Retirement provision

Supplementary pensions: investors' myopia and the role of advice

Posted by MoneyController on 16.05.2024

Saving for retirement is often seen as a forward-looking choice. However, the inclination of many savers is to postpone the decision or to be discouraged by difficulties in choosing a product that is right for them. In this sense, financial advice can play an important role.

The inclination towards short-sightedness

Experts dealing with supplementary pensions and retirement savings often agree that there is a lack of foresight on the part of savers. This happens because of a number of typical human inclinations. These inclinations, in their financial repercussions, are studied by behavioural finance. Patricia Lüer, Project Manager at Horváth, writes about this in an article written for the German banking association (Bankenverband), also taken up by the magazine FONDS Professionell.

Overcoming myopia when it comes to retirement savings

One of the tendencies of human beings is to often favour the present over the future. However, this leads to postponing choices regarding the future, as well as underestimating what Lüer calls ‘the value of future cash flow’. In her analysis, Horváth's project manager suggests some solutions that providers could adopt to solve these ‘barriers’: a) using products that work automatically and do not require the constant commitment of those who subscribe to them, b) systems to assess the progress of savings, so that already in the present one can visualise the benefits one will enjoy in the future.

The role of financial advice

The role of advice, in this sense, can be decisive: it can take a more far-sighted view and tailor investment strategies to clients' goals, without letting itself be influenced by irrational components of thoughts and behaviour. Not only that: as Lüer explains, advice can also help clients navigate their way through an often very complex landscape of offers; the advisor, on the basis of investment objectives and risk tolerance, can therefore make a pre-selection and help clients choose a financial product.

Read also:

What do supplementary and private pensions mean?

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