Greater transparency needed in retirement industry

Steven Nathan, Chief Executive of 10X Investments.

In a time when retirement saving levels are at an all-time low in South Africa, the release of the Financial Services Board's (FSB) Retail Distribution Review (RDR) discussion paper earlier this month is seen as a step towards creating greater transparency and a simpler product offering for retirement fund investors.

According to Steven Nathan, Chief Executive of 10X Investments (10X), the RDR paper proposes a number of changes to the regulatory framework for distributing retail financial products in South Africa. "It sets out, in great detail, the many different distribution channels and fees charged, underlining the complexity of the system and the inherent conflicts of interest. The paper makes sound proposals on how to simplify the system and limit these conflicts, to ensure that financial customers are treated fairly and can navigate the retirement industry more easily."

Nathan says that all retirement investors essentially have the same objective: to secure a pension that will preserve their standard of living through-out retirement. "At first glance, this seems an imprecise and complicated objective, which reflects in the way the retirement industry sets about its business."

He says that if the problem is properly defined - in terms of an absolute savings goal - it is possible to solve the key variables that will likely achieve this outcome: how much to save, for how long, and the required return on those savings. "Once the required return is defined, it is also possible to set the optimal investment strategy (in terms of asset mix and fees) that has a higher chance of delivering this return. In this way, a complicated problem can be rendered into a simple solution."

Nathan says the retirement industry currently obscures this simplicity, by offering hundreds of funds, each with a 'unique' mix of assets. "The confusion is compounded by multiple fee layers and opaque reporting.

Investors are further intimidated by technical regulatory debates and commentary on short-term economic developments."

He points out that most investors and trustees are unable to see through the confusion that is created and make sensible decisions. "The confusion and complexity is deliberate, aimed at disempowering investors and trustees and keeping them hostage to 'independent' consultants."

Many of these consultants are conflicted and prioritize their own interest.

Some represent companies that provide administration and investment management services, and accordingly nudge investors towards in-house products. Others simply seek to maximize their own commission. They disregard low cost service providers and lead clients to high-cost products.
In doing so, they advocate actively-managed funds, fully aware that the great majority deliver lower returns than index funds. In addition, they also promote complex structures and choices, to secure their own role.

Nathan points out that there are many cases where so-called independent consultants offer their clients only one product - the one that they are familiar with and secures them preferred treatment from the service provider - and totally disregard alternative more suitable products. "These advisers also tend not to move with regulatory trends."

He says that in this way, savers are penalised twice: they pay for advice they do not really need and they end up with expensive investment products that typically deliver a sub-optimal outcome. "Given that a 1% per annum fee saving increases the long-term pension value by up to 30%, the industry's deliberate lack of transparency - and investors' inability to make informed decisions as a result - causes many of them to miss their retirement goal by a large margin."

Nathan explains that the introduction of the RDR discussion paper hopes to counter these issues; however, it is only one part of the many regulatory reforms seeking to improve the services and outcomes delivered by the retirement, investment and insurance industries. "But for this to happen, it is crucial that service providers commit to the substance of these reforms - not seek ways to navigate around them - and endeavour to educate and assist the public."

He says that retirement fund members should be encouraged to become more informed and to make financial decisions on their own with the help of relevant, reliable tools, such as the online 10X retirement tools. "In addition to this, members should always question: 'Am I getting value for money advice?' And they should be aware that they have the right to use alternative providers, or to ask for a transparent and complete comparison."

Nathan says that 10X fully endorses the principles and proposals contained in the RDR and already applies many of the underlying principles in its business model and product offering. "The company offers investors direct access to its retail products - the 10X Retirement Annuity (RA), the 10X Preservation Funds and the 10X Living Annuity - and does not depend on any other channels to secure customers."

He says that if customers do choose to use a financial adviser or broker, 10X will not permit an upfront commission, merely an ongoing advice fee, at the customer's discretion and limited to 1% per annum. "If applicable, the adviser fee is clearly disclosed (both as a percentage and as a rand amount), which is in line with the RDR proposals," concludes Nathan.