Moonstone 3 November 2008: Section 14 Transfer Fees

SECTION 14 TRANSFERS: FEES STILL A PROBLEM

The debate around fees payable to advisors for Section 14 transfers was addressed in the recently published Financial Services Laws General Amendment Act of 2008.

Readers may recall that there was no issue with payment of commission until input from the LOA persuaded the national treasury to ban it altogether. Protest lead to a compromise that saw the following arrangement put in place:

• No fees or commissions are payable by any party in return for the facilitation, intermediation or recommendation of the transfer.
• No fees or commission are payable by any party for financial services rendered after the transfer in respect of the transferred interest of a transferring member or non-member spouse which exceeds the maximum commission that would have been permissible in terms of the Long-term Insurance Act and the regulations there under in the case of a transfer from an underwritten fund had the transfer not been done.
• Notwithstanding the above, provision is now made for trail fees that are negotiated and agreed to by the transferring member or non-member spouse annually, which fees are payable by the transferring member or non-member spouse personally or authorised by the transferring member or non-member spouse to be deducted from the fund.

Practical implications

The informative Old Mutual “Did You Know” newsletter, from which the above was taken, also makes the following observation:

“Trustees will have to decide how Funds will deal with the “annual agreement” requirement. Processes need to be put in place to pay fees that are negotiated and agreed to in writing by the transferring member or non-member spouse annually where the transferring member or non-member spouse authorizes the fund to pay the advisor. Provision will have to be made for this on application forms.”

A reader sent me a copy of a letter from a “receiving” fund in which they indicated that there were still issues around this matter that they had referred to the FSB. Until they received a ruling from the Registrar, they would not be in a position to pay initial and ongoing fees to advisors.

While one understands that the product houses need to act within the parameters laid down for them, consideration should also be given to the plight of the intermediary.

Obtaining the required documentation, together with compulsory FAIS paperwork, is no small task, and then one has to monitor the process to completion. While the stipulated period is 180 days it can in practice very easily take more than double that time to complete. Your fee is only payable when the whole deal is concluded, provided that the current uncertainties have been resolved. How many other businesses expect you to wait for your remuneration that long?

A further issue that emerged in the wake of the world economic crisis is the application of market value adjustors when a Section 14 transfer is requested. These can applied in addition to reduced early termination values and can have quite an impact on the eventual value available for transfer. Part of the advice that the advisor has to offer is whether the client will be better off moving to a new fund where lower costs apply, or staying in the current fund, but with his capital intact.

There are numerous variables, and it is a wise man indeed that makes the call. Very few clients have the insight to make an informed decision on their own, and if your recommendation proves to be incorrect, the client suffering from selective amnesia may very well lay a complaint and sue you for damages.

The upshot is that clients who needed to move their funds will be disadvantaged as the combination of a fear of regulatory backlash and a lack of remuneration will force advisors to avoid assisting their clients in this regard.

And yet again, the biggest loser could be the one who is supposed to be protected by these regulations - the consumer.