Retirement products: are you being ripped off?

Issued by Fedgroup Financial Services
Johannesburg, Jun 1, 2015

The retirement industry displays a concerning degree of complexity. It is also unnecessarily costly. According to Scott Field, FedGroup's financial director, these intentional practices drive healthy profits, at the expense of investors.

Field's advice? Seek simplicity and transparency. "Planning for retirement is, in fact, extremely simple: Entrust your savings to an organisation that practices consistent asset management, thereby lowering your risk and cost, and is utterly transparent about where your money is and how it's doing."

One of distractions to this simple approach is giving members of retirement funds individual investment choice.

"Don't be misled by promises of greater choice or returns into allowing more of your monthly payments to go towards the cost of managing your money than to your ultimate retirement payout."

Company employees, whether they are blue collar workers or well-educated executives, rarely have the sophisticated insight into financial markets to be able to choose the mix of the assets in their portfolio with any real competence.

"For one thing, people tend to make emotional choices," Field says. "The excitement of a buoyant market leads people to buy at the top of the cycle rather than the much more profitable bottom.

"Also, no matter how skilled the person is, active trading seldom produces better than market average results. But, active trading costs more. Why incur the costs for no additional benefit?"

Even with expert help, most people opting for individual investment choice end up with a default portfolio, negating any theoretical advantage.

In Field's view, active asset management even by informed fund managers creates the same kind of dilemma, in that the cost of constant movement of assets within a fund outweighs the potential for greater profit.

"Consistent asset management, on the other hand, still achieves at least the market average over time without the burden of brokerage fees and trading costs.

"Beyond that, consistent asset management gives the client stability through steady growth of retirement savings and confidence in achieving the target final amount."

Field believes the most important decision a retirement fund manager makes is selecting the right asset mix upfront. "If your selection is good and the market has been running hard for the last year, then, by all means, sell some of the equities and realise the profits. And, obviously, you have to monitor the market on an ongoing basis to make sure there are no outliers. But, there's simply no advantage for your client in extravagant strategies."

The option of life staging, which emphasises having more money in cash investments than equities as you approach retirement, in order to avoid the risk of a disruptive economic event, also holds more downside than upside.

"It ignores the fact that economic cycles are very difficult to predict," Field says. "So, there are no guarantees that moving from equities into cash at any particular time prior to your retirement will protect your savings.

"Also, people are living longer and retiring later. You may not want to draw a retirement income for five or 10 years beyond the date initially chosen to move you to a higher weighting of cash and bonds. Or, you may want to retain a higher exposure to equities and property to generate both income and capital growth during your retirement.

"In the end, retirement planning comes down to leaving the management of your savings in expert but sensible hands and to hold your fund manager accountable at every stage of your working and retired life."