Media bias and poor journalism have often given the perception that the financial planning industry is more complex than it actually is. You hear things like, “endowment policies are poor investments”, “retirement annuities (RA’s) have high cost structures”, “unit trusts produce better returns”, and living annuities are risky.
The truth is that a lot of what is said about these various investment vehicles is very misleading. From a risk and return perspective, it all depends on what the underlying assets are of the investment vehicle being used. For example, if the underlying assets of a retirement annuity are equities and the underlying assets of a unit trust is cash, then over the long term the RA would outperform the unit trust and vice –versa. If the unit trust and the RA happened to be invested in the same portfolio then their returns over the same period would be very similar. The only difference to their respective rates of return will be due to the returns being taxed differently within each investment vehicle.
Thus the main purpose of having various investment vehicle structures is for tax and liquidity purposes and has very little to do with the rate of return earned on the investment. A good financial planner will first calculate the rate of return that you require in order to achieve your investment goals and then model an investment strategy for you. The planner will then assess and analyze your tax and liquidity situation and based on this, decide which investment vehicle/s would be most appropriate for your financial plan. The financial planner will then make sure that your investment strategy is applied to each of these investment vehicles appropriately.
From a cost perspective, two cost structures exist for both RA’s and endowments where money is invested into these two investment vehicles on a monthly basis. Your financial planner should disclose and explain both of these structures to you, highlighting the advantages and differences of each.
Financial planning can be very simple and can produce spectacular results. All that is required is to improve one’s financial literacy, work with a good financial planner) and keep one’s emotions out of making financial decisions.
Colin Long CFP®
