You won’t know who Tom Palone is, so I’ll jump right in and help you out.
He was the subject of an article on the Bloomberg website on June 23 this year. He’s not a fund manager, economist or business mogul who became a billionaire before the age of 30.
Instead Palone (77) was former vice-president at dental care company Oral B who, at the peak of his career earned a six-figure salary in US dollars and flew first-class around the world as a business mover and shaker.
Now, seventeen years after his retirement, he is flipping burgers and serving drinks at a golf cub where his weekly earnings are what he used to earn per hour while employed at Oral B.
The only reason I did not skip this article was that my wife previously worked at the same company, also in marketing, and I asked whether she used to know Palone, whom she didn’t.
Palone is one of 7,2 million Americans older than 65 who were employed in the US economy last year, an increase of 67% compared from a decade ago according to US government data. Yet 59% of households headed by people 65 and older currently have no retirement account assets, according to the National Institute on Retirement Security. Most of these people will simply work until they drop dead or are too weak and feeble to work anymore.
This is a horrific statistic from one of the richest countries in the world.
It’s also about to get worse. Right behind the current legion of elderly workers is the looming baby boomer generation, who began turning 65 in 2011 and are reaching that age at the rate of 8 000 per day. An estimated 24 million baby boomers will reach retirement age over the next 8 years, and most of them won’t be able to retire.
In South Africa the numbers are even scarier. My guesstimate is that less than 3% of people can look forward to what is commonly known as a “care-free retirement”.
THE DANGERS OF DIY-INVESTING
There were two quotes by Palone which stuck in my mind which I thought I could use some day, if not in a column then on a radio show or presentation.
If Palone has one regret, the article says, is that he didn’t get better retirement investing advice somewhere along in the future.
“ I thought I could do it on my own”, he is quoted as saying. That was the first one.
The second one, elsewhere in the article, was : “ I didn’t think that I would live this long.”
Palone’s experience since he retired was one of bad investment choices or none at all, spending too much and giving away too much to his children when he had some money. To survive today he now flips burgers and waits on tables.
GENERATION OF BABY BOOMERS
I don’t know what the statistics are for South Africa but from research and my own experience I would say that a generation of baby boomers in this country are facing the same potential threat of that faced by Palone and millions others around the world.
Living longer- which is great when you are able and healthy- and running out of cash,which is not, are the two threats facing a whole generation of people today.
I have witnessed first-hand many horror stories from inexperienced and novice investors who have tried to go the DIY-route without taking advice from a seasoned and professional investment advisor.
Whenever an article about the merits or de-merits of using a financial advisor appears on Moneyweb or other financial websites (Sasha Planting :”Oh my hat, do I really need a financial advisor”, 23rd October 2013), will you find the same group of internet trolls advocating the DIY-route, generally running financial advisors down.
To the Onkelscrooges and Freetherands of the internet world I say, you are entitled to your own opinions and are welcome to run your own investment portfolios, but please do not suggest that by reading a couple of highly technical books, together with hours and hours of googling, most people should be competent enough to handle their own personal financial affairs.
Please, this is rubbish, and you know it!
This is also irresponsible advice in the extreme and could, in my view, lead to a wave of Tom Palone’s over the next decade or two.
Financial planning – not just financial advice or product marketing – is today a scary, complex and highly regulated activity which comes with a great deal of responsibility should the advisor get it wrong.
The industry has moved a very long way from the days when commission-driven products were the order of the day.
What is not that well-known is that there is a large group of local investment advisors, who on their own volition, stopped selling commission-driven investment products many years ago and instead opted for the fee-based model. They are now reaping the rewards for eschewing commission-based products.
They, by and large, also avoided falling into the trap of selling unregulated and highly-commissionable products like the Leaderguards, Sharemaxes and Picvests of the world.
The determinations so far by the Ombud for financial services against ‘advisors” for selling these products were mostly against one-man bands who were seduced by the high commissions on offer.
Many were not financial advisors at all, but were operating under an umbrella licence of entities like USSN, which was which was set up to market Sharemax products exclusively. Most of these ‘advisors’ have simply closed up shop and disappeared into the nether regions.
The top-end advisors, on the other hand, have generally built up very successful and well-functioning wealth management practices by adding significant value to their clients over a long period of time.
Their functions are not only restricted to investment advice but extend to estate planning, wealth and life protection, tax advice, the setting up of trusts, business insurance and the drafting of wills, to name just a few.
Often their clients are themselves very smart and successful businessmen/-women who understand the world of financial markets but know and appreciate the value of sound, impartial and unemotional advice, and, more importantly, are prepared to pay for it.
CHEAPER IS NOT BETTER
And another thing. There cannot be an industry in South Africa today where the fee structure of its products is more openly dissected, analysed and commented on than the investment industry.
Imagine if this practice is applied in other industries, like going to a supermarket or petrol station, for example. How would your supermarket manager react when you start questioning the profit margin of every item before you bought something? Or your petrol station, restaurant or dry cleaner? You would be laughed out of the shop.
The focus on fees is reaching ridiculous proportions. It reminds me of the time I visited the open air market in Istanbul in Turkey, in the shadow of the Great Mosque.
Every one of the literally hundreds of dealers had only one unique selling proposition, and that was that he was cheaper than the next guy. It didn’t matter if he was selling carpets, paintings, ornaments or whatever.
This now seems to be the approach by certain vendors in the investment space who, in order to obtain some media exposure, only focus on one thing, namely fees, often using very dubious statistics.
It’s getting so bad that even Business Day, our foremost daily business newspaper, recently ran an article on the issue of fees under the headline “Fees rob pensioners of a decent retirement”. What will we see next in this publication”?” Profit margin on bread causes millions to starve to death”?
*Magnus Heystek is director at Brenthurst Wealth. He can be reached at magnus @brenthurstwealth.co.za