Financial advisers' worst clients of the year
Retirees who want to gamble with their nest egg or try to time the market are among the worst clients financial advisers have worked with this year.
Going against her financial planner's advice, a 68-year-old retiree with a portfolio of only R3m and no family to depend on, took a third of her money to give to an offshore outfit that claimed to be trading in bitcoin. She instructed her financial planner, Gerrit Viljoen of Ultima, to withdraw R1m from her unit trust portfolio, which has delivered a return of only 7.3% over the past five years.
In response to a pop-up advert online, she had been contacted by a person promising her huge returns. She couldn't answer any of Viljoen's questions about the company, where it was situated or what she was being charged in fees.
“A few weeks ago, things got even worse when she asked me if she could 'redeem' her living annuity and retirement annuity (RA) to invest with the same company.
“She said she was to deposit the funds in a Swiss bank account which would provide her with a yield of 23%.”
Viljoen explained to her that she could access only 33% of her RA and could not disinvest from her living annuity.
She was not dissuaded by proof that Swiss banks currently offer negative interest rates, says Viljoen.
“People in their twilight years who haven't saved enough for retirement are more prone to falling for scams,” he says.
Ultimately, a financial adviser takes instructions from his or her client.
Cape Town-based Barry O'Mahony, a financial planner at Veritas Wealth Management, dubs his worst client of the year “controlling Conrad”.
O'Mahony spent significant time trying in vain to discourage the retiree from moving his R7m out of stocks and into a money market investment, where he could earn 7.5%, before jumping back into stocks “at the right moment”.
“He retired four years ago having been a DIY investor up until then. He had a company pension, which he had little control over, and it performed reasonably well over the years. But he doesn't trust advisers in general.”
O'Mahony says Conrad likes the idea of having a financial plan until it comes to implementation. He checks his investments monthly, instead of annually, and runs spreadsheets to track the performance of his portfolio. He reacts to local and foreign negative news.
Over the past four years, the investment environment has changed. Good returns are no longer the order of the day. Cash has outperformed most long-term investments in recent years, making it tempting for investors to move. But trying to time the market is futile, and investors have a tendency to move at the wrong time, locking in losses.
“Conrad believes that he needs to do something about his investments — anything! He wants to see action,” says O'Mahony. “Changing an investment strategy from a long-term target of CPI+5% to money market is massive and incredibly dangerous for Conrad.”
Conrad may be comforted by taking action, but there will be long-term repercussions for staying in cash too long.
By moving to a money market investment, clients like Conrad are guaranteed that they will not get a negative nominal return, but they don't realise they are getting a negative after-tax real return (return less inflation). They believe they will know when to get back in the market — which is highly unlikely.
“It feels like the ultimate failure when a client forces your hand because he can no longer stay the course.”