Financial advice in retirement – a real value-add

By: Sumayya Davenhill, Head of Marketing & Retail Client Services at M&G Investments

Sumayya Davenhill

The value of financial advice is a tricky thing to quantify. Certain elements are measurable against investment performance while others are more behavioural aspects and therefore less quantifiable. A study by T. Rowe Price found that investment selection is the most important aspect to people who pay for advice. Retirees value investment selection and asset allocation the most, whereas people who are still working value retirement and tax planning more.

For retirees, financial advice around choosing underlying funds and making asset allocation decisions aligned to a broader retirement plan can be a critical success factor. To quantify this, we looked at a few of South Africa’s largest LISPs (Linked Investment Service Providers) and analysed their pre- and post-retirement books (in other words, the underlying investments according to ASISA categories of retirement annuities [RA] and living annuities [LA]). 

From the research and historical returns, we estimate that de-risking at retirement can result in an investor losing out on 28 months of retirement savings because their total return could likely be some 0.8% lower than if they had not de-risked.

We share some considerations around maximising the value of financial advice for retirement planning.

Conduct annual reviews and rebalance portfolio

Doing an annual review with your financial adviser throughout your pre-retirement and post-retirement journey is key. Having these reviews annually helps to assess how your circumstances may have changed, which may result in the need to adjust your investment portfolio accordingly.

For example, when you reach retirement, you’re at an important point in your investment journey as your retiremen savings value is the highest at that point in time. A financial adviser can help you choose and structure your annuity to suit your retiremen lifestyle while building an investment portfolio to help you achieve this. Should you choose a living annuity to secure your retiremen income, a hands-on approach is essential, especially during periods of market volatility, as the income is not guaranteed.

Be practical

An important part of a financial adviser’s role is to address a client’s inherent biases and provide guidance around the best approach to meet their retirement income needs while maintaining capital funding levels with the returns achievable under the current market conditions. Advisers need to maintain a delicate balance between respecting clients’ wishes and ensuring they provide sound financial advice.

During your retirement years, financial advice becomes even more important. In the case where an investor chooses a living annuity to secure their retirement income, there are several considerations and risks to keep in mind. 

With living annuities, a retiree can choose the amount of income they receive (or drawdown from their total savings), ranging between 2.5% and 17.5% of the total value of the policy per year, as well as the intervals at which they receive these payments. The annuity is structured to provide flexibility for the annuitant in terms of their income while still being invested in the market. Because the living annuity income is not guaranteed and can be affected by market fluctuations, the underlying investments and drawdown rates need to be managed carefully to mitigate longevity risk, which is why guidance from an adviser can go a long way.

A trend typically associated with market volatility is for investors to move to cash, as we’ve seen in the most recent six-year period (to end December 2022), which was riddled with large market moves, including the Covid crash, the Russia-Ukraine war, etc. Where an adviser would add value is by helping you navigate through the periods of uncertainty and provide information on the return opportunity you may be foregoing by switching into less risky asset classes or funds. Often, there are other options to consider, such as multi-asset funds, which an investor may miss out on by not consulting with their adviser before switching, or making hasty financial decisions when markets bottom out.

Partner with a professional

Fostering a good working relationship with a qualified financial adviser can go a long way towards helping to achieve your investment goals, for retirement or otherwise. Taking financial advice from multiple sources can muddy the waters of your financial strategy. Similarly, when you sell a house on an open mandate, you might get multiple, conflicting offers. But with a sole mandate, you’re likely to receive an offer that is tailored to your requirements, and in line with realistic market expectations.

While it’s tempting to follow a neighbour’s investment tips, your circumstances are unique and require a tailored solution that keeps up with you as your life changes. A qualified financial adviser can help you sift through the noise and myriad financial tips from friends, family and the media, among others, and help to keep your plan on track.

Consistency is key

It helps to have an adviser that walks the journey with you through the various phases of your life. In this way, they are clued up on your personal circumstances and portfolio as you progress. An adviser will also help you stay focused on your retirement goals.

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