The Pro’s and Con’s of Using a Single LISP

Financial advisers often ask why they should select only one Linked Investment Service Provider (LISP) to do business with, rather than numerous. Their concerns in using one LISP could relate to a number of the following questions and/or concerns:

1. If all of my client’s assets are with one LISP, am I not risking the possibility of not being seen as “independent”?

2. If I place all of my new business with one LISP, I could possibly not be alerted to new product offerings being offered by a LISP that I do not place business with? This may render me uncompetitive.

3. In spreading my business amongst various Lisps, I could potentially limit any risk of the LISP going into liquidation or insolvent and thus spread my business risk. This must be “good business practice”.

4. If the service of one LISP deteriorates, in having multiple LISP contracts, I could suspend business with the “non-performing” LISP without compromising my clients.

While some of these comments and observations have a semblance of truth and reality, it is worth exploring each one in a little more detail to separate the myths from the home truths.

Independence

Whereas FAIS requires independent financial advisers to ensure that that the advice they dispense is “appropriate and reasonable” and that they have exercised “care and diligence”, it does not require them to have multiple LISP contracts to be seen to be delivering on this requirement.

LISP’s generally have an array of products that span local and international discretionary and retirement products, and depending on the particular LISP, would have a multitude of underlying investment choices. These choices could range from balanced investment mandates through unit trusts, guaranteed structures, direct shares, exchange traded funds and asset classes that could include hedge funds and private equity.

This means that LISP’s potentially have the broadest range of investment options that a client could ever hope for. Notwithstanding, the underlying investment options are not predominantly owned or managed by the LISP, but are provided by third-party asset managers completely unaffiliated to the LISP.

It is also highly improbable that these funds are being provided to one LISP at a price that is completely different from another LISP, unless it is derived from their own proprietary asset manager.

It is therefore reasonable to assume that a financial adviser could still be seen as being ‘independent’, irrespective of only doing business with one LISP, as these companies provide the most comprehensive range of investment options available to investors.

Competitiveness of LISP’s

The environment that South African LISP’s operate in is one of the most competitive in the world. The resultant effect is that when one LISP releases a new product initiative, it is quickly replicated and often further enhanced by its competitors. Therefore product leadership is often seen as temporary, unless the particular LISP has technological advantages or a legal structure (mainly offshore) that renders it difficult for a competitor to copy.

Often the “competitiveness” of one LISP over another is determined by the fees that they levy for the client. This is where financial advisers often see this factor as the most important criteria in doing business with a LISP. This is understandable as the impact of fees on investor’s portfolios can be dramatic over time if improperly managed. However, it can also be misleading and the incorrect conclusions be arrived at if the adviser does not look “holistically” at fees. This means that he/she should consider ALL of the expenses levied on the client account on the particular LISP platform including administration fees and asset manager fees. This, unfortunately, is often difficult to do, especially when it comes to comparing “like on like” but often Lisp’s offer fee calculators where appropriate comparisons can be made.

While fees are an important determining factor in doing business with a LISP, financial advisers should safeguard against using fees only, as a reason to support a particular LISP.

Business risk

LISP’s are regulated in terms of the Financial Advisers and Intermediaries Act (FAIS) and are required to have a nominee structure in place that separates the investor’s assets from that of the LISP administrator. There are also very stringent audit requirements placed on the nominee structure and professional indemnity insurance on the part of the administrator. LISP’s therefore have very stringent requirements in place to safeguard investors interests.

Most LISP’s are owned by large corporate entities, so financial advisers should be reassured. The recent events unfolding with a local LISP, where the nominee and the LISP were placed into curatorship, was indeed an unusual and unfortunate event.

It does however highlight the security in the safety of a large corporate balance sheet and the continuity of businesses in the event of unseen events unfolding in the management of the LISP business. Credit ratings are generally a good benchmark in viewing one LISP over another.

Non-performing LISP’s

It is fair to say that there is enormous complexity involved in the administration of a LISP business and service levels may fluctuate because of this. This is further exacerbated by an acute shortage of skilled and experienced service agents and administrators.

However, it is likely that any service deficiencies are temporary as administration is a core requirement, one that is essential for a LISP to perform. Pressures in terms of shareholders and new business strain will quickly address non-performance.

Conclusion

While there may be some merit in working through more than one LISP, on balance, financial advisers should also consider the following matters, before arriving at such a decision:

1. In having all of your business with one LISP, you increase your leverage in terms of fee negotiations. Often, LISP’s will have different fee structures for financial advisers with different levels of assets with them. If you spread your business too thinly across multiple LISP’s, you lose any potential bargaining power.

2. Some LISP’s offer investors the benefit of “fee aggregation” for clients. This means that if clients have multiple investment contracts with one LISP, they benefit from a fee sliding scale. If client contracts are spread amongst several LISP’s, the investor will lose this benefit.

3. Never under-estimate the value of strategic relationships with management of a LISP. When a LISP knows that you are committed to them on a long-term sustainable basis, you are likely to get much more “air time” with management. This helps you to work through any difficulties that may arise from time to time.

4. It is much easier to align your “back-office” and standardise your client reporting when you receive standardised client data. When you work with multiple LISP’s, the format of reports will vary and this compounds your client administration reporting complexity.

Kevin Hinton (pictured) Head Marketing Momentum Wealth