JOHANNESBURG – The retirement industry of the future needs to utilise technology to assist investors to – in the very least – not harm themselves.
This is the view of Greg Smith, a South African and the former Goldman Sachs executive who controversially penned an op-ed for the New York Times in 2012 titled “Why I am leaving Goldman Sachs”. In the article, he described the work environment at his employer as “toxic and destructive” and argued that the firm did not act in their clients’ best interests.
Addressing a 10X Investments Conference via video call from Kansas City, Smith argued that technology has a vital role to play in assisting retirement savers to avoid naively picking the most expensive funds that could reduce the lifespan of their retirement capital and to resist the urge to sell investments in a panic during events like Brexit.
From Goldman to Blooom
Originally from Edenvale on the East Rand, Smith left for the States in 1997 to attend Stanford University, studied economics and worked for Goldman for over a decade. A book published about his experience at the banking giant also shares his views about the global financial crisis.
“I am very clear that I’m absolutely a capitalist – I believe banking is absolutely necessary, but I think what ultimately causes these I’d say bubbles to inflate and burst really is the complexity problem and it is the fact that even the people running the banks frankly do not understand the products that are making a lot of profits,” he told the audience.
After the publication of his book, he got involved in some of the Dodd-Frank Financial Regulatory reform discussions in Washington.
Smith said it became clear that the regulators and legislators themselves didn’t understand the system.
“I don’t think there are any bad eggs in the system necessarily that are trying to do harm, but I think the system has absolutely become too complex, too jargon-filled – really thousands of times too complicated for anyone in the general public to understand.”
His views about the intricacy of investment structures are likely to resonate with many South African savers.
According to the 2016 Sanlam Benchmark Survey only a small percentage of local pension fund members are able to determine how much money they would need to retire comfortably, what they need to contribute and how long their savings pot will last in retirement.
“Many find the problem too complex and daunting, not even knowing where to start and respond with an all too human ‘Whatever – let the trustees worry about that!’ and avoid making any decisions. This disengagement can have serious repercussions, with this year’s Pensioner Survey showing that 51% of pensioners only discovered what retirement benefits they had in place two years before retirement (worse 22.5% of pensioners stated that they only learnt of their retirement benefits at retirement),” the survey found.
Through Smith’s work in Washington, he started meeting with public pension plans. About two years ago he specifically started focusing on the 401k, the US equivalent of an employer-sponsored pension fund. He is currently president of Blooom, a robo-advisor that analyses the health of a saver’s 401k by asking individuals to supply a few key pieces of information.
In presenting individuals with the outcome of its analysis, the company has replaced charts and graphs with the image of a flower. If the flower is wilting, it might suggest that the saver’s pension fund savings is not sufficiently diversified. If the flower is turning into a Venus flytrap, it could mean that the client has taken too much risk.
“That might seem silly or simple, yet most people when they are confronted even with words like stock and bond are completely bewildered and you have lost them.”
Blooom doesn’t use financial jargon and has stopped using basis points as pricing as it believes most individuals do not understand the concept.
“In the States basis points are often used in order to allow inertia to set in.”
Smith said the vast majority of investors do not know fees exist because they never pay anyone a bill or write a cheque to the service provider – all fees are automatically deducted off their account.
Once the robo-advisor has identified where the individual’s problems are, it proposes solutions, could select appropriate funds in the 401k and could make changes on the saver’s behalf.
It charges a Netflix-type monthly subscription fee of $5 a month (roughly R65) for new savers and $19 a month (about R250) for individuals with more assets. Where accounts exceed $500 000 the fee increases to $99 a month (around R1 300).
The firm has now analysed more than a $1 billion worth of 401k pension plans and according to Smith, most of them are “significantly screwed up”. For example, if there are ten underlying fund choices, many people allocate 10% of their savings to each fund. Or if the fund offers 12 underlying target date funds (a type of fund that sets the asset allocation in line with the investor’s time horizon to retirement) investors put money in all 12 funds, thereby negating the purpose of these funds altogether.
Smith said one in four people who have signed up for the four minute 401k health check have become paying clients of the company.
While a lot of people argue that if every person in the world took a personal finance class in high school or at university, the situation would be much better, Smith said education may not achieve significantly better outcomes as there is still a multi-billion dollar industry like CNBC that is trying to convince people through entertainment that their financial situation will improve if they sharpen their skills by tuning in.
They find that if you start educating people as to what a stock or a bond is or what high-yield debt means they may feel more empowered to time the market and trade, he said.
The right type of education highlights the behavioural aspect, he argued.