Much is beyond your control, but not your golden years

Many of us feel powerless as we hear almost daily about the emptying of our national coffers and observe the unstoppable election train steaming towards an apparently predetermined destination, all the while ignoring a key area of our own financial lives where we could stop the decay and the devastation.

What can we do to about the R250 billion hole that threatens Eskom’s sustainability? Go off the grid? Start growing our own food? Those might solve a small part of the problem for a short while but there is not much one can do to mitigate the risk of societal chaos should Eskom actually fail.

The debate around the ANC’s tainted party list for the May 8 election is another case in point. People feel frustrated, hopeless even, that the party (that looks set to win the election) won’t budge, despite an outpouring of outrage. We can hope the tainted individuals will have a sudden, unexpected attack of conscience and resign from the list, as many in the ANC have been reported as hoping for. That seems rather a long shot.

Amid the broad outrage that the same people who have looted our national coffers and almost brought the country to its knees will still be in charge after the May elections, it is easy to overlook the outrage happening in your personal affairs, specifically your retirement investments.   

It’s not just the government that robs us blind. You may have noticed that apart from the food and automotive industries, only one other business sector is still advertising vigorously on television: financial services. They can afford to, because this industry makes hay, whether the sun shines or not. 

National Treasury has warned many times that the great majority of us are destined for an uncomfortable retirement. The reasons are varied and complex but most obviously, many South Africans simply don’t save enough, or they blow their savings when they change jobs. These people are almost guaranteed to retire poor. But those affected will also include millions of diligent savers who have unwittingly entrusted their savings to an industry that, it turns out, is more concerned with boosting its own income than the retirement prospects of its clients.   

But there is good news. A terrible retirement is not inevitable. After decades of “living off the fat of the land” (to quote former Finance Minister Trevor Manual), the South African retirement savings industry is undergoing major disruption. There are now alternatives available that promise a far better outcome to the traditional savings products that have, literally, cost savers their retirement.   

While the retirement industry is heavily regulated, that regulation seeks only to protect people from losing all their money at once. It won’t necessarily protect them from losing much of their money over time. But that is what happens when they are sold underperforming investments and charged high fees. This combination will reduce their potential annual returns by between 1% and 4%, and their total retirement capital by between 20% and 60%. It will all but guarantee they won’t retire with enough money. The unpalatable irony is that the perpetrator will likely be a well-established company with a good reputation. 

This is made possible by the industry’s deliberate complexity and poor disclosure, which obscures not just the true cost of these products (in fees and underperformance), but also the detrimental impact thereof on the long-term savings outcome. These practices have enabled the life assurance companies to thrive at their customers’ expense, without the customers suspecting a thing. Most investors still don’t know the fees they pay and how these impact their retirement fund. 

Investors are intimidated by the jargon and the many options, and they are seduced by the emotive marketing campaigns, funded from the high fees they pay. They equate reputation with future performance and confuse familiarity with understanding. They end up blindly trusting brand names or the advice from an advisor, the person who is handsomely rewarded by the companies whose products they sell (again, ultimately paid for by the hapless investor).

The life assurance sector makes it all but compulsory to engage the services of such an advisor, to help navigate the complexity. The number of available funds continually grows, and there is always increasing investment uncertainty, what with elections, and political risk, and rating reviews, and rand volatility, and Brexit, and Trump, and climate change, and ESG, and SRI, and the Fourth Industrial Revolution, and trade wars, and slowing global growth, and stalling interest rates, and inverted yield curves, and whatever else gets thrown into the ring.

With so much going on, it would be a miracle if one asset manager made sense of any, let alone all, of it, and for an advisor to know who that genius would be. Yet their advice invariably recommends the use of active fund managers to pre-empt the opportunities that will arise from the madness. 

But according to Morningstar, up to nine out of ten funds underperform the index.

It is a triple whammy for investors, who pay for investment advice that steers them to high-cost products that are likely to produce a below-average return. But this is of no matter to the industry, which generally does very nicely, earning high fees no matter how well or badly their customers fare. 

It does not have to be this way. Those in the know understand that retirement saving is not that complicated. We all have the same goal: to have the best possible chance of retiring with dignity. What then is the best strategy to achieve this goal?

The difficult part is to save diligently over the course of your working life. The easy part is to invest in a low-cost index-tracking fund. There is a large body of research showing that index funds beat more than 80% of active funds, after fees, over most long-term periods. This is true in South Africa and international markets. 

The superior performance is achieved firstly by matching the index return (something that most active managers fail to do over time) and secondly, by charging lower fees. The fees alone matter: over a diligent 40-year savings term, a 2% fee saving can increase your long-term savings outcome by 60%. Fees for individual investments can easily add up to 3% of your investment capital, comprising advice (0.75% plus VAT), administration/LISP fee (0.5% plus VAT) and investment management (1.5% plus VAT). A fair fee should not exceed 1%.

If you then add in underperformance of just 1% or 2% pa, investors could receive no more than inflationary growth on their savings, without building real wealth. They have no chance of sustaining their lifestyle in retirement.   

10X Investments is one of the companies offering low-cost products, including retirement annuities and corporate retirement savings funds. 10X Investments never charges more than 1% plus Vat. Not only do our low costs dramatically improve an individual’s chance of retiring with enough money, 10X also has an 11-year track record of outperforming the industry.

And as it turns out, changing your provider is far easier than changing the government. 10X will do a free cost analysis and comparison for interested individuals and companies, so they can decide for themselves. (Spoiler alert: more than 9 out of 10 people choose to leave the old party.)

Steven Nathan
Founder, Chief Executive (BCom, BAcc, CA (SA), CFA)

As the former Managing Director of Deutsche Bank in Johannesburg and London, Steven spent more than 10 years in equity research and corporate finance. He was consistently the top-rated Banks and Life Insurance analyst in South Africa, and was also voted best overall analyst in SA and EMEA (Emerging Europe, Middle East and Africa). During his time as Head of Research, the Deutsche Bank team was consistently rated no.1.

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