The abuse that I have received over the past week from some financial advisers is quite incredible. It seems, in the view of a few, that we should not have published the report last week by actuary Rob Rusconi on what costs can do to the potential returns of your retirement savings.
Obviously a lot of readers, having read the report, have voiced objections to their financial advisers about the costs, particularly those of retirement annuities provided by life assurance companies.
This week I was told that by publishing the report I am wrecking the financial services industry; I am confusing you the reader; and I am encouraging you not to save for retirement.
What nonsense. Personal Finance has over the years concentrated extensively on the need to save for retirement. At the same time we have also pointed out the pitfalls.
In fact, I consider retirement savings so serious that this year I published a book, Retire Right, spelling out what you need to do and what you need to consider in the build up to retirement, at retirement and post retirement.
This is what Personal Finance has repeatedly said over the years:
- It is essential that everyone saves for retirement. It is in your own best interests.
- It is not in your best interests for the financial services industry to treat retirement savings as a pig trough to dip into unreservedly.
- It is not in your best interests that financial services companies allow financial advisers to give advice and sell retirement savings or any other products without first ensuring that the people giving the advice are properly qualified to do so.
- It is not in your best interests when the financial services industry does not make its costs absolutely understandable to you and your adviser.
The object of Rusconi's research was to establish the potential loss to your retirement savings as a result of costs. It is important that you know exactly how costs will affect your savings when you choose a retirement savings vehicle or any other financial product.
Obviously there will always be costs. It is the quantum of the costs that matter and whether you are receiving value for money in paying those costs.
For financial advisers to now shoot the messenger, namely Personal Finance, or the researcher, Rusconi, does not solve the problem.
Financial advisers should be putting pressure on the financial services companies to provide costs in an understandable format so that they can give you the most appropriate advice and you can understand the basis of that advice.
Rusconi's research is far from complete for a number of reasons. It did not, for instance, cover the costs of saving for retirement through an umbrella fund, where a financial services company provides a single retirement vehicle for numerous employer groups; nor did it deal with the costs of retirement preservation funds.
Rusconi also admitted that he had found it difficult to get full details of the costs from financial services companies.
The education of consumers about financial services and products is moving into top gear, and not a moment too soon. The Financial Services Board is rolling out an education programme, and, in terms of the Financial Services Charter, financial services companies have to spend money on educating consumers.
Education has been the main aim of Personal Finance since its launch almost nine years ago. If you are informed, you are less likely to be ripped off and more likely to build your wealth. We published Rusconi's research as part of this commitment.
Information that is aimed at educating you, however, must be accurate and clear. Here's an example of a shoddy consumer education campaign, followed by an example of a good one.
How it should not be done
Some companies need to take more care about the advice they dispense. Recently I received a press release from a financial services company which referred to the unclaimed benefits retirement tax (See Fund for unclaimed benefits).
Among other things, the press release stated that the introduction of the unclaimed retirement benefit tax is yet another reminder to individuals that they must ensure they move their benefits within the six-month period or become liable to pay tax on that benefit.
This is untrue. The tax only applies to unclaimed benefits. You are quite entitled to leave your retirement savings where they are until you retire. This is known as taking a deferred pension. The money will not be subject to tax. The tax only applies to unclaimed benefits.
The press release goes on to state that when you move your benefits, you have four options, including placing the money in a preservation fund or a retirement annuity (RA).
The upfront costs of transferring to a preservation fund or an RA are about six percent of your retirement savings. Then you have all the other ongoing costs, which can eat the heart out of your retirement savings. This is according to Rusconi's research.
Incorrect information like this is unacceptable, particularly when it forms part of an education campaign and as a result of it, you land up being driven into a high-cost product.
How it should be done
Recently I was at a fundraising dinner hosted by a non-government organisation, You & Your Money. Among other things, You & Your Money gives free advice to individuals on how to manage their money. It's aimed at people with high debt, particularly those with micro loans.
You & Your Money coined the slogan Debt Sucks which, you may recall, Finance Minister Trevor Manuel used in his budget speech earlier this year.
Manuel, who was the guest speaker at the dinner, paid tribute to You & Your Money for the work it is doing to slacken the noose that is choking too many South African families.
He says debt in itself is not a bad thing. It allows us to fund our ideas for the future: To leverage today's productivity and to borrow from tomorrow's energy.
But, Manuel warns, debt can be explosive if not handled carefully. All of us are well aware of the grim trauma that over-indebtedness exacts on a family. All of us have seen the hollow stare in the eyes of a family as the shadows of the omashonisa (loan sharks) loom.
People who operate in this environment don't give a damn. They only care about how much they can squeeze out.
But, as Manuel acknowledged, there are those who care. They care enough to give of their time to start organisations such as You & Your Money.
Since 2000, You & Your Money has helped 436 people get on top of their debt. This help has not only been in education but also in overcoming debt and taking legal action when the debt has been illegally increased.
Started by three people, You & Your Money has now grown into an organisation that receives international funding and is supported by legal, financial and social experts who volunteer their time and expertise.
The number of people it has assisted may be relatively few, but the example it is setting and the real education it is providing is significant and an example to the financial services industry.
Incidentally, the one way You & Your Money makes money is by providing educational courses for employees of companies. For more information go to: www.youandyourmoney.org.za