Make sure you read your investment contract to ensure it’s what you signed up for.
Do you know how much you are paying for your investment policy? Could you state exactly how much of your monthly contribution is paid in commission or product fees? The truth is few people really understand what they are invested in, let alone how much they are paying for their investment products.
A reader recently wrote to City Press to highlight his personal experience where his adviser had charged significantly higher fees on his retirement annuity policy than was agreed. The client had trusted the adviser to deliver on the agreed fees and failed to check the final documentation issued by the product house which stated the actual fee his adviser was receiving.
It was only a few years later when he questioned his returns that he discovered that his adviser had received over R50 000 in commission as opposed to the R5 000 that had been agreed.
The client was able to prove what had been agreed due to the records of the meetings held with the adviser – documents which are required under the Financial Advisory and Intermediary Services Act (FAIS).
In this particular case, Momentum, who issued the retirement annuity, was able to reverse the commission because the adviser worked directly for the company. The adviser has been dismissed and reported to the Financial Services Board for misconduct.
Legislation is there to protect the consumer; the problem is that the consumer needs to know that it exists.
Who carries the responsibility?
Product houses certainly have a level of responsibility to ensure that the people they employ are above reproach and they also need to have systems in place which can identify irregular behaviour. FAIS requires that any fees or commissions must be clearly stated and fully transparent.
It is just as much a client’s responsibility to understand what they are signing for and to check the documentation as soon as it is issued. Not only could a fraudulent adviser change the commission but there are also instances where clients are not invested in the product they agreed to.
Although there is legislation to protect consumers, a product house can still create complicated contracts that clients struggle to fully understand and salient information can be buried in pages of legalese. Although the current FAIS rules require that commission and fees are stated not only in percentages but also in rand values, this information is often buried on page five or six of the contract.
Treating Customers Fairly
Leanne Jackson who heads up Treating Customers Fairly at the Financial Services Board (FSB), plans to change all this and to make contracts more equitable for clients, starting with having salient information such as costs provided to you in a clear, short format before you enter into a contract.
TCF task teams are developing standardised templates with key information which will make it easier for individuals to compare products. These templates will specify the information you need to see before you choose a product, and will specify where the information has to be displayed. Once the decision has been made to invest in a specific product, then there will also be tighter rules for product suppliers to improve the quality of specific product information.
TCF is in the advanced stages of developing these templates and is currently testing them in consumer focus groups to ensure that they provide consumers with the correct information to make an informed choice.
“What we do know is that people respond better to layered information. They want to see the key facts up front and then drill down to the details later in the document,” says Jackson. This also prevents companies from hiding salient information deep in the document.
The Treating Customers Fairly project was started by the FSB over two years ago and aims to change the mindset of the financial industry to move from working within the letter of the law to applying the spirit of the law. As Jackson says, TCF will impose not only rules but also fair treatment principles, so companies now not only have to stick to specific rules, but also be able to demonstrate why they honestly believe that what they are doing is fair for their customers and whether fair treatment of the customer forms part of their strategic plan.
Changes to advice fees
Two years ago TCF issued a roadmap detailing its initiatives and goals, which encompass a wide range of reform within the industry. As part of the broader TCF framework, the FSB is also reviewing remuneration. Several proposals have already been made by the FSB and it is likely that South Africa will follow the route of separating the fee for advice from the selling of the product.
Jackson says what is clear is that the issues around remuneration are not just about intermediaries but also about how products are designed and how fees are often hidden in those designs.
One of the challenges has been the issue of responsibility across the value chain as currently the industry works in silos. “What becomes apparent is that the more complex the value chain, the more people think the customer’s interests are someone else’s responsibility,” says Jackson.
Our City Press reader’s experience highlights this exact issue – is a financial services company responsible for an independent adviser that mis-sells its products or for the level of advice given?
“Clearly product houses cannot be responsible for independent advice, however, that does not mean that a product supplier can abdicate all responsibility for distribution channels they have chosen to use,” says Jackson.
Financial institutions rely heavily on their distribution channels to sell their products and have in the past created products and fees with the distribution channel, rather than the client, in mind.
If commissions are banned and the fee for advice is something negotiated between the customer and adviser, then the product house’s responsibility is to ensure that it produces products that are fair to the consumer and to ensure that advisers are fully trained and understand the intricacies of the product.
