We should be giving more awards for excellence in financial planning than for excellence in asset management.

Over a 30-year period, more than two-thirds of your retirement fund costs will go to the asset manager. In fact in the final year of retirement, the active fund managers – the people who select the shares your fund is invested in – will make up 82% of the fees paid by your fund.

These fees are paid despite the fact that there is enough research to show that over a long period of time, active management does not outperform the average of the markets. “In reality, fund manager performance tends to go in swings and roundabouts over time,” says Anne Cabot-Alletzhauser, co-author of the Alexander Forbes Benefits Barometer which published the research. “The longer the time frame the more likely any exceptional manager performance simply evaporates.”

And if you think you can stay ahead of the pack by simply switching to the next hot fund manager, there is enough research to prove that chopping and changing fund managers in an attempt to chase returns, is a further source of value destruction.

In fact active fund management can be a wealth destroyer. According to the Alexander Forbes Benefits Barometer if a fund followed a passive index-tracking model, lowering the cost of asset management, it would add an extra 5.63% points to an individual’s retirement income relative to their final salary. This could be the difference between having a retirement income of 60% of your final salary compared to 65.63% if the fund invested purely in an index-tracking fund. A recent National Treasury study found that if consumers could reduce their fees from 2.5% to 0.5% then they would be able to double their final pension or save half the amount to achieve the same pension.

Despite these facts, we continue to obsess about the performance of asset managers like Allan Gray and Coronation, rather than focusing on the value of good advice.

Poor financial decisions

Over the last 15 years, the market has delivered high returns, yet individuals are retiring with less money than ever. The estimated 90% of people who will not retire with sufficient capital will do so not because of the underlying fund manager’s performance, but because of poor financial decisions. These include not preserving their retirement funds, contributing too little to their retirement, and choosing investments that are too conservative to deliver the growth needed to retire comfortably.

As Steven Nathan of 10X Investments points out, selecting a fund that is too conservative will have a far greater impact on your final retirement lump sum. According to 10X Investments, if you invested R1 million for 40 years in a low-equity fund which targeted a return of inflation plus 3%, you would have R3 million in today’s value. In contrast if you invested in a high-equity fund which targeted inflation plus 5% you would have R7 million. Getting good advice about the correct risk/return profile could be worth R4 million!

What these figures suggest is that retirement-fund members are paying the wrong people for the wrong expertise. The real value sits in helping individuals make the right choices about their retirement.

What we really need is good advice about how to invest our retirement funds rather than overpaying fund managers to deliver average performance. Personally I would like to see far more awards and rankings going to advisers who have helped their clients achieve their goals than to a fund-management industry that has not added value to our retirement benefits.