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Advice or information?

20 August 2006 Angelo Coppola

Mike Jackson, LOA chairman, says that international best practice is not always the best thing for SA, but there is a learning that the country can benefit from.

He was speaking at the LOA convention in the Western Cape, and he went on to ask whether consumers need advice or information? An industry has been created around this and it is just another barrier between the consumer and the market.

Note: Since the convention last Thursday he has issued a clarifying statement, which we don't carry here.

He did however highlight several key challenges, and we report on them, as we heard them- we were there.

Challenge 1 is based on the fact that between 2005 and 2006- which was and is a major inflection point for the industry, as there was and is now government involvement in product design- which is a first- with the consumer as the key starting point.

Challenge 2 focuses on the savings culture, with the problem being that less than 15% going into any kind of savings. Interestingly there is compulsion in Nigeria and Australia for example, where it's legislated and is seen as the ultimate tool, as people don't naturally save.

Jackson stressed again that the life industry is geared for the recurring premium business, as people don't just acquire wealth- it's a long process. He again touched on the power of compound interest, and the impact of skipping a monthly payment.

He reiterated that there should be limited access to the savings as people will always find a good reason to tap into the savings. He called for a mix of rewards and penalties- working in tandem to get the ultimate benefit. In China people are saving, despite small amounts of disposable income.

Challenge 3 is really about costs. We have created an incredible industry blocking the consumer from the market- which prevents them from getting there. The layers of intermediation are expensive.

The cost structure of the morass of people involved and the percentage would be huge, as a GDP number- which erodes savings, and investing.

We have to rip out as much as possible- and distribution is a huge cost area- sometimes as high as 20%.

In the life industry he asked why people would get involved if the risk is carried by the investor. They can go direct to market. Smoothed bonus products are the way to go- as the vagaries as removed.

Challenge 4- distribution. The products and legislation is complex. Clients need to work through the complexities and the fees charged for advice. We the industry have over-complicated the life industry. They are guilty of looking at the sophisticated investor as using them as the starting point. This is not the way to go.

The solutions he says is that product simplification. Actuaries and lawyers beware- the complexities are unnecessary- strip out advice and make the product self regulating. Simplify distribution- execution-only sales are the way to go.

Sophisticated investors are opting out because they don't need advice. Legislation follows market behaviour and when products are simplified it should follow that legislation will be simplified.

He also suggested that investors should be incentivised to save. The savings structure shouldn't exclude the wealthy. Tax breaks, bonuses and exemptions are some solutions.

Editor's thoughts:
* As usual Jackson was direct and forthright, and his comments will stir up the industry as usual regardless of the traction he made.

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