What's Happening?

Even if you can, doesn’t mean you should



“Once a plan has been implemented, it is important to continuously remind your client that sticking to the plan is crucial.”

This comes as no surprise, but us as human beings prefer immediate gratification. In fact, research indicates that 55% of people will prioritise immediate consumption over putting money away for the future. This is known as ‘present bias’ – we don’t like thinking about the future and we mistakenly assume we will have time to make up any deficit by starting to save and invest later. I am sure that this sounds very familiar to you as a financial adviser, and you probably encounter this too often with your clients.

Robbing our future selves

The reality is that in most cases this human preference and consequent action will materially impact our standard of living when we retire one day. The unfortunate effect of this bias is that the average saver will have reduced their retirement money by as much as 12%. And naturally, this translates to a 12% reduction in their income during retirement.

I am convinced that you often try to counteract this behaviour by encouraging your clients to start saving and investing as early as possible – we all know the benefits of compound growth and the meaningful impact this can have on our clients’ retirement investments.

Stick to the plan

However, an aspect that people often overlook is to persist with this plan – something that is naturally negated by the urge for immediate gratification. Once a plan has been implemented, it is important to continuously remind your client that sticking to the plan is crucial.

In this context, I do not only refer to the amount being invested, but also to the investing strategy and asset allocation plan. In research conducted at Momentum Investments, we found that up to 6.9% of a client’s yearly investment return was destroyed by the wrong behaviour during the Covid-19 pandemic. This “behaviour tax” – lower investment returns directly linked to an investor’s behaviour – is an expensive price to pay and typically leads to worse financial outcomes, especially if it compounds over 20 to 30 years until retirement.

Two-pot problems

A new risk that is emerging for people investing for retirement is the soon-to-be-implemented change in regulation known as the “two-pot system”, which will allow retirement savers partial access to the money in their retirement funds, even between job changes or resignations. Although the industry appreciates the need for some people to have access to money to survive, the detrimental effect on their retirement plans should not be underestimated. This is certainly an example where immediate gratification, even for valid reasons, can have a material negative long-term impact.

Our view is that financial advisers can play a meaningful role in coaching their clients to not only understand the impact of these withdrawals that will be allowed by the new regulation, but also to influence their behaviour so that they can try to avoid withdrawing money from these investments at all costs. We believe that withdrawing retirement money should be a last resort when liquidity is required.

Source: Momentum Investments Sci-fi Report 2022, January 2023