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Wanted: financial industry altruism

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(Shutterstock)
(Shutterstock)

THE long-term insurance and investment industry at large is in need of reform - not just government-mandated changes such as retirement reform, but a complete rethink of its approach, ethos, ethics, morals and reason for being.

The financial services industry should, first and foremost, seek to create social value within society. From that the industry can then seek to derive benefit, and consequently profit, from the financial prosperity of its clients.

And this is not merely a requirement in the South African market, as the World Economic Forum holds these same views from a global perspective. This led to the creation of the Role of Financial Services in Society initiative, a group of public and private sector leaders who aim to agree on and demonstrate the social value of the financial system and its core activities.

Retirement saving too complex and costly

However, today the prevailing trend is one where the needs of the client are secondary to those of company investors and shareholders. Accordingly, in this drive for profit, many financial services companies have made retirement saving and investments unnecessarily complicated and costly, to the detriment of the investor and saver.

For instance, many funds today are unnecessarily complex as fund managers try to differentiate themselves to attract business in an increasingly cluttered and competitive market. This has also given rise to the inclusion of additional programmes and services that seemingly add value and act as unique selling points.

However, these add-ons need to be paid for, which adds to the cost and complexity of products, much of which is unnecessary as it is merely window dressing. These complex structures also create additional administration requirements, which adds to the cost of investing and saving.

This shift away from the core value of providing financial services to uplift and empower people has also spawned an industry with products and services that are characterised by complicated, often unnecessary fee structures, and a lack of transparency.

For example, various funds today apply differing cost structures, with some charging asset-based management and administration fees that increase in relation to the sum invested. This penalises those who save or invest more, which makes no sense in an industry that should be helping to create wholesome wealth.

In addition, the assets under management bear no relation to the cost of administration and should therefore be structured differently. A fixed cost every month per member, for instance, regardless of how much they contribute or how much has been invested, would offer a more equitable approach as it doesn't penalise those who invest or save more.

The costs associated with managing assets should also be reviewed. Some funds choose to invest in portfolios, which attract multi-manager fees. However, often only the top fees are disclosed, not the underlying asset manager fees.

If the same level of transparency and cost disclosure required by collective investment schemes, through the Total Expense Ratio, were applied to other funds and investment vehicles, investors and savers would be able to make more informed comparisons, and make selections based on performance and the associated costs to determine real returns.

Unnecessary fees for savers and investors

Further compounding the issue is the ever-expanding financial services value chain, which has also become unnecessarily complex. While there is and always will be a vital need for a financial advisory role in industry to assist the public in making the correct and most beneficial long-term financial choices, the fee structures and administrative complexity inherent in the industry at present heaps unnecessary fees on the saver and investor.

While some may argue that this sustains an industry and creates valuable employment in a country where a quarter of the population is without work, more can be done to help create and preserve personal wealth, instead of merely eroding it in the name of profit and industry sustainability.

For instance, proposed governance and regulatory changes to the collective investment scheme and life insurance industries aim to equalise the disparity inherent in the affordability of products and services, and product complexity. In this regard, the Retail Distribution Review, which is supported by National Treasury, provides for a new structure for financial adviser remuneration which will help to reduce the associated costs.

Such changes would ensure that advisers are correctly remunerated in a manner that promotes continued engagement with clients in an advisory capacity, not just at the point of sale. Annuity-type remuneration fees, and not lump sum commission payments, would therefore offer a better option as they promotes consistency and greater transparency. It will also help to reduce initial costs, ensuring that more of an investor's money can benefit from the power of compound interest over the long term.

Advisers can also assist in further reducing the cost complexity in the market by eliminating member choice - where members of funds choose the assets in which their money is invested. This is detrimental because people who opt for member choice pay a substantial premium for it as it costs financial service providers more to administer individual choices. However, because the cost for the member choice is levied from the invested money this additional fee is not transparent, and most people don’t realise that this cost is actually eroding their investment.

Sadly, in the current age of capitalism, where many financial service companies seek to profit at the expense of the investor and saver, a shift back to a more altruistic form of business remains some way off.

However, the fact of the matter is that greater transparency, lower costs and simplified products will benefit the financial services industry in the long run, ensuring industry sustainability. A more open market will attract more South Africans to save and invest in financial products, which means that by shifting the focus back on the individual and their financial needs, everyone will prosper.

* Walter van der Merwe is CEO of FedGroup Life. Views expressed are his own.

              
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