Edition: October / December 2016
EXPERT OPINION

LET ASISA’S NEW STANDARD APPLY TO BENEFICIARY FUNDS TOO

So argues David Hurford, director for Marketing & Consulting at Fairheads Benefit Services

Wouldn’t it be nice to be able to buy a financial-services product knowing exactly what it will cost, and what it will do for you? It seems that many financial-services professionals have made an art out of obfuscation, confusing consumers to such an extent that they either run screaming or resign themselves to a state of ignorance.

Fairheads has a long and proud history of leading the beneficiary-fund industry with products, service and innovation. We have also been at the forefront of making our fee structure simpler to understand by removing the many layers of cross subsidisation which exist with many other service providers.

In 2014, we developed an industry-first Comparison Rate which attempted to compare beneficiary fund service providers’ costs structures. Our hope was that this would make it easier for trustees to spend more time on considering the value propositions of the service provider – what they actually do for the minor dependent members in the beneficiary fund.

The model, which was independently reviewed by IAC (Pty) Ltd, a leading employee benefits actuarial firm, revealed some interesting results. Often, the service providers with low administration fees actually proved more expensive when taking into account the high investment fees that they charge.

While the Comparison Rate model provided some great insights into the costs of various service providers, because it was developed by Fairheads it would always be subject to suspicions of bias. This is why Fairheads called on the industry to adopt a standard for comparison which all service providers could use.

Thankfully the Association for Savings & Investments South Africa (ASISA) has developed, from 1 June 2016, a new standard for calculating the Effective Annual Cost (EAC) of an investment. The EAC outlines how ASISA members will disclose costs in retail products to the advisors and consumers who use their products.

As a result they can compare cost structures across various investment products in a simple, transparent and standardised way. The standard prescribes inclusion of all costs associated with the financial services product, including investment management charges, advice charges, administration charges and any other costs which could be incurred.

Fairheads believes that this is a great step forward for the financial-services industry in general. We have adopted the EAC for all Fairheads disclosures and call on all beneficiary-fund service providers to do the same.

How do they stack up?

The table below shows the EAC for eight beneficiary funds, each managed by a different service provider and commenced for a term of 18 years for an amount of R100 000. Included in the features of the product are monthly income distributions of 5% per annum of the capital introduced, as well as capital distributions of 5% of the capital introduced, escalated annually by 5%.

Table 1: Effective Annual Cost across eight beneficiary funds

Using the ASISA standard methodology it is easy to see which fund is the cheapest over the full term. It’s not quite that simple for trustees when looking at each service provider’s fee structures! In Table 2 below we have sourced fees from publicly available sources for the largest beneficiary- fund service providers. (Note that service providers may provide fee discounts or concessions to individual clients which would result in a lower EAC).

Table 2: Disclosed fee structures for the largest beneficiary-fund service providers

1 Asset allocation assumed at 10% cash portfolios, balance split equally between remaining investment portfolios.

Interestingly, the results are consistent with those of Fairheads’ Comparison Rate model in that, more often than not, service providers with low administration fees are usually the ones which charge the highest costs (giving credence to the old adage that if something looks too good to be true, it probably is).

This gives further weight to the fee and reform work being spearheaded by National Treasury, and particularly to the Retail Distribution Review paper which is currently out for comment. One of the aims of this review is to put an end to advisers placing their clients’ funds into products and services based on the level of remuneration that advisers earn, rather than the suitability of the product.

Fairheads hopes that this same sentiment is carried across the entire financial-services industry so that fairer and more transparent outcomes can be achieved for all. We call on the whole beneficiary-fund industry to adopt the EAC.

 

WINNER OF THE IMBASA YEGOLIDE BENEFICIARY FUND AND TRUST ADMINISTRATOR OF THE YEAR 2016, 2015, 2013, 2012, 2011
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