The stats on South Africans and their preparedness for retirement are for the most part, dismal. With nine out of 10 people not being able to afford retirement when it comes along. The reality is that South Africans are not great savers, and very often, monthly contributions to retirement simply don’t cover what is needed at the end of the day, this is added to by a confusing retirement saving vehicle environment, a mistrust of financial advisers, opaque fee structures and earnings on retirement savings that do not live up to their charges. Steven Nathan of 10X Investments, untangles the basics of what savers should be doing at the very least, and what we can expect to see in the retirement fund industry in the future, on the back of the legislation changes coming in. Thankfully, it’s good news. – LF
ALEC HOGG: According to Steve Nathan, the Executive of financial services provider 10X, over the past two decades, nothing much has changed in the retirement industry. In fact, things might have gotten worse. He’s in our Cape Town studios. I read the piece that you were quoted in on Fin24 Steve, and described before (in the introduction to this program) that you’re a bit like Don Quixote. You’re having a full go at this retirement funding windmill, but it’s nothing new and in fact, you’re a lot more powerful than a man with a lance is. Are you making much progress? Are people starting to listen?
STEVEN NATHAN: I think they are, Alec. I think it’s a combination of what 10X is saying as well as what National Treasury has picked up very heavily in their retirement reform, where they’ve been very critical of the industry practices and they’ve highlighted (almost verbatim) exactly the same issues that we at 10X have highlighted. The bottom line here is that the retirement saver is getting a poor deal in most instances, and that poor deal means that they fail to retire with enough money. There are simple ways for them to improve their outcomes and that’s really the message we’re trying to get across.
ALEC HOGG: Steve, you’re an interesting guy. You’re a top-rated analyst on the JSE. You could have stayed with the money. I’m sure you were earning a seven-figure salary long before it became the norm for investment analysts and yet, you went in a different direction – yet, you’ve gone into this very challenging field of yours, of trying to educate people, trying to change, and trying to disrupt an industry. What motivated you? What clicked for you there?
STEVEN NATHAN: Well, my interest in finance really stems from trying to understand how financial markets worked, how we could allocate capital efficiently so that everyone benefits, so we create win-win’s for providers of capital, and for people that use capital. However, when I entered the investment industry and I actually analysed these financial services companies, I saw the practices that we were doing really weren’t in the best interests and they certainly weren’t what we learn as investment professionals, which is really ‘allocate capital sensibly. Have a long-term view. Be efficient. Minimise fees’. As you say, I had a wonderful position both in South Africa and globally, meeting the top CEO’s all around the world, but my conscience really got the better of me and I said ‘there’s a big opportunity to give something back’. We’d like to be successful as a company, but that’s really a secondary incentive.
ALEC HOGG: When you have to highlight the issues that are keeping you awake at night, those issues that actually pushed you in this direction, are fees at the top of them?
STEVEN NATHAN: There really are a couple of things. There are a few ‘and’s’ here. You have to do simple things well. It’s not really that ‘I have to do this or that’. You have to do a few simple things well and really, we break it down into two main components. Firstly, you have to be a diligent saver. We’re entering Savings Month and we know that South Africans aren’t great savers, so we need to stress to people ‘for retirement, you should be saving 15 percent from your first pay check to your last pay check for 40 years’. Secondly, you have to earn an optimal return on those savings, and that’s really, where the industry comes in because it’s our responsibility to provide you with a low-risk path that’s likely to deliver high returns.
That is really a combination of ‘where do I invest my money for that long-term period’ and ‘what fees do I pay’, so you have to get the right portfolio and you have to get that at the right fee. If you do those things correctly, save sensibly, invest sensibly, and minimise fees, your chance of success is dramatically higher.
You should actually almost guarantee that you’re going to have enough money. We know that in South Africa, nine out of ten people fail and they’re doing one of two things wrong. They’re either not saving appropriately, or they’re not earning the optimal return on investment.
