Financial PlanningInvestment

Using a skilled financial adviser will deliver better savings outcomes

Adriaan Pask, Chief Investment Officer, PSG Wealth 

Substantial evidence shows that the global population is struggling to build sufficient reserves for a comfortable retirement. However, investors who make use of the services provided by reputable financial advisers tend to make better financial decisions. Skilled advisers support clients to approach saving in a more disciplined fashion and make better decisions. 

Putting the global savings shortfall crisis into context   

According to a Schroders Global Investor Study conducted in 2020, over 40% of investors globally fear that they won’t have adequate savings for retirement, a challenge which has been exacerbated by the Covid-19 pandemic. A 2019 World Economic Forum (WEF) report also notes that most people will outlive their retirement savings by approximately 10 years or more as life expectancy continues to increase, putting pressure on pension systems. The report concluded that “retirees in six major economies (the US, UK, Netherlands, Australia, Canada and Japan) should expect to outlive their savings by eight to nearly 20 years on average.” This is due to retirees being in an overdrawn state and employee retirement funds forcing individuals to rely on their own savings, which in most cases are inadequate. Moreover, the global retirement shortfall is projected to grow to $400 trillion by 2050.  The global savings gap is rising at $3 trillion a year in the US alone and is expected to widen even faster in emerging market economies like China and India, at growth rates of 7% and 10% respectively.  

South Africa is no different; according to the Organisation for Economic Co-operation and Development (OECD), SA has one of the lowest gross replacement rates in the world at 12%, compared to the global average of 70%. This means that on a current monthly salary of R10 000, locals have only saved enough to withdraw a monthly income of R1 200 on retirement. Perhaps even more chilling is the fact that less than 10% of South Africans have saved enough to retire comfortably, while the rest will be forced to either work for longer or save a lot more aggressively before they can retire. 

The value of sound financial planning  

A large body of research suggests that investors who incorporate professional advice into their financial planning are more likely to reach their financial goals than individuals who decline the services of an adviser. Until recently, the value of financial advice has been difficult to gauge for investors questioning whether it was worth paying for advice.  

Research from Morningstar, titled Alpha, Beta and now Gamma, illustrates the greater returns investors can generate towards their retirement by using a well-thought-out investment plan. While terms such as Alpha (manager skill) and Beta (market performance) are quite popular in the world of investing, this research introduces a new term, Gamma, which is essentially the value added by simply making informed financial decisions. This highlights the crucial role advisers play in helping clients save more. The research concluded that achieving the Gamma-type return was almost always guaranteed if investors followed specific steps (outlined in table 1). The Morningstar research showed that the retirement income for a hypothetical retiree would be approximately 31.80% higher (on a risk-adjusted basis) if they made the stipulated adjustments with the guidance of a financial planner. 

Table 1: A hypothetical retiree could generate nearly 30% more income using a Gamma-efficient retirement-income strategy that considers the below: 

Asset allocation Diversify across a blend of assets (equities, property, bonds and cash) both locally and offshore to limit downside risk.  Don’t follow performance. Don’t try to time the markets. 
Withdrawal strategy Have a disciplined and calculated withdrawal strategy in retirement. 
Tax efficiency Make use of tax-efficient products where it is sensible to do so. 
Liability-driven investing Consider spending liabilities when making decisions. Adding a liability (future expected expense) ensures that the portfolio remains optimally positioned. 

Real (inflation adjusted) current earnings yield vs long-term average 

*Data as at end quarter two 2021 Source: PSG Wealth research team 

Diversification remains key and we continue to recommend the use of multi-asset portfolios to withstand volatile market climates   

To improve your chances of achieving smoother returns, we continue to advocate the use of multi-asset funds that actively allocate assets across the asset class spectrum, both locally and abroad. Under the guidance of a reputable adviser, this can help reduce the overall risk of underperformance in your portfolio in tough market climates. 

Advisers bring value to their clients by offering benefits such as confidence and peace of mind in their retirement planning. Sound financial advice can help investors avoid emotional decision-making and rather channel their focus towards the bigger picture. 

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