Dangers of do-it-yourself financial planning
South Africa is seeing a proliferation of do-it-yourself buyers of financial products. The phenomenon is driven by a younger technologically literate generation, comfortable with finding information and purchasing financial products online.
While this trend can’t be ignored and the South African financial services industry needs to evolve fast to accommodate these new information seeking and purchasing patterns, “a little information can make people feel financially over confident – wrecking havoc with long term financial planning” warns Sherlock.
Without doubt the trend towards the on-line purchase of financial products reflects the global shift to social media with consumers accessing information and products online. “The shift is reflected in a growing reliance on word-of-mouth in the on-line space replacing traditional brokers, financial service advisors and the large corporations whose services they sell” says Linda Sherlock, Head of Advisory, Alexander Forbes Financial Services.
The danger in this otherwise encouraging trend is that social media savvy consumers often “use price, savings and discounts, rather than performance, to understand, rate and use the information available to them. This often leads them to apply advice inappropriately to their personal financial situations” warns Sherlock.
The result, adds Sherlock, “is that we’re seeing a flurry of once-off purchases of financial products in South Africa - without reference to any larger plan or vision in which these products link up to form an integrated long term financial plan.”
Building long term financial security is a bit like a jigsaw puzzle. Not only is it made up of many very different parts, but unless you have a plan or end goal to guide you, like the picture on the lid, there is little chance of getting it right. And even once you have the big picture, knowing to start on the corners and then do the edges because these are easier is critical if you are to complete the picture in time, that is, by retirement.
Instead, by the time man South Africans reach their fifties and sixties, they often have a range of unnecessary financial products that either duplicate each other - or are simply inappropriate for their circumstances or needs. Moreover, the opportunity cost of these random financial product purchases, measured in investment lost over a lifetime, is staggering.
“The missing link in this scenario is the bigger picture, the plan, or the overall objective-based goal, namely, protecting, preserving and growing wealth to sustain a comfortable lifestyle in retirement” says Sherlock.
In short, retirement lifestyle should be the goal. Not short term return on investment.
Unfortunately, there is another misconception in the market, namely, that financial advice needs to be linked, or priced, according to the results achieved. Commoditising advice in this way leads to short-termism without regard to the long term goals. In other words, “financial advice is not about giving you great returns, but rather making sure that the appropriate savings, investments and covers are in place so that people make the right decisions with their money throughout their lives, entering retirement able to maintain their lifestyle” says Sherlock.
Financial planning needs to focus on the outcomes, or lifestyle, that people want and can realistically achieve with the resources they have. It’ s not just about beating the market. It’s also not just about making choices based on the past performance, or the price of the product or financial option being considered. Both of these approaches are flawed as a basis on which to make a decision to purchase a product.
Certainly, historical performance is no indication of future performance, and pricing methodologies within companies are all very different. Even a single company may apply different pricing structures between its own products. “Only professional financial advice from a qualified financial advisor can help people gain an understanding of the various pricing methods, products and packages - and what they all mean, relative to individual circumstances” says Sherlock.
So, without wishing to sound old school Sherlock still believes in the intangible, though hugely valuable, benefit of a long term, often life-long, personal relationship with a financial advisor. For example, an advisor “who knows your spouse, your children, your goals and needs is invaluable should one of you die, lose your job or get divorced.” Having someone walking life’s journey with you, adjusting advice, plans and products as your circumstances change – guided by a clear view of where you need to be when you retire – is critical.
“Despite the brilliance of the technology out there this kind of old fashioned, intimate professional support is still not available in the on-line space” says Sherlock.
For example, helping newly-widowed clients find the keys to the safe, locate wills, cover costs while estates are settled, or pay university fees when the business fails, all give an indication of the kind of intangible value that a life-long personal relationship with a professional financial planner can deliver.
And it’s not only financially illiterate people who need a good financial advisor. Wealthy, financially savvy people have multiple assets and incomes and complex needs and obligations. People like these often fall into the trap of buying multiple products in the belief that they, somehow, have ticked all the boxes. Without an overall plan, and a professional advisor to align decisions and financial product purchases to the end goal, even the most comprehensive array of products is unlikely to deliver a satisfactory result.
This is especially so since when wealthy people retire they expect to maintain their higher-than-average lifestyles in retirement. Yet this is nearly impossible to achieve unless “you’ve adopted an outcomes based approach to savings, investment and retirement – guided, throughout your life, by a professional financial planner” concludes Sherlock.
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