Gig workers need financial solutions that address income volatility

Cape Town - The global move to a gig economy has accelerated in recent years as workers exit formal employment in favour of flexible freelance work or take on freelance assignments in addition to their main jobs. In fact, online platform Statista expects gig workers to gross over US$455bn globally in 2023.

With this economy growing so rapidly, asset managers and financial advisers need to think smart when developing and recommending financial solutions to this growing market segment. Most importantly, we must remember that gig workers’ earnings may vary wildly from one month to the next.

Income volatility and inadequate savings to pay for unexpected expenses stand out as the main financial challenges facing South Africa’s gig workers, described by Oxford Languages as “individuals who do temporary or freelance work", often as independent contractors engaged on an informal or on-demand basis”.

Many traditional investment products are designed with those in formal employment in mind. For example, retirement annuity products and pension funds assume that clients can afford a fixed monthly contribution, plus an annual increase. These products can present difficulties for gig workers due to their uncertain earnings.

In additional, research by the United States based Commonwealth (assisted by Green Dot, Gig Wage and Steady) found that most gig workers had no savings for emergency expenses, observing that financial ‘blows’ of US$1,000 to fix a vehicle or make up a rent payment were often insurmountable. As such, the starting point for a gig-worker-appropriate financial solution is a product that allows for irregular cash savings and gives workers access to that money in the event of an emergency.

Although cash savings can be accumulated in a bank account, it makes sense for gig workers to consider money market funds that allow them to earn ‘better than bank’ interest rates while avoiding the price uncertainty that goes hand-in-hand with stock market investments. As the gig worker accumulates sufficient savings and his or her earnings become more stable, the adviser may suggest lump sum or once-off investments in a range of discretionary investment products.

South African gig workers can choose from hundreds of collective investment schemes such as unit trusts and exchange traded funds (ETFs), which allow them to build a savings portfolio with exposure to any asset class, both locally and offshore.

An individual with a volatile income should not neglect saving for retirement. After building an adequate emergency fund, equivalent to around six months of average income, the gig worker can begin contributing to a retirement annuity offered by one of the country’s Linked Investment Service Providers (LISPs). Retirement annuities are balanced funds, and they allow flexibility in contributions introducing gig workers to a highly regulated retirement fund industry.

The gig economy carries significant risks and a high level of uncertainty. This uncertainty makes it difficult for gig workers to choose investment products for housing emergency funds or securing retirement. Satrix believes that gig workers should approach financial advisers to assist in managing uncertain cashflows, and over time build the necessary exposure to savings, retirement funds and discretionary investments.

Asset managers and financial advisers can work together to ensure that gig workers benefit from sound financial advice and the investment returns on offer to appropriately match the needs of the client.