ALEC HOGG: I had this conversation with Anise, who’s in her mid-twenties, and she was saying to me that she’s worried that she’s not saving enough. My response to her was ‘you can actually invest in yourself. Keep building your own business. Keep educating yourself – maybe do another degree etcetera’ – that’s also an investment, not necessarily money that goes into retirement. What’s your reaction to that?
STEVEN NATHAN: Without a doubt, you have human capital… Early on, there’s a lot of human capital. You want to invest in yourself. You want to improve your earnings potential and your earnings power. As you know Alec, one of the most important rules of long-term investing, is compounding. You have to start saving early on. You should do the others as well. As I said, these are ‘and’s’, they’re not ‘or’s’. It’s not as if I have to invest in myself or invest in my retirement fund. You just have to do both of those and all of those other issues that I mentioned, consistently. If you wake up to late…if you start saving, not with 40 years to go, but with 30 years to go, the amount you save – that 15 percent – has got to go up by at least 50 percent, and that’s unaffordable for most people.
ALEC HOGG: It’s a smart thing to start saving early and as you say ‘compounding’. Isn’t that the eighth wonder of the world? We did see in the Budget that there was some comment about the new retirement playing field. How do you think it’s all going to work out in the next few years?
STEVEN NATHAN: This is a journey that National Treasury’s on and we’re really at the very early stages. From March of next year, we have the first tangible legislation coming into place. Quite simply, what National Treasury has said is that retirement savers are getting a raw deal and the issues they’ve raised is that it’s a very complex environment. There’s too much investment choice out there. Investment choice leads people to seek advice. Sometimes that advice is conflicted and sometimes that advice is very expensive. Investors are using active managers that, on average, are delivering returns below the index and they’re paying high fees. Treasury has to address quite a few areas. The one area they’re currently doing is the complexity, where they’re saying we have Pension Funds, Provident Funds, and Retirement Annuities and there’s a very complex legislation, which is completely unnecessary.
They’re therefore starting to address that, so I think that hopefully, in five years’ time and maybe a bit longer than that, we’ll have a very different retirement fund industry that will be much simpler for people. It will be much better for them to get improved value for their savings, and it will be much better for them to understand the difference between products A, B, and C where currently, they have no idea what the differences are. A big drive from Treasury is to have a default – is to say ‘people, we’re going to show you a low-risk path to get you to retirement with high confidence’ and that default should have all the sensible investment principles that I spoke about earlier.
ALEC HOGG: So it’s very consistent with the way that you’re looking at it. Steve, there are lots of good financial advisors in South Africa. We always tend to – in anything in life – look at those in margin who are maybe not that good. We make exceptions of the bad guys. How are they changing? How is the financial advisory world changing and supporting ideas like yours?
STEVEN NATHAN: Well, as you say, the financial advisors have a very important role to play because people don’t proactively save for retirement themselves, so they need to be nudged, they need to be encouraged, and they need to be hand-held. What a financial advisor should do is give you a retirement plan – a time and plan to say you need X amount at retirement in order to meet that. We’re going to have to save a certain amount and we’re going to have to earn a certain amount on those savings. The financial advisors are there to give you a financial plan, to encourage you to save, to get you to save today and not next year, to hold your hand when markets are volatile, and you’re thinking of changing course. That’s the role that financial advisors should play. As you say, some of them do play that role, but a lot of them aren’t playing that role. A lot of them are really looking to maximise their commission.
They’re looking to put investors in higher products that have higher margins for them, and the Regulators are looking at that. The Regulators are looking at an incentive structure for advisors that truly puts the client’s interest ahead of the advisor’s interest, and that would really be by moving away from commissions. You therefore pay a professional fee for your service as you would pay a tax advisor or a lawyer, rather than depending on how much money you have to invest or the product, you invest in.
ALEC HOGG: Well, I told you there was good news in today’s program. That was Steve Nathan, Founder and CEO of 10X Investments.
