Spaghetti ignorance
A third of millennials in the survey make use of a financial adviser
Ialways imagine that the wolf in Little Red Riding Hood would have teeth a lot like those of Steven Nathan. As CEO of the index-based 10X retirement administrator, he talks often about how his competitors, who don’t boast his gnashers, take bites out of retirement savings.
I am surprised that he didn’t star in the recent Youtube video in which a waiter eats 40% of people’s spaghetti. He left that to comedian Nik Rabinowitz, who has also done hosting work for the Financial Mail. The point of the video was to show the effect of excess fees on retirement savings (or any other kind, for that matter). This has been Nathan’s preoccupation for several years.
But the message is not sinking in. 10X commissioned a survey of 2,200 people, millennials aged 25-35, and their somewhat young parents, who are in Generation X, those born between 1964 and 1982.
Among the millennials 42% did not know what they were paying their service providers in fees and a further 51% believed they were paying less than 1%. This is very naive, considering that retirement funds do not just charge investment fees but also administration fees, and have to pay sundry service providers such as tracing agencies.
Clients of 10X pay a 1% fee, which is well below the 3% industry average. Of course it is like buying a Model T Ford rather than a Rolls-royce. 10X can be cheap and cheerful by offering a basic, industrially manufactured, index product. In fact, it offers just two choices — a high- and a low-equity product.
Compounding not understood
There is a lot to be said for keeping it simple; 10X is ideally placed for a world where intermediaries focus on people with highly complex financial needs and single products are bought directly.
To many people saving 2%/year doesn’t sound like a bargain. I wouldn’t rush to Spar to get a 2% reduction in the price of bananas.
But it is a different story over time. About 28% of millennials seem to have slept through the classes on compounding. They believe the impact on the value of the portfolio over 40 years of a 2% fee would be 2%. About a third of the millennials in the survey make use of a financial adviser, compared with almost 60% of their parents.
I will admit, as a strong supporter of a direct, disintermediated, approach for most people, I am quite anxious to see almost half of millennials rely on the Internet to get information about financial investments — though only 5% are already buying investment products online. But then again, the millennials surveyed considered the ability to manage their investments online to be a critical feature of an investment company, just as important as low fees. It is certainly a shift from the days when investments were sold and not bought.
What I find intriguing is that barely anyone — about 1% of the millennials sample — goes to the bank for financial information or products. They wouldn’t be in the target market for the private bank, but shouldn’t the banks provide some coaching to the next generation of executives and entrepreneurs?
In the sample black millennials were less likely to seek advice from their parents, colleagues, friends and partners or financial advisers than their white counterparts, but more likely to trust the Internet, magazines, newspapers and particularly TV and radio.
Almost a fifth of millennials plan to retire at 50. Some might be lucky, but most will not be able to retire on anything like their final salary so early on. It is at least encouraging to see that more than 60% have no such delusion and plan to retire at 60 or later.