Build your nest egg while you still have the means

In a country where high net worth individuals (HNWIs) seek to play an active role in the economy for as long a time as possible, South Africa’s wealthy do not view investment as the path to early retirement.

According to Barclays Wealth’s last instalment of the Wealth Insights survey (Volume 11: “The Changing Wealth of Nations”), findings reveal that in other markets, including Latin America, Europe and Asia Pacific, HNWIs invest to fasttrack their ambition of early retirement.

These super-wealthy seek to accumulate more wealth as a means to not only gain respect of friends, family and peers, but also for the easy access it allows them to high-quality luxury goods and material possessions.

In Europe, more specifically, the wealthy prioritise their spend in terms of leisure travel and ‘lifestyle accessories’, including décor.

“Our South African wealthy have a different approach to investment and support a more humanitarian definition of wealth: they invest for the future: their wealth is about the future for themselves and for their families, and to them, wealth is an opportunity to create a legacy,” offers Absa Wealth chief investment officer, Philip Bradford.

He believes that “this says something about our values, the vision and the foresight” of South Africa’s wealthy.

“Around the world, it is a well-known fact that wealth only lasts three generations, and

I would argue that for this reason, particularly in South Africa, we find that our wealthy want to remain active in the economy for as long as possible,” says Bradford.

“Our boardrooms are full of executives who have created wealth from the bottom up and want to retain it, multiply it and have control over where it is spent for as many years as they can.”

New money/new vision

The combination of an accelerated growth in the ranks of the wealthy, demographics of global ageing, increasing access to quality information on the wealthy and their portfolios, and the sophistication in technologically advanced solutions have made wealth management one of the fastest growing and highly competitive segments in the financial services industry.

Wealth has passed to the new generation, either from huge intergenerational transfer or from the enormous shift as baby boomers retire; it has moved into the hands of the ‘new wealthy’ who are more technologically skilful and accustomed to making financial decisions and participate actively in the management of their wealth.

While the rise of the world’s younger generation of wealthy could be debated, the Digital Age – which fast-tracked the Information Age at light-year speed – is undoubtedly a key contributing factor.

The new breed of the wealthy has had easier access to real-time market and investment information. For most, they have been able to monitor their investments much more closely than those from the older generation who, according to the survey, have only become a little more involved, and kept themselves more up to speed with their investments since the downturn in the economy.

The growth of the new affluent segment of wealthy and the enormous size of transfer of wealth changes the characteristics of client/ adviser behaviour in respect to:

• Demographic and economic shifts, causing the majority of affluent assets being with the ‘new wealth’;
• Increased expectations and demands for more personalised offerings; and
• Demand for transparency of portfolio performance and significant self-directed involvement with investment decisions

There is a noticeable difference in the interest of HNWIs in sustainable investment according to age, gender, wealth origin and wealth bands.

The younger generation of wealth owners are more inclined to invest sustainably, as they demonstrate a greater appetite for social entrepreneurship, and are more attuned to this investment class.

The younger generation of the wealthy, women in particular, show a keener interest in sustainable investment.

Bradford adds: “An increasing number of high net worth individuals, under the age of 40, acknowledge and believe that they have a responsibility to participate in a more meaningful way in their respective country’s local corporate social investment (CSI) and sustainability programmes.”

The most important sustainable issues are climate change, renewable energy and socioeconomic development. The demand for sustainability criteria as an offering is growing largely due to a generational shift in thinking about capital growth and preservation.

The reality: retirement planning

“Most new high net worth individuals are ‘self-made’, as opposed to the majority of

those from the 1950s and 1960s who inherited their money,” says Bradford.

“Today’s wealthy investors are more knowledgeable about investment alternatives and are generally less risk averse than the investors of 20 years ago.”

To compete successfully, wealth managers will need to modify their operating models to create new client experiences. Specifically, those who want to compete in the large affluent wealth management services market will need to build trusted personal relationships on a mass scale.

While estate planning and other similar issues may not be a priority for current earners and investors who are in the wealth accumulation stage, these issues move to the fore as one approaches retirement.

This shift in priorities not only results in a change from using growth-strategy investment products to those of income-producing ones, but also a change in the amount of time required from an investment adviser to support retirees or near-retirees.

Wealthy retirees demand a more ‘hightouch’ model of interaction with their financial service providers, one with which wealth managers are well versed.

While the number of wealthy men far exceeds that of wealthy women around the globe, women from all walks of life live longer than their male counterparts.

