The costs you pay to invest have come down, the investment industry claimed in its defence this week after a senior National Treasury official questioned the relatively high cost of saving for retirement at the annual Association for Savings & Investment SA (Asisa) conference held in Durban this week.
But it was clear that Treasury and the Financial Services Board (FSB) will keep the spotlight on costs and the disclosure of costs and other information about your investments, particularly in light of the expected introduction of the Treating Customers Fairly (TCF) legislation next year.
Treasury said it will shortly publish recommendations aimed at addressing the high cost of products, while the FSB is working on measures aimed at ensuring financial services institutions treat you fairly, the conference heard.
David McCarthy, a consultant to Treasury, said that, as consumers of financial products, we are entitled to know what value we are getting in return for the costs we pay for investing for retirement.
South African financial products, particularly retirement annuities, do appear to be expensive relative to products internationally, he says. This is puzzling in light of the large amount of assets under management in South Africa, McCarthy says.
He says Treasury’s recommendations will focus on:
* The move away from upfront charges related to costs incurred, to fees charged annually on assets under management. The ongoing fees appear lower but have a significant cumulative effect on your savings.
* The strong bias among financial institutions to offering investment products that are actively managed rather than cheaper passively managed products.
* Inappropriate and/or easy-to-beat benchmarks being used to make an active manager’s performance look better than it should, and forming the basis of the performance fees charged.
* The relationship between costs, the “utterly startling” complexity of retirement products, and advice. McCarthy says simple products would be sufficient to meet most consumers’ retirement needs.
* Costs resulting from governance problems, and advice adversely influenced by commissions. McCarthy cites the example of members of a large commercial umbrella fund being defaulted into portfolios with exit fees that offset all the tax benefits of investing in a retirement fund. Another example is that of a fund run by a union where union service providers were given business on preferential terms at members’ expense.
Jonathan Dixon, the deputy executive of insurance at the FSB, says one of the aims of the TCF legislation is to ensure that you, as a consumer, can expect financial products to meet your reasonable expectations.
The FSB has therefore embarked on a review of the suitability of products for different consumers and the remuneration of advisers (see below), to ensure these issues are not in conflict with the aims of TCF.
Dixon cites the example of contractual life assurance savings products aimed at low-income earners, saying the charges on these products, unsuitable tax treatment and penalties levied for interrupted premium payments made it difficult to see how these products could be regarded as meeting the expectations of these consumers.
Johan Schreuder, a product developer at Investec Asset Management, says significant progress has been made in reducing fees over the years. Administration fees have been halved, and asset management fees are competitive and are often negotiated down by advisers and consultants.
Schreuder says the passive investment industry requires greater scale in order to be able to offer really low fees, but the value of active management is not just about beating benchmarks but choosing appropriate ones.
He says Investec has moved to unbundle administration, asset management and platform fees because “bundled fees often lead to opaqueness”.
Schreuder says compelling you to save for retirement could also reduce costs.
Another speaker at the conference, Anton Gildenhuys, chief executive of actuarial at Sanlam, argued that competition and innovation have reduced the fees on financial products over the years.
He suggests that costs have been reduced by as much as 31 percent since 2004.
Leanne Jackson, the head of TCF at the FSB, says the FSB is working on templates for key information documents that financial institutions will be expected to produce for each of their products.
The TCF legislation will force financial companies to give you appropriate information before, during and after the sale of a financial product, and the key information documents will help you to filter out unsuitable products.
In addition, Jackson says, the FSB will scrutinise further documents, such as quotes and policy documents, to ensure content and the medium used are suitable for you.
It will also consider the expectations that product information creates in the minds of consumers and how this is managed on an ongoing basis, she says.
Conference speakers also emphasised the need for consumer education to ensure that you understand information disclosed to you.