Jackson says another challenges is finding ways for affordable access to products. Currently many products for the lower end of the market are very expensive and therefore not appropriate. “Access does not mean at all costs, we need to have access to products that meet needs and affordability and deliver on expectations created,” says Jackson, who adds that the FSB is looking hard at the overall framework of distribution especially for lower-income earners where the cost of advice is often unaffordable.
Overall Jackson believes that the industry is starting to take action. “The industry associations have all got active task teams helping to shape TCF. I am often called to meet with the executive committees of larger players. There is a strong sense of commitment to get involved in the process although there is still a varying degree of readiness.” Jackson adds that the rules are needed but these are simply there to underpin the principles. “We will challenge people on principle and not only the rule.”
You can choose how you pay your adviser
As a client you have the right to decide how to remunerate your financial adviser. By law your adviser is required to disclose this information.
Prior to the new commission dispensation for investment policies which started in January, an adviser could select upfront commission on all types of life insurance contracts. This commission was paid in full over two years based on the term of the contract. In other words if the client took out a 20-year retirement annuity, commission would be calculated based on 20 years of premiums and then paid to the advisor in two lump sums in year one and year two.
The client’s actual investment was debited monthly over the 20- year period – in order to pay the adviser upfront, a loan account was created and the client had to fund the interest payable to the insurer for having made the payment upfront – often at rates as high as 12%. Fortunately this highly punitive commission system has been addressed and today industry regulates the commission more effectively, and on some structures such as “as and when” commission, if the insurance company pays the “as and when” commission upfront then the insurance company has to carry the interest costs of paying the broker upfront.
A client can select many different ways to remunerate an adviser:
• A client may select “as and when” commission instead of upfront commission
“As and when” commission is also based on the premium but is payable as and when a premium is paid, therefore if no premium is received no commission is paid. There is no pre-funding from the insurer and the client can stop this commission at any time. If the client for examples decides to discontinue contributions to the contract then the future commission to the financial advisor will cease but no adjustment will be made to the client’s fund value for commission purposes.
• Select a longer clawback period
Upfront commission is calculated based on the monthly premium contribution over the period of the contract. Werner Du Plessis, head of specialised services at Momentum, says with an upfront commission structure some insurers, under the old dispensation, allowed a client to select a two or five year clawback period. Under the new dispensation only a five-year clawback is allowed. This means that if the client makes fundamental changes to the contract during this term a larger portion of the commission is recovered from the financial advisor instead of from the client’s fund value “By selecting a longer clawback term a client can keep an adviser at risk for five years,” says Du Plessis. This ensures that the adviser gives advice that is relevant and appropriate for the client and the client has some recourse if they are unhappy with the advice given.
• Trail fee
Instead of an upfront commission structure as referred to above, a client can also negotiate a trail fee structure where the adviser charges an annual fee or a combination of an initial fee and trailer fee. The annual fee is calculated based on a percentage of the total value of the fund and not as a percentage of the monthly premium.
Some clients prefer this option as it ensures that the adviser focuses on servicing the client as he/she will only recoup their costs over a period of time. A client could also change advisers at any stage. Be aware however that a trail fee could actually cost more over the period of the investment, especially if it is a long-term investment such as a retirement annuity. This is because the fund value in the early years is lower and therefor the fees will be lower, however as one is closer to retirement that half-percent trail fee can become very expensive. For example if you had accumulated R2 million in your retirement annuity your adviser would be earning R10 000 a year. You have a right at this stage to decide whether or not his or her services are worth that percentage. Therefore it is important that the fees are disclosed in rand terms and allow you to discuss it with your adviser.
• Fee-based adviser
Some advisory firms are moving to fee-based structures where clients pay a professional fee for the adviser’s time.
Du Plessis says a good adviser is not afraid to discuss fees as they are able to prove their value. “A good adviser keeps clients up to date and always acts in the best interest of the client. Clients are then happy to pay for the value-added service.”
|Know your rights
A full financial analysis is required by the FAIS Act and you are paying for it as part of the adviser fee. It is important that your adviser provides this along with proper documentation specifying what you have agreed to. This becomes an important document if there is ever a dispute around the investment.