“Across the globe, in a diversity of cultures, we know that women have a longer lifespan than men. So wealth managers who are worth their salt ought to be advising their wealthy women investors on wise investments for the future, which not only preserve their wealth but also their desired lifestyle after retirement,” remarks Bradford.

It may seem unnecessary, at first glance, to think that someone with millions of dollars would not need to engage in retirement planning in the way a person of more modest means would.

The retirement planning needs of ultra high net worth investors differs from those who rely on company or government pension funds, but retirement planning is still required.

“Even those who are considered high net worth individuals – with assets ranging from R15 million to R30m and above – can place their lifestyle and legacy in jeopardy if they do not have a realistic retirement plan that takes into account a variety of risks and objectives, along with the discipline to adhere to it through the inevitable seesaw of market conditions.”

Retirement saving shortfalls run up and down the income and wealth scale. In some cases, shortfalls can be worse for people with high earnings.

The overarching challenge confronting all retirees and pre-retirees is to have sufficient income to meet their needs and maintain a particular lifestyle for many years into the future – a goal that is simple to state, yet requires careful planning to achieve.

HNWIs confront many critical issues relating to retirement planning: having to make certain assumptions about the future of the economy, inflation and their own life expectancy; and settling on an asset-allocation plan to ensure they meet their lifestyle requirements while having enough money to provide for, and transfer wealth to spouses, children, grandchildren and charities.

“People often focus on the accumulation phase of retirement planning, not how much they will need after they stop working or how long they will need it. People tend not to think about mortality; it’s a question they are not willing to face,” comments Bradford.

“Wealthy investors need to assess both the historical annual returns for investment portfolios of stocks and bonds over different time periods, for example, and catch a glimpse of the probability of outliving their assets over varying retirement lengths, varying withdrawal rates and varying asset allocations.”

Inadequate retirement planning can leave a wealthy person working for longer than he/she had planned. Even the ultra-wealthy are finding that retirement age has to be pushed out to later years because they may not yet have enough to live on if they stopped working.

“Over the past few years, I have seen clients who had millions of rand in assets, but who were surprised to learn from analyses of their financial situations that if they wanted to continue their passions for art collections or vintage car, their annual spending needed drastic reductions,” says Bradford.

Going backward in terms of lifestyle and income hurts people, and is felt more negatively than making progress toward a goal. That may mean that many high net worth investors actually require more assets during retirement than they were expecting.

If investors are unwilling to cut back on their expenses, they have to ensure their assets grow in value.

Some investors ready for retirement may have their assets tied up in a business and, as a consequence, have relatively little liquidity.

These investors eventually face two critical decisions:

• First, they must sell their businesses at the right time and at the right price to maximise the financial rewards of many years of work; or
• In the process, they become inheritors of ‘sudden wealth’ as a result of a ‘liquidity event’ and finding themselves confronting a second difficult task – properly diversifying assets to reduce risk by choosing from an array of investment choices.

Retirement priorities

For most ultra high net worth individuals, retirement planning is as much about estate planning as it is about retirement planning. It is as much a matter of the money you want to leave for others, as it is an issue of the amount of money you will need for yourself for the rest of your life.

Bradford believes that the comprehensive way to think about retirement planning for the wealthy is to divide the task into a hierarchy of segments: “Me, My Family and the World”.

First provide a lifestyle for yourself with which you can live. No amount of money, by itself, is necessarily enough. Look at the assets you have today and the lifestyle you want in the future.

Then decide how to provide for your spouse, children and grandchildren. The issue of how much money to leave children and at what age is particularly sensitive, but a critical issue nonetheless.

Lastly, decide if you would like to provide for charities or other CSI programmes as part of your legacy.

“What is important is whether your investments are meeting your personal needs, vis-à-vis, your retirement goals,” says Bradford.

“When markets are going up, many investors want to assume more risk. When markets are going down, investors tend to want to take risk off the table. But the best way to achieve your goals is to stay the course that best meets your financial goals.”

The approach to managing HNWIs is changing. The days when a single adviser could function as a one-stop shop are gone. Today, a holistic framework that includes a chief strategy officer, a risk management professional, an accountant and others, delivers greater efficiency.

While some investment advisers try to shortcut this process, by emulating the investment strategies of large pension funds, an individual portfolio presents different challenges.

The actual costs of retirement and the cost of longevity need to be considered and the client’s spending rate needs to be examined to see if it is sustainable.