Whose responsibility is it to ensure your adviser updates you regularly?
Almost every single person who has a life or investment product is probably paying an ongoing advice fee. Yet every week I’m inundated with requests from people for help or information about the products they have. In most cases the client has no idea who their adviser is or that they are paying them a regular commission from their policy or investment premium.
A reader wrote to complain about the penalties she would have to pay if she stopped her contributions to her retirement annuity and endowment policy with Sanlam. Despite contributing for the last 24 years, her fund values would fall by R7 234 and R8 832 respectively. Over the last ten years the adviser in this case received tens of thousands of rands in commission – all paid by the investor who will now have to forfeit some of her returns to pay for them.
Listen to Maya and Mapalo Makhu discussing this and other topics in the My Money, My Lifestyle podcast.
The reason she needed to stop her contributions was because the adviser had originally signed her up for premium escalations of 15% and 20% per annum respectively which had become unaffordable. As she had an annual escalation, the adviser received additional commission each year.
Although there is legislation that states that termination/surrender fees cannot be charged on a policy after a maximum of 10 years, this only applied to polices taken out since 1 January 2009.
This then led to a question about the financial adviser’s conduct. Is it considered good advice to tie someone into a 30-year endowment policy with a 20% annual escalation? Keep in mind that with compounding, even a R100 per month premium would have increased to R19 781 within 30 years.
The other question is why this adviser continued to receive commission when the last contact that the client had with the adviser was over 10 years ago.
In this case the adviser did not work for Sanlam as he was an independent adviser who happened to sell Sanlam products. Sanlam hence argued that they cannot investigate or take action against the adviser as he is not a so-called ‘tied agent’.
Recourse from the FAIS Ombud
Her only recourse is in terms of the FAIS Ombud. It would not be easy to go back and challenge an agreement that was made 24 years ago in terms of the escalations that were signed, however, she could argue that the adviser did not provide a regular review of her investments and should return the commission.
Section 7(4) of the FAIS General Code of Conduct states that “a provider who had provided advice to a client or is rendering ongoing financial services to the client in respect of one or more financial products, must on a regular basis (but not less frequently than annually) provide the client with a written statement identifying such products and providing current details of any ongoing monetary obligations of the client, the main benefits of the product, the value of the investment and any ongoing incentives, commission, fee or brokerage payable to the provider.”
It is also important to note that the product provider has a similar obligation to provide annual benefit statements disclosing the above information required by the FAIS Act. These benefit statements would form part of the review with the adviser.
Had she received regular reviews, a simple discussion about the unaffordability of the escalation would have resulted in the escalation being cancelled a few years ago and the policy remaining affordable.
Given how important these reviews are, whose responsibility is it to make sure you have regular discussions with the adviser you are paying?
On one hand the FAIS Act makes it clear that the adviser has a responsibility to contact the client annually and review the portfolio. But shouldn’t the client also be taking responsibly for their own financial wellbeing? If you sign up for a gym contract and pay gym fees for the next two years but never go, you can’t blame the gym that you are not getting fit.
We have the greatest responsibility to ourselves to look after our hard-earned money. You should receive and review your benefit statement from the product provider each year so make sure you update your details with the product provider so you receive regular communication about your investments and policies. The statement will have the contact details of your adviser. If you have taken out a policy and never heard from the adviser again, contact the product provider and either get another adviser or cancel the commission that is paid to the adviser.
In some cases, mostly in life insurance products, commission is structured into the fees, but that doesn’t mean the original adviser should keep receiving it, if they are not performing their duty. Find another adviser who is prepared to work for the commission they are earning.
Don’t just sit back and then wake up when you realise you have forked out tens of thousands of rands in commission. Take action today – find those policies and call the adviser!
Rules around termination fees
There have been changes to the legislation around commissions and termination fees, but it all depends on when you took out your policy.
In 2005 legislation was introduced to cap the maximum termination fee on retirement annuities and other policies. It was set at 30% for retirement annuities and remained at 30% until 31 December 2017. Since 1 January 2018 this percentage was decreased to 20%. Yearly decreases to the cap were introduced at the same time to gradually reduce the maximum charge each year, to arrive at a cap of 5% on 1 January 2029. The table below provides details:
A new set of rules was introduced for retirement annuities or endowment policies taken out from 1 January 2009. The maximum surrender charge is set at 15% and it must reduce over a maximum term of 10 years to zero (a shorter term applies to some policies).
This article first appeared in City Press.