Col 14: Beware from where you get investment advice for retirement
By Bruce Cameron
Co-author of The Ultimate guide to Retirement in South Africa
One major reason why retirement planning goes wrong
It is amazing how many people try to give other people free advice – and some on bad advice they have received themselves.
And it is made even worse when this advice is given to people planning for their retirement or in retirement.
At two recent conferences, at which I was a speaker, it was amazing how some audience members tried to pass on ‘investment’ information that would simply be bad advice for most people.
Conference One:
A Professional Provident Society (PPS) conference entitled “What happens now when there is no fixed date for retirement.” The main reasons being that people belong to more than one pension fund and many do other jobs after retirement.
At the PPS conference a member of the audience stood up and said: ‘I do not trust investment professionals and financial products as I always lose money’.
His advice instead was ‘buy diamonds and antique Italian motor bikes’.
It may work for him, but I suspect for very few others.
On the investment side:
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Diamonds are increasingly being manufactured artificially; De Beers does not have the same monopolistic grip on the market; there is a significant difference between the buying and selling price; and, diamonds provide no interest or dividend returns.
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To make a profit from any collectable, such as antique motor bikes, you really need to understand the market, the bikes and how prices fluctuate.
Conference Two:
A fundraiser organised for the Hermanus Hospice to inform retirees of the multitude of scams to which they are often subjected.
The conference, organised by Janet Hugo and her team at Sterling Wealth, is something that should be done on a much wider scale as retirees are normally target number one of con artists – and too often, successfully so.
Increasingly the major warning is on cyber-scams and cryptocurrencies (digital currency).
One of the points made was that many people, who invest in cryptocurrencies, do not even understand the basics, such as block chains. One retiree stood up and said she understood block chains and was about to invest heavily in cryptocurrencies.
The problem with cryptocurrencies is that no one knows what is legitimate or illegitimate. The have been major scams costing R millions in the trading of the cryptocurrencies, in the companies doing the trading, raids of storage ‘wallets’ and in the companies that tell you they are protecting your wealth. Even if you avoid the fraudulent schemes you are still faced with the amazing difference in the volatility of cryptocurrencies.
Regulators around the world are warning of the significant dangers of cryptocurrencies. Despite widespread cooperation between regulators, it is difficult to regulate an industry which ignores the borders of countries and operates in what is the opaque world of computers. And the industry, both the legal and illegal, spend enormous amounts of money on advertising themselves.
Until cryptocurrencies are properly regulated internationally, it is something most people should ignore, particularly if you are investing retirement money.
Retirement funds are different
Retirement money should not be extremely high risk. Neither narrowly diversified investments such as trading diamonds, or even worse, antique Italian motor bikes, should really be considered. If you want to invest in cryptocurrencies should only use non-retirement money; and, you need to do a great deal of research before investing.
It is also unwise for audience-members to try to promote these high risks investments at retirement conferences.
There are also questions marks over the claim that more popular investment products have failed investors: Very few shares markets, for many years, for any five rolling year period, have failed to give positive returns.
All I can think of, the PPS investor was using a life assurance product pusher, who sold him high cost, low performance contractual investment insurance products; and, probably also paid extensive penalties when he cancelled the contracts.
Why retirement fund savings ‘do not’ perform
Factors that have a negative impact on retirement investments are:
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Historically: Many bad investments were sold into the retirement market by life assurance companies. At one time even PPS permitted the sale of Sanlam retirement annuities to PPS members using badly qualified financial advisers and the policies were accompanied by dreadful surrender penalties, high costs and poor returns.
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Switching: If you switch between different investments you can expect to lose money. By the time the average person switches, any advantages have already been lost. You cannot consistently time market for either increases or falls - not even big asset managers get it right. Retirement is a long-term investment, so you should have investments that require few changes, apart from rebalancing, over the years.
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High costs: High costs definitely have an impact, particularly many of the products of the traditional life assurance industry. These costs came through in two ways.
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surrendering a policy, where there was a contractual element to keep investing for a fixed number of years. If you cancel the product by reducing or stopping your payment you will be charged with a surrender penalty; or,
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being misled by life assurance product floggers, who were selling investments that paid maximum commission with little concern about your financial future.
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Lack of diversity: Being placed in investments that do not have sufficient diversity. You are far better off in the long run to be invested in an exchange traded fund following the JSE Top 40, or the S&P 500 tracking the top 500 USA shares than in diamonds or even listed-diamond mining shares. The more you concentrate your investment the greater your investment risk.
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Preservation: Not savings enough and withdrawing your retirement savings along the along the way.
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Advice: Not getting the best advice from a certified financial planner licenced by the Financial Planning Institute.
One further issue. More than 30 years ago there was not much choice in saving for retirement. The then life assurance industry had a solid cartel-like grip on retirement industry. The cartel is now shattered much to your advantage. This is the subject for the next column.
There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on our website www.retirementplanning.co.za
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