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A simpler selection process

30 July 2013 Nico Coetzee, PPS Investments
Nico Coetzee, Executive: Business Development at PPS Investments.

Nico Coetzee, Executive: Business Development at PPS Investments.

“Too much choice can produce a paralyzing uncertainty.” This is one of the findings of professors Hazel Rose Markus and Barry Schwartz, in a study on the meaning and significance of choice published in the Journal of Consumer Research 1.

So if a plethora of seemingly simple selections – from choosing a breakfast cereal to a cellphone operator; a brand of toothpaste to the make and model of a car – can leave you riddled with indecision, what does this mean for your investment decisions?

With over 900 unit trusts currently on offer in South Africa, each with their own mandate and investment objectives, it’s understandable that you may at times feel overwhelmed. Even the performance of those unit trusts grouped together in categories set by the Association for Savings and Investments South Africa (ASISA) has the potential to vary significantly. When making your investment decisions, where do you even begin?

Whereas open-architecture platforms try to give investors access to every available unit trust, guided-architecture platforms deliberately limit the number of unit trusts made available and only allow certain asset managers exposure on the platform. Such a platform may therefore help in making more appropriate choices when constructing portfolios by eliminating unit trusts that are too finely mandated or perhaps feature unusually high inherent risks in their strategies. In contrast, an open-architecture platform is likely to have a preponderance of volatile sector-specific unit trusts and may even include asset managers with poor track records. When choosing the underlying unit trusts for your investments, having investment professionals narrow your list down for you may be a good place to start.

Guided platforms further place emphasis on asset allocation unit trusts, which offer exposure to a number of different asset classes, such as equity, property and cash. This means that in addition to the assistance you’ll receive when compiling your unit trust shortlist, you’ll also be able to delegate important asset allocation decisions to your selected asset managers.

As an added advantage, the asset managers included on guided platforms are usually more willing to negotiate on fees, as they know that their unit trusts have a better chance of being included in investors’ portfolios due to the exclusivity of unit trusts available. This usually takes place in the form of a rebate, which the platform can use to reduce investors’ asset management fees.

So, if too many choices prove to be too much of a good thing, a guided platform may be a suitable consideration for you and your financial intermediary. These platforms simplify investment choice considerably and make it easier to construct appropriate portfolios while potentially offering reduced fees.

"Does Choice Mean Freedom and Well Being?", HR Markus, B Schwartz. Journal of Consumer Research, February 2010.

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