Edition: Mar - May 2014


Nearly ready for JSE

With the top Alexander Forbes executives likely soon to commence roadshows for the group’s keenly-anticipated initial public offering, they might expect some key questions. Here are a few, relevant to the retirement-fund industry as a whole.

Alexander Forbes, a leader in the financialservices sector, will later this year emerge from its Actis-led hibernation in private equity again to assume prominence as a JSE-listed company. While the group could sleep easily from the share market during this period, it certainly hasn’t been asleep in its business market. From published statements of group chief executive Edward Kieswetter, it’s evident that Forbes intends to execute a strategy of extending its institutional footprint to retail customers.

This can have wide-ranging ramifications, not just for Forbes but also for clients and competitors. Typical is potential conflicts in the leveraging of institutional business for individual business.

So TT drafted a series of questions for Kieswetter. Only the first four are answered here. The others, being specifics around the retail strategy, can only be answered after a Forbes board meeting towards end- March. They’re nevertheless published below as an indication of the issues that Forbes is addressing, and that its competitors will similarly need to address, as the strategy unfurls.

Kieswetter . . . higher purpose

Question: Do you foresee a big opportunity to build a retail business off the strength of your employer relationships?

Answer:The group has a clearly-defined strategic intent for the next 36 months. It has been anchored in creating an ethical financial-services company, driven by a higher purpose. The expansion into retail (individual clients) business forms part of that strategic intent. We see significant growth opportunities to leverage off the synergies in the group for a compelling offering that speaks to the aspirations, needs and expectations of our individual clients. The actual details of the retail strategy are being finalised so it would be premature at this stage to discuss them.

Are the proposed legislative changes of compulsory pensions preservation and default annuitisation hugely beneficial to your business?

We have been consistent in our belief that there is need for an integrated approach to structuring employee benefits that not only ensures financial security and wellness for employees but also entrenches a savings culture in SA. We therefore welcome proposals on compulsory preservation of pension-fund savings, as this will ensure that employees can build their savings for retirement.

The broader picture is that SA’s savings rate will improve significantly. This will contribute to social and economic transformation.

Also, as such a large administrator of pension funds, Forbes can access the records of thousands and possibly millions of individual pension-fund members. To build the retail business, will Forbes do so in order to approach these members for individual product sales? Can it do so without contravention of the Protection of Personal Information Act?

Naturally, any initiatives aligned to the implementation of our retail strategy will have to conform to any legislative and regulatory frameworks. We are in the process of ensuring that, in formulating and implementing the strategy, we will adhere amongst others to the POPI Act as well as Treating Customers Fairly which apply to the entire group.

For Forbes, is fund administration a loss leader (as with several other administrators which use it as a platform to cross-sell products and services) or is it a profit centre in its own right? If it’s a loss leader, then is it cross-selling that makes it profitable for Forbes? Can this business compete on a standalone basis?

Our administration is profitable as a standalone business.

Responses to the questions below will only be disclosed after the forthcoming Forbes board meeting. For a general context of the retail strategy, Kieswetter emphasises: “We have and continue to instil a culture of transparency and openness, in addition to implementing robust risk and governance policies which are reviewed regularly. We have zero tolerance of any activities that negate the objectives of our strategic intent to create an ethical financial-services company driven by our higher purpose.”

By extending its footprint, is the strategy to return to the concept of a one-stop shop? If so, will the strategy be implemented by incentivising client-facing individuals to cross-sell products?

For product distribution, to the extent that Forbes wants to use client employers, would a conflict of interest not be introduced for trustees of their pension funds? On the one hand, the trustees would choose Forbes on its merits as the fund’s administrator. On the other, what do they do if Forbes offers a discount on the administration service in exchange for the fund and its members being accessed to buy other Forbes products or services?

You’ve claimed to have removed all “perverse incentives” from the Forbes sales and consulting force. What “perverse incentives” would those be? Might it not be necessary to reintroduce some of them for implementation of the cross-sell strategy? Historically, Forbes has built its reputation on being a trusted advisor in selecting products for pension funds from a variety of insurers and asset managers. By looking to integrate the value chain and offer services from your own product houses (e.g. AF Life, AF Insurance and Investment Solutions), will Forbes’ value proposition change so that it becomes less unique and more akin to other large institutions?

Are the days of advice-only consultants numbered?

Who would you see as your biggest competitors? How will you manage the fact that many competitors are also product providers? In other words, can your consultants objectively advise a client to use a competitor’s products?

Why would an independent advisor want to support a Forbes product capability when he anticipates that it will be used to leverage more Forbes products, potentially in conflict with the independent broker’s advice appointment?

Will Forbes create a loyalty programme to entice individuals into buying more than one Forbes product or service? If so, from the perspective of the Treating Customers Fairly (TCF) requirements, how would Forbes justify the selective provision of benefits to different boards of trustees requesting the same core service?

When you took over at Forbes, you acted smartly to settle the damaging allegations against Forbes on “bulking” i.e. making secret profits through taking interest on the bulk deposit of client funds without disclosure. With Forbes’ change in strategy, how do you avert the danger of secret profits again being made by clients not knowing how discounted services are subsidised and how incentives are applied in the advisory force?