Dave asks: Is there a way to invest the two-thirds of my retirement annuity when I retire without incurring broker charges? I ask this since the long-term return is about 11% and taking inflation at 6% that leaves 5% available as an income, without depleting the capital. With brokers’ fees at 1,5% to 2,5%, nearly half of the income after inflation is paid to the broker. How can I structure this investment so that the lion’s share of the real income winds up in my pocket, and not the brokers?
Maya replies: This raises an excellent point and one the investment industry has to confront. Going into a low-growth environment, annual advisor fees of over 1% are just not sustainable. Although many advisors waive an upfront fee in favour of the annual fee I have seen living annuities with total upfront fees of 8%. So by the time you have paid the advisor fee, the product house fee, the platform fee and the underlying asset management fee you have lost up to 8% of your retirement savings. One really needs to interrogate fees as they make a significant difference to your long-term performance.
There are two options open to you. Firstly you can invest directly into unit trusts that provide living annuity platforms such as Coronation, Allan Gray and Investec for example. It is a less expensive option but you are exposed to a single fund manager and you also have no advice. You need to make sure you are comfortable that you do not need advice on your retirement strategy.
Ideally you should get advice from an expert who can calculate your retirement needs and recommend investment strategies. Having an independent and unemotional bouncing board is very valuable, but you can decide how you pay for that.
There are financial advisors who run fee based practises. In these cases the advisor only charges for his or her time. The fees range from R500 to R1 000 per hour. They would do a full assessment and make recommendations and you are then free to implement them. You would meet once a year to re-evaluate your financial plan and make any necessary changes. You would then only pay for that meeting.
Just one word of warning however, make sure the practise really is truly fee based. Many say they are but they still charge some annual management fee on the assets.
You can contact the Financial Planners Institute to find out a fee based practise in your area.
Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.