changed.
Speaking at a recent FMI adviser engagement roadshow, CEO Brad Toerien said that these discussions need to be held together; if clients are going to receive wholesome advice.
“Clients are not robots. They are normal people, they want to effectively manage their risks and their investments together, clients do not place these concerns in two separate boxes,” said Toerien.
Advisers can make a real change in their clients lives. In order to do this, Toerien said that mindsets need to change. “The world has recently changed so much that old thought patterns need to be challenged. We cannot hold onto old truths,” said Toerien.
Myth number one
Toerien added that some of these old truths have turned into myths over the years. And these need to be challenged.
The first myth that needs to be challenged is that a client will earn a continuous, steadily increasing stream of income until retirement.
The reality is that injuries and critical illness are becoming more common. It is estimated that seven out of ten people in South Africa today will have an injury or illness in their working lives that will prevent them from earning an income.
Further, half of the people who claimed from their insurance policy have claimed before. “A client is unlikely to earn a steady income, but they are likely to have interruptions caused by injuries that may cause a temporary disability,” said Toerien.
According to Toerien, the devil is in the detail, clients can increase their future insurability by reading the fine print.
For instance, clients can increase their disability cover the day after claiming for a disability. This means that when they claim again, they receive a higher pay-out. “Clients need to protect 100% of their income. Some people cannot survive on 100% of their income while earning it, how do they think they can survive on less when claiming for a disability?” asked Toerien.
Clients also need to select the shortest possible waiting period when it comes to claims being paid out. In some extreme cases, Toerien pointed out that a 30 day waiting period can reduce a total claim pay-out by nearly 60%.
Any investment plan relies on a steady income stream. A client’s ability to earn an income is their greatest asset.
Myth number two
The second myth, or mindset, that needs to be challenged is that a client knows exactly how much money they will need to retire comfortably.
“This is often driven by two rules of thumb. The first rule of thumb is that a client needs a 75% replacement ratio to retire comfortably. The second rule is that twenty times that ratio is enough; if a client has a lumpsum of twenty times their replacement ratio invested, they will apparently be fine. We need to test as to whether these bets are appropriate to make on our lives and the lives of our clients,” said Toerien.
A part of the myth that needs to be challenged is that advisers need to sit down with their clients and ask if 75% is enough. What if clients reach retirement and they still have debt or dependents? There is also the issue of medical care which is expensive for the elderly, and medical schemes increase their premiums by much more than inflation every year.
A 75% replacement ratio is simply not enough to retire on one day.
Myth number three
The last myth that needs to be challenged is that your client will retire at 65 and only live until 80. However, medical advancements have disproven this.
“Clients live much longer in retirement these days. In the past, spending 30 years in retirement was unheard of. But there are many children who are being born today that will live past 100 years old. Some advisers have not brought this reality into their planning. Clients can no longer retire comfortably at the age of 65,” said Toerien.
People are living longer and are spending more time in retirement. We need to plan for this.
Editor’s Thoughts:
Advisers are not being asked to reinvent the wheel. They are being asked to be innovative with the tools that they already have at their disposal. Planning for retirement is about looking at it with a new frame of reference. Are you doing this for your clients? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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