You need a professional to guide you through the complexities of retirement planning, Andrew Leventis, senior wealth manager at Alexander Forbes, says. This is the sixth in a series of articles by Bruce Cameron, the founding editor of Personal Finance, on the popular Personal Finance/Alexander Forbes Ready Set Retire conference, which was held around the country in March.
Not receiving professional advice on retirement planning is as dangerous as acting on ill-informed financial advice from your neighbour, Andrew Leventis says. Planning for your retirement is not like entering the Lotto. If you think it is, you have a one-in-14 million chance of success.
“Retirement planning is a very complex process and most people need assistance to get it right.”
Leventis says the complexity of retirement planning is reflected in the concerns people have when approaching retirement.
He says a survey into these concerns undertaken 30 years ago is still valid today. The areas of concern were: the depreciation of the rand, medical expenses, the South African economy, inflation, having enough money for unforeseen expenses, having enough money to last until death, maintaining a standard of living and interest rates.
“Nothing much has changed,” he says.
“There are diverse issues that have to be taken into account, ranging from tax to estate duty, to your family situation, your investment choices and income needs in retirement.
“Investment alone requires many complex choices, including how to invest in equities, whether to use unit trust funds, whether to use active or passive management, and how to diversify your assets to get maximum returns at minimum risk.”
Leventis says the important thing is that no two people are the same. What applies to you will not apply to your neighbour – so taking advice from your neighbour can be very dangerous.
“For example, some people have a lot of debt while others have no debt. Some debt is good debt, such as borrowing to buy a house. Bad debt is money you borrow to buy things that lose value, such as a car.”
The level of debt you have will, on its own, affect your retirement planning, apart from issues such as the size of your family, the assets you own and how much you save.
Leventis says a skilled financial adviser will assist you with the mundane things, such as ensuring you have a will so that your family will not have to deal with all the complications of you dying intestate, through to complex issues, such as assessing the financial risks you and your family face.
He says that you should see your planner as both your adviser and coach, who will teach you to deal with the complexities and keep you from making the wrong decisions – for example, when investment markets crash (See “Choose an adviser who’s a guide for life”, below).
Leventis says there are many ways in which a financial planner can add value to your financial security. The most important are:
Financial risks
As you progress through life there will be risks you can afford to take and those you have to share with others, Leventis says.
For example, you may be able to take the risk of paying for repairs to your car after a minor accident, but you cannot take the risk of your car being written off, particularly if you have a vehicle loan.
You need continually to assess how much risk you can share with others, through short-term insurance and life assurance, and how much risk you can afford to take on yourself. A financial adviser is there to help you to get the balance right.
Leventis says if you have too much insurance, you are wasting money, but if you have too little, you are putting you and your family at risk of a loss you can’t afford.
Behaviour
Human behaviour is often illogical, particularly when it comes to financial decisions, so much so that a new field – behavioural finance – has opened up, Leventis says.
He says people often make illogical investment decisions because of either the fear of losing out or greed to take advantage of what may appear to be a good opportunity.
For example, you may do extensive research before buying a new car. Then a friend tells you about someone who had a bad experience with the vehicle you have decided on. You then decide not to buy, despite the fact that millions of people have had a good experience.
The same applies to investments. You may consider an investment after proper research, but a friend who bought the investment advises you against it. The reason your friend had a bad experience may be that he bought at a market high and sold at a low. In other words, emotions may have influenced his buy and sell decisions.
Leventis says people often do not want to invest because they believe a market is too expensive. But then the market keeps going up, making it even more expensive. In the end, because of fear, they lose out.
A financial adviser is there to prevent you from making irrational decisions, Leventis says.
Asset allocation
Leventis says that fear and greed are driven by investment market volatility, where people sell because they believe an investment is under-performing, with greed playing a role in bull markets.
He says that you need to understand that all investments over- and under-perform – some more than others (see table, via link below). For example, since 2000, local listed property has been the top-performing asset class most of the time. In 2001, the top-performing asset class was foreign bonds, but the following year this asset class was near the bottom, and it remained there until 2008 when it shot to top spot again, only to hit the bottom the following year.
Anyone who bought at the top and sold at the bottom would have been hammered.
“Investment returns do not stay in the same place all the time. They are all over the place, and you need to structure your investments to get the best return at the lowest risk.”
He says the way to do this is to diversify your investments across asset classes rather than try to guess which asset class will be the next best performer.
The table shows that balanced funds, which invest across asset classes, are not at the top or bottom. They can lose money, but generally provide sound returns.
He says if you try to time the market, you are likely to lose out. Research by Nedgroup Investments shows that if you miss the top five days of performance in an investment market you reduce your returns by a potential 30 percent; miss the best 30 days and you reduce returns by about 75 percent.
Leventis says the answer is time in the market with a diversified portfolio – not market timing.
He says the other advantage of staying in the market is that most volatility is short- to medium-term. The longer you stay invested, the propensity of an investment to go up and down in value decreases, while it provides ever-increasing, sound returns.
Leventis says that a financial adviser is there to help you put together a balanced investment portfolio that will meet your needs. He says it is not simply a matter of maximising returns
Leventis says the composition of your investment portfolio also needs to take account of factors such as whether you are young and able to take risks while seeking sound capital gains, or whether you are more cautious and are relying on your investments to provide an income.
He says a very important area, in which most people need assistance, is deciding on their income in retirement based on getting the best possible income while ensuring their investments last for life.
CHOOSE AN ADVISER WHO’S A GUIDE FOR LIFE
Choosing the right financial adviser can be critical to getting the best out of your financial plan, Andrew Leventis says. And it is important that you choose an adviser who will become your guide for life.
Leventis says you and your adviser are a team. You have to understand the advice and what you and your adviser are trying to achieve.
He says it is equally important that your partner or spouse is actively involved in your financial planning. Your adviser must, among other things, understand what is important to both you and your partner.
He says the first thing you need to do is ensure that your adviser is licensed with the Financial Services Board (FSB) as a financial services provider (FSP) or as a representative of an FSP. You also need to check the financial products that your adviser is permitted to give advice on and sell. The greater the range of products, the better.
To do this, go to the FSB’s website, www.fsb.co.za, and click on “FAIS” and then on “Financial Service Providers”.
The next step is to check on your financial planner’s qualifications. The best-qualified advisers are Certified Financial Planners (CFPs), licensed by the Financial Planning Institute (visit the institute’s website: www.fpi.co.za).
Leventis says CFPs have an obligation to provide you with honest and professional advice. This includes following an established six-step process. The steps are:
1. Establishing and defining the professional relationship with you.
2. Gathering your personal data, including your financial goals.
3. Analysing and evaluating your financial status.
4. Developing and presenting financial planning recommendations and alternatives.
5. Implementing the financial planning recommendations.
6. Monitoring the financial planning recommendations.
Leventis says it is also important to establish whether your adviser is a one-person operation, works for a small company, or belongs to a large company that provides expertise and proper back-up for its staff.