Could Robo-Advice Contribute to a More Comfortable Retirement?

The Sanlam Benchmark Survey is the most referenced research paper in the retirement funds industry in South Africa, bringing together the views and practices of over 1,000 industry stakeholders.  BVA BDRC has been Sanlam’s research partner of choice for this important study for more than ten years.

The Benchmark Survey is designed to promote discussion and thought leadership in the industry, with the ultimate goal of guiding South Africans towards better retirement outcomes.  But, while there has been considerable change in the industry in recent years, we continue to see many retirees struggling to balance their retirement income with the growing cost of living.

In a bid to find a solution, based on robust research data, we introduced a booster sample of affluent pensioners to the survey design to learn their ‘secrets’ in achieving a comfortable retirement.  In 2016, affluent pensioners were defined as those earning R35,000+ per month in annuity income.  The results confirmed many of our previously held convictions that certain behaviours during the course of one’s working life do lead to better financial outcomes in retirement.

When we compared the research results amongst the affluent pensioners against those of the ‘average’ pensioner in the core survey, they were startling and confirmed that affluent pensioners…..

1. start contributing to a retirement fund earlier and contribute for longer
2. save through additional investment vehicles (notably Retirement Annuities) in addition to their company provided retirement fund
3. preserve their retirement benefits when they change job (rather than take the cash)
4. seek professional financial advice both during their working lives and post-retirement.

The first three insights, certainly, were to be expected.  The latter insight, however, is an interesting one, particularly as the research shows that the average active member often harbours negative perceptions of professional financial advice, seeing it as expensive or untrustworthy, i.e. the advisor has his own interests at heart rather than those of his client.  In the past, we have seen evidence to support these views, but looking to the future, could technology offer a potential solution to counter these negative perceptions?

In the 2016 Survey we explored the concept of “robo-advice” amongst industry stakeholders.  Robo-advice is a relatively new development in South Africa.  It is essentially an online wealth management tool whereby a consumer – in this case, a retirement fund member – inputs his details, such as his retirement goals and the minimum contribution he is prepared to make each month, and he is provided with automated, algorithm-based portfolio management advice rather than advice from human financial planners.

When we tested the concept amongst Principal Officers of standalone retirement funds, 43% said they were willing to consider offering robo-advice to members to help them plan their retirement more effectively.  Most (8 in 10), however, want a human financial advisor to be available at the end of a phone as back-up to provide reassurance to the member, if necessary.

The concept also received considerable support from younger active members of retirement funds, notably those under the age of 30.  They see it not only as a cost-effective means of accessing professional financial advice, but also like the fact that it is less time consuming than face to face meetings and addresses the potential negative impact of receiving biased advice.  Some young members, especially those who already have a strong savings culture, see robo-advice as a motivator in terms of active retirement planning, particularly if reporting can be customised to enable wealth tracking over time.

Going back to our affluent pensioners, we find that significantly fewer than average…..

• have post-retirement debt
• had to use the lump sum they received at retirement for living expenses
• have a shortfall between their monthly income and their living expenses

And significantly more affluent pensioners are able to afford a private medical scheme in retirement.

Perhaps by embracing digital tools, such as robo-advice, South Africans can move one step closer to achieving the financial security and comfort they strive for in retirement.

For further information on robo-advice and to access the full results of the 2016 Sanlam Benchmark Survey go to: www.sanlambenchmark.co.za or get in touch.