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Retirement funds: too complex for investors? Picture: 123RF/ALPHASPIRIT
Retirement funds: too complex for investors? Picture: 123RF/ALPHASPIRIT

The retirement fund industry faces a fundamental conflict between producing profits for owners and delivering a fair return for clients. Owners usually win the day. Salesmanship trumps stewardship; the demand for shareholder rewards outweighs the duty to serve investors.

The industry spends heavily on marketing to gather more assets, while many of its products deliver poor returns. Investors are left disappointed even as their service providers earn fat profits. These are the “elephants in the room” we have written about.

Long-term investment success rests on just a few simple and unambiguous high-level elements: align the portfolio’s level of market risk to the investment term; use index funds, as they outperform most managed funds; and minimise costs.

For their part, investors need to stay the course. Rather than try (and almost always fail) to manage short-term returns, they should manage their own behaviour, particularly how they react to market movements.   

This seems like a remarkably easy strategy. But it is not so easy to follow, for two reasons.

First, your emotions may get in the way and cause you to react to sensational headlines, the drama of big market moves and the compelling arguments of so-called experts. This drama persuades some to abandon ship and invest more conservatively. Others buy into the myth that star fund managers can reliably deliver above-average returns or avoid the next correction.

Second, the financial services industry will also encourage you to ignore it, because simplicity is at odds with the “business” of investing, which is about making money off investors rather than for investors. To that end, the industry actively promotes a complex, expensive and largely underperforming investment system to the public.

The hard truth

The industry markets a small number of funds that have done well, but stays silent on the many other funds, owned by the bulk of its clients, that have underperformed. The worst ones eventually close down, taking their poor returns to the grave. About 20% of funds tend to disappear in this way over a five-year period.     

This “business” approach conceals the hard truth that no one can reliably exploit volatility or predict where markets are going. And it fails to admit that about 80% of fund managers habitually underperform the market and low-cost index funds.

The complexity is justified on the grounds that it allows the industry to address clients’ specific wants. That is salesmanship – “making what will sell, rather than selling what we make”, as John Bogle, founder and former CEO of Vanguard, the asset manager with more than $5-trillion in assets under management, put it. Stewardship focuses on the client’s needs, but that is a far less profitable undertaking for those who live off other people’s money.

These are the thousands of asset managers, life companies, product providers, retirement fund administrators, brokers, financial advisers, life insurance agents and the many, many investment funds (1,600 unit trust funds and counting, plus all the life company funds, retirement funds and hedge funds).

They add nothing to the market return, yet they capture a large slice of it – the aggregate amount of its charges to be exact. These charges add up to billions of rand every year. Should you wonder who paid for your fund manager’s flashy new office, their luxury sedans or their marketing on prime-time TV, the answer is: you did, out of your retirement income.

The complexity they engineer exacerbates those costs. Obscure fund names, with variable designs and fee structures, impede comparison and price competition. Platforms that serve up this investment buffet add to the confusion and fee layers.

How much of their investments do some people pay away?

Dependency on advisers

All this helps create an artificial dependency on financial advisers to navigate the hundreds of options on offer. But what seems like a valuable client service is no more than the industry’s way of dressing up distribution as know-how, and sales commissions as advice fees. Adding injury to insult, the charge is recovered from the customer’s investment rather than the manager’s profit.

These costs add up in a big way. Although investors provide all the capital and take all the investment risk, they rarely receive the lion’s share of the return. The average policy-based retirement annuities sold by the large insurance companies cost close to 3% per year, roughly made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management (excluding VAT).

In the context of a consistent 40-year savings regime, someone paying 3% in fees – rather than, say, 1% per year – receives almost 50% less money at retirement. That is the harsh reality of investment costs: they compound in an unexpected and dramatic manner and have a disproportionate impact on the long-term savings outcome. The aforementioned Bogle, who is also the pioneer of index investing, calls it the “tyranny of compounding costs”.

When the national Treasury released its first Discussion Paper on Retirement Reform (“Strengthening retirement savings”, 2012), then finance minister Pravin Gordhan called for standardised solutions and default options that do not require financial advice.

He believed this would aid price competition and eliminate the unnecessary choice and complexity that add to cost, confusion and uncertainty. The paper encouraged greater use of passive investment management, particularly in the retail sector.

A select few providers, such as 10X, do offer such standard solutions, which obviate the need for advice. The 10X retirement annuity is available directly online, and already incorporates all the essential elements of long-term investing in its design: low fees; life-stage portfolios that automatically align the asset mix to the investor’s time horizon; index funds that avoid active management risk and market timing; and broad diversification coupled with disciplined rebalancing.

It hasn’t become the industry standard, though, because the “elephants in the room” trampled Gordhan’s default proposals and reduced them to ineffective guiding principles. But, while the Treasury had to give in to industry pressure, its position on what it deems best practice is still public. This should be the first point of reference for retail investors searching for an optimal solution.   


About 10X Investments

In an industry famous for mammoth promises on a large, confusing array of products, most of which disappoint, 10X uses a simple, proven strategy to give individual and institutional investors the best possible chance of reaching their retirement investment goal: invest 15% of your income for 40 years in a high-growth index fund and pay fees of 1% per year or less.

10X relies on index tracking to deliver the returns of the market as a whole. Fees are a valuable tool for predicting future investment performance and the fees on 10X’s retirement annuity are less than half the industry average. 10X invests in a mix of shares, property, bonds and cash to maximise growth and automatically adjust portfolios as savers get closer to retirement to reduce risk.

Already got a retirement investment? Nine out of 10 investors could do better with 10X.

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This article was paid for by 10X Investments.

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