Popular off-the-shelf investments that target CPI plus have serious negatives attached, though saver-investors fail to realise this as they rarely look beyond the inflation-busting label.
The consumer alert comes from Integral, a boutique asset and wealth management business that prefers a personalised investment approach.
“CPI-plus funds have become an easy ‘sell’,” says wealth management chief executive Lara Warburton. “They have a place in the investment product mix, but some key assumptions made within the CPI-plus space should be challenged.”
One assumption tends to be made by clients; the second tends to be made by financial advisors.
Warburton explains: “People assume CPI means their household’s prevailing inflation rate. In fact, it’s a national average that does not pretend to measure the inflationary impacts facing a specific family. Any family doing the month-end shop will tell you the price increases they pay are way above official averages.”
Some groups face particularly stiff pricing pressures.
“If you’re near retirement or in retirement the rate of increase in your medical costs will almost certainly climb way above CPI,” says Warburton.
“If you’re younger and your children go to private school, you are also exposed to inflationary impacts way above a weighted average for consumer goods and services.”
The danger is that CPI-plus investors may assume these products deliver real wealth-building potential comfortably above inflation when this may not be the case.
Financial advisors, says Warburton, run a different risk involving misidentification of client needs.
“Categorisation on a CPI-plus scale can be rough and ready,” she cautions. “CPI plus 2% may fall neatly into the ‘moderate risk’ band and older clients may self-identify themselves as moderate risk investors.
“From there on, the product sells itself. The advisor ticks the appropriate box and the sale proceeds. But close examination of a client’s circumstances and assets might indicate that much higher growth should be sought.
“The mismatch between the tick in the CPI box and the client’s personal reality can be the difference between adequate provision and retirement in poverty. That’s why Integral believes in personalisation, not categorisation.”