1 year ago

Blue Chip Issue 80

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Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.


LIVING ANNUITIES The artificial line of “retirement” How you can add value to clients who are considering a living annuity option I recently presented at a workshop to a group of senior employees from one of South Africa’s largest auditing firms. It was an interesting experience for me, as the workshop was hosted by Google Meet and it was my first experience using this tool for an online group meeting. Auditors, it turns out, are a lot like you and me! They also do not particularly like staring at their own face, and so most of the cameras of those attending the workshop were turned off. This took me a little while to adjust to, but soon I started to lean into the silences, which were probably 10 seconds, at most, but felt like 10 minutes at the time. It must be noted at this stage in my article, that all of the employees on the call were planning on purchasing a living annuity when they retired, and not a life/guaranteed annuity. This is important to keep in mind as the rest of the article refers to living annuities only. Engagement from the attendees really started to flow once I had touched on their retirement fund and the different factors that they should consider when making decisions on their underlying investment strategy. Those that engaged, spoke at length about the lifestage model portfolio that they were allocated to and the appropriateness of this strategy for them. I could not give direct individual advice, but I did speak about the importance of seeing one’s retirement date as an artificial line in the sand when it came to their retirement fund. A quick note: The lifestage model portfolio has a place in the retirement fund industry. The derisking of the investment strategy done automatically by the retirement fund administrator can be the right strategy depending on the client. The reason I brought this up is that the retirement from an employer/employee relationship does not mean that a retirement fund investment strategy should suddenly radically change purely on this basis. If you believe in a long-term investment strategy, like I do, you need to see the transition from a retirement fund to a living annuity as just that, a practical product transition. In a lot of cases the underlying investment strategy will change only slightly as the client comes out of Regulation 28 guidelines and into a life licensed product with a wider investment choice. The investment strategy, regardless of product, needs to be appropriate for the client’s financial plan at all times. A client risk profile rarely changes so drastically that they go from a high-growth long-term investment strategy in their retirement fund to a capital-conservation based investment strategy in their living annuity. In fact, there have been recent studies done on the optimal investment strategy for a living annuity where a regular income is being taken. Jaco van Tonder, from Ninety One Asset Management, has written an excellent paper on exactly this. His findings were quite conclusive: individuals drawing an income from a living annuity need a high-growth long-term investment strategy to give themselves the best chance of not depleting their capital before they die. Let’s get back to the faceless auditors from my recent presentation. They all had a mandatory retirement age of 61 and hence needed their living annuities to produce an income for at Individuals drawing an income from a living annuity need a high-growth long-term investment strategy. 48

LIVING ANNUITIES least 20 to 30 years after retirement. Missing out on return from growth assets, particularly five years or less from their date of retirement, was a major risk to their financial plans. The risk was easily understood with what we have seen from growth assets in the last year alone. Below is an extract of the returns of equity markets over a one-year period ending March 2021 in the relevant country’s currency: The investment strategy, regardless of product, needs to be appropriate for the client’s financial plan at all times. (Source: PortfolioMetrix 2021 Q1 Quarterly Commentary) Cash or cash-like investment strategies would have had the capital protection at the time but they most likely would have not captured any significant return. This is shown in the chart above. As financial advisors, we often struggle to advise clients appropriately on their company retirement fund. I believe that taking some time to engage with your client on their retirement fund can add huge amounts of value in making sure that they are positioned as appropriately as possible when they approach retirement. The difference for your client is not only in the long-term return on their investment that they may need, but it is also knowing that your chances of having a client for life are hugely increased. Tom Brukman, Retiremeant Specialist and Director of Chartered Wealth Solutions, Western Cape. 49

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