Craigh Chidrawi Head of Retirement at employee benefits advisory at NMG Benefits
For the tens of thousands of South Africans whose retirement income is sitting in an umbrella fund, an investment strategy with low volatility and low administration costs might seem like the safe, attractive option.
But there’s a downside to an umbrella fund investing too conservatively and focusing more on loss avoidance than on growth potential, says employee benefits specialist NMG Benefits. Typically, South African umbrella funds provide varying levels of flexibility in the fund’s investment strategy to accommodate the wider membership of the fund and its different needs. Less flexible investments generally have low administration costs, as they’re easier to manage, while more investment flexibility results in higher administration costs. Some funds even allow employers to create a bespoke investment strategy.
For many umbrella funds, the low-cost option often invests in a ‘smoothed bonus’ investment portfolio. Smoothed bonus portfolios guarantee, or partially guarantee, the value of the money invested in the portfolio. Returns are declared as bonuses by the insurer, and these bonuses are smoothed out to ensure income stays steady through times of negative returns.
YOUR BUSINESS IS ABOUT CREATING AND PROTECTING WEALTH FOR YOUR CLIENTS.
OURS IS ABOUT HELPING YOU DO THE SAME FOR YOU AND YOUR BUSINESS.
Fairbairn Consult has a dynamic ecosystem that supports growing your practice in a way that is profitable and sustainable.
We are an innovative business with a national footprint of advisers that values you, your business, and your clients.
Give us a call if you are struggling to manage all the different aspects of your business while dealing with clients’ demands.
Because it no longer makes sense to do everything by yourself.
Fairbairn Consult is an authorised Financial Services Provider
and member of the Old Mutual Group.
The danger is that if the investment strategy is too conservative, the members’ investments may not achieve the returns needed to meet their retirement goals.
The time horizon of the membership needs to be considered. If the retirement age is many years, or even decades, away, then members can afford to be more aggressive in their investment strategy, as they have more time to recover if there is a downturn. Older members who are closer to retirement may opt for a more conservative investment strategy, depending on their plans for a retirement income after retirement.
That’s why it’s important that members are well educated around the risks of investment strategies that are too conservative. We hear many stories about taking too much investment risk, and not enough stories about taking too little risk and getting low growth from missed opportunities. When the low growth is compounded over many years, it can be devastating to your retirement income.
To counter the risk of over-conservatism, the employer or management committee must continually monitor the investment strategy to ensure that it meets the members’ investment objectives and their needs.