Many pennies for your thoughts

By: Anne Cabot-Alletzhauser, Head of Alexander Forbes Research Institute 

Money down the toilet

Two years after I bought my first cellphone, I dropped it in the toilet. You might think this incredibly bad luck but apparently 75% of cellphone owners use their phone in the toilet and 19% of users actually end up dropping their phone in the toilet.[1]

But I thought I would be just fine. I had fallen lock, stock and barrel for the pitch that, now that I had a smartphone, I would need cellphone insurance. After all, this would cover me for theft, loss, physical damage and even damage from “liquids”. What could go wrong?

It hadn’t even occurred to me to check if perhaps I was somehow already covered – by a home contents policy or some other pre-existing policy. It also hadn’t occurred to me to read the fine print – the print that explained that I wouldn’t be covered unless my South African service provider’s SIM card was in the phone. And here I was, in an American toilet with a temporary American SIM card in my phone. It wasn’t just the cellphone that went down that hole – it was close to R18 000 in both replacement value and wasted insurance coverage.

Should I have made better decisions here? It bothered me that the world of “financial advice” didn’t appear to extend to such mundane issues as: Is cellphone insurance really worth it? Or, do I really need full comprehensive auto insurance? Or, which is more cost effective: leaving my emergency savings in a money market account with a bank or investing it with a money market unit trust? Google those questions and the advice offered is even more confusing.

The world of financial advice should help you manage these kinds of financial trade-off decisions. What makes this difficult is the way that financial services are siloed. For example: would I not be better off if I didn’t buy that cellphone insurance package and only bought auto insurance that covered third-part liability – and then put those savings into a longer dated money market fund? Just think. With that kind of emergency stash, I could actually “self-insure” myself against the kind of little life crises that were likely to befall me without the risk of falling foul of “fine print” exclusions. But where do these basic financial trade-off decisions actually get taught to consumers? When you have to manage with a very thin wallet, these are the kind of decisions that matter most.

Fast forward to last week.

I sit on the research committee for Inseta’s training and skills development. The topic on the table is: How do we need to evolve the training and skills development for employees in the insurance sector so that they are relevant for the industry’s future?

Because savings vehicles often use insurance licences to pool funds, the pension funds, asset managers and financial advisers are also catered for by Inseta. Intriguingly, the banking industry is covered by a totally different seta – Bankseta. So presumably, those professionals require a different sort of training.

And therein lies the rub. Because, when you sit down and map out the whole world of financial touchpoints that an individual faces through their life, these are actually all part of one continuum of considerations. Here is essentially how the continuum works:

The starting point is an income, whether from a job, from a grant or inheritance, or from an investment. The question every individual (and their family) faces is, how can I best deploy this so I get the greatest “bang for buck” from that income over time? On one side of the trade-off decision is how to use that income to protect the family from any future financial shocks. On the other side is a consideration of how to deploy that income so that it can increase one’s financial mobility by investing to either create wealth or self-improvement. These are not trivial trade-off decisions. But they can be grappled with if one focuses on weighing out:

  • The magnitude of protection required against its cost
  • The timeframe required to accumulate a necessary protection
  • The degree of “risk” one is prepared to take on in investing to accelerate the timeframe or quantum of any funding needs
  • The degree to which a pro-active “investment” would protect against much more costly interventions further down the road

Now let’s ask a different, but far more important question. If I only have the very thinnest of wallets, what decision in each quadrant would likely give me the greatest bang for my buck? Of course, the optimal answer will be different for everyone’s specific circumstances, but the generic answer here might come as a surprise – and potentially sound quite different from what one gets as financial advice.

  1. “Emergency savings” comes out on top of any consideration in the savings category – even saving for retirement. Without emergency savings, we have seen that people in financial crisis will simply find a way to access their retirement savings anyway.
  2. From a healthcare perspective, the best defence is a good offence – which puts primary healthcare in the workplace as the lowest cost defence. Beyond that, let’s say with an accident or medical emergency, getting the best possible care during the first 24 hours matters most. That is what would be worth paying for.
  3. From a risk coverage perspective, you can’t get a better deal than with the group risk that accompanies your employee benefits.
  4. If you want to increase your earnings potential, your best, low-cost option is to take advantage of any workplace skills development programme – throughout your whole career.
  5. And finally (here’s a surprise one) if you want to invest in enhancing your children’s long-term potential, paying for an early childhood development programme has significantly greater impact than saving for tertiary education.

But here is the crux of the problem: consider the way the financial services industry currently approaches these concepts. Not only do we compartmentalise the marketing of these different financial products, but until now, their marketing was governed by completely different regulatory bodies. Advisers hoping to advise on trade-offs between these “product silos” would have to pass qualification standards for each product area.

Is there a way forward?

Potentially, the introduction of COFI, the Conduct of Financial Institutions Bill, could map the route forward here. For the first time this principles-based regulatory framework will shift the focus from the regulatory silos that govern how each sector of financial services (and their attendant products) is regulated in their interactions with the consumer to an outcomes-based framework – where the outcomes and impact to the consumer become the primary concern. With this new overarching regulatory framework, financial decision-making advice can begin to explore interconnectedness and interdependencies of all these financial touchpoints.

Imagine if we could actually get this all right. The impact this could have on enhancing trust in the financial services system could dramatically improve people’s willingness to plan and save – both short term and long term. Most importantly, it could help South Africa build up a financial services capability that genuinely creates a stable trajectory to wealth and asset accumulation to South Africa’s burgeoning, yet all-important middle class.