The great debate: Section 14 transfers

The Life Offices' Association (LOA) presentation to Parliaments' Portfolio Committee on Finance on 31 May 2007 included recommendations on trail fees on the transfer of funds from underwritten to non-underwritten RAs, sparking a fiery debate in the industry.

The LOA believes that excessive financial incentives would result in intermediaries recommending that clients switch to underwritten RAs regardless of the financial implications. Thus, "the LOA proposed that fees, notably trail fees as percentage of the assets, should not be permitted to be deducted from the transferred retirement savings under the second fund - where those fees by law are not permitted to be deducted from those retirement savings under the first fund."

FAnews, via the FAnews Online newsletter, asked our readers if they shared the LOA's view that trail fees on transferred RAs were unfair. Here are a few comments - you will find many more on our website www.fanews.co.za:

"Exploiting the situation..."

"The National Treasury and the FSB have set up legislation via the FAIS Act that they are not competent to administer. The LOA is exploiting the situation for all they think its worth to them and intermediaries are being treated like criminals without a trial.

"Surely the matter of a trail fee should be between the client and the financial adviser? A trail fee is discretionary, and a client can cancel it if he/she feels the intermediary is not providing regular follow up.

"Take the case of Sanlam refusing to allow transfers to Allan Gray, without Allan Gray agreeing not to let the intermediary have any trail fees. Allan Gray has, quite understandably, told Sanlam to go and get stuffed with that idea. So what does an intermediary do? If a client is genuinely dissatisfied with an assurance company, the intermediary effects the transfer without a trail fee. Allow the transfer to proceed without any hassles from the transferring fund. The client and intermediary can agree to a trail fee after the fact.

"A lot of my clients absolutely hate assurance companies. They prefer to deal with independent fund managers like Allan Gray, who don't have shareholders diving into the returns on their investments.

"Now that a lot of assurance companies are losing a lot of business to fund managers like Allan Gray, they are trying to screw the intermediaries over to fall into line. Unfortunately it's too late for that over-used tactic to work anymore.

"I don't mean all assurance companies. Companies like Altrisk and Momentum are quite pleasant and professional to deal with. It's the old dinosaurs that are causing chaos in their own, self-inflicted death throes."

A clever smokescreen

"What a clever smokescreen! LOA members can levy penalties on the RA's fund value well in excess of the cost of any trail fee. They then have the temerity to suggest that a trail fee for looking after the client's interests is the cause of a serious increase in costs and should not be allowed?

"The continuing arrogance of these companies is unbelievable and still smacks of the way things were done by the old order. Surely it is the client's democratic right to decide how they want to remunerate their adviser and not to be policed by a body that has lost most if not all of the credibility it thought it had.

"What the LOA's members are relying on is that many advisers will feel that it will not be worth their while to do the necessary for their clients for no reward. Sorry to disappoint, but a good adviser will do what's best for the client anyway. I think you will find that many of us haven't sold an ‘underwritten' and ‘expensive' RA for many years."

Retaining a legacy

"I notice that the LOA doesn't make mention of the commissions on updates that they have been deducting for themselves because the original intermediary is no longer in the business! The industry needs to do a thorough analysis of the old policies and compare them to the new generation products, and present those details to Parliament!"

Paperwork controls

As far as fee based advice is concerned, agents of certain life companies have been informed that if they charge for advice they will be fired. So we, as agents, have no choice except to complete transfers for free.

"It is my personal opinion that if ‘unscrupulous' intermediaries wish to swap funds from one company to the other purely for personal gain as is inferred then paperwork controls should be initiated by the LOA, which ensure that justifiable reasons were given to warrant transferring such funds."

A question of size

"As a legal adviser in the industry for 12 years I believe what is happening is one of the most wonderful developments in the retirement industry history. The person who gives the advice and service should be remunerated accordingly on an ongoing basis, because the adviser will be liable for the advice.

"Product providers should provide products and not give advice. The problem is that the big insurers have the finances and infrastructure to recruit, train and remunerate new entrants into the market and obviously these are the products they learn - which include traditional life products and RAs. This is where the insurers make their big money - with the so-called ‘smoothed bonus' or similar portfolios where 25% returns are made and 15% is given to the clients. When clients object and make it paid-up or reduce premiums, they get hit with penalties, similar to a paternalistic headmaster in the old regime.

"This obviates a larger debate between adviser groups. The solution is almost political - broker organisations should regroup and bulk their investment books (including all traditional products - can you imagine the size?) and become stronger organisations that can do their own recruitment and training and pressurise the insurers for lower fee structures at better ongoing fees to advisers."

Conclusion

The majority of our readers believe a trail fee on section 14 transfers is essential to cover the financial intermediary for ongoing advice and communication to the client. The consensus is that the LOA is again forwarding arguments to the specific and ongoing benefit of its own members, leaving the intermediary to deal with another cost of providing good financial advice.

The only real concern seems to be whether a financial intermediary will provide ongoing advice and support to warrant the trail fee. It seems there is some work to do before the industry finds a fair solution for all stakeholders - including the intermediary and the consumer.