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What are the true costs?

04 September 2019 Jonathan Faurie

Over the past two years, a lot of legislation has been passed in the financial services industry focusing on promoting cost transparency.

We recently published newsletters which discussed the new Association for Savings and Investment South Africa’s (ASISA) Retirement Savings Cost (RSC) Disclosure which was implemented on 1 March 2019 and became compulsory on 1 September 2019 for all ASISA members with commercial umbrella funds. 

However, there are concerns among some financial services providers that advisers will not be able to effectively disclose costs to clients. FAnews spoke to Shakeel Singh, CEO at Sanlam Umbrella Solutions, to find out his views on the new standards and whether there is a concern about the future of advice. 

Opaque disclosures

Singh points out that in the past, costs were disclosed in different ways which led to some opaqueness regarding the true cost to client. Now that there is standardised disclosure, fairer comparisons can be made on a total investment basis that is expressed as a percentage. This will bring a lot of clarity into the market. 

He adds that what ASISA is trying to do through this standard is to try and get investors to understand what are the cost implications impacting their investment. “Every product provider uses different metrics and information to determine their cost. The new standard will allow independent advisers to sit with clients and discuss why they recommend one fund over another. These recommendations are aligned with the risks that the client faces and the investment goals that they have,” says Singh. 

Singh says advisers who can interpret costs will have an immediate edge, especially if they can pre-emptively explain the implications of the new rules to clients. 

“This is a standard that needs to be implemented at an employer level and not a member level. Therefore, it goes to the heart of initial advice that employees receive when they join a company and begin their retirement savings,” says Singh. 

Areas of focus

In compliance with the new standards, fees will be disclosed across four main buckets:

- administration;

- advice;

- other, which includes all other fees deducted from member contributions like contingency reserve account levies; and

- investment management, which will be the biggest fee component. 

Singh says here is where many disclosure problems arose, as asset managers are not necessarily used to giving the amount of detail required for the new RSC standard. ASISA wants the total investment cost, which is total expense plus transaction costs, shown as a percentage of assets under management. 

He adds that, for advisers, the real skill lies in interpreting the data and ensuring this is the same across the board. 

“If there is a difference in the membership data that is compared from one administrator to the another, it will naturally affect the generated numbers. The same goes for the investment portfolio; if a passive fund is compared to a smooth bonus fund, the smooth bonus fund will end up looking more expensive. However, passive funds are generally cheaper as an investment strategy and are not comparable to actively managed balanced funds. Advisers need to understand this and recognise it when doing calculations,” says Singh. 

Challenges abound

“There are a few concerns when it comes to the level of advice that will be provided in the future. Because different product providers use different metrics to drive their investment, there may be some discrepancies when it comes to the interpretation of costs,” says Singh. 

Then there is the challenge of one type of investment strategy being used over another. Different strategies have different costs, but they also achieve different outcomes. Advisers will need to have more than a basic knowledge about investing so that they can discuss this with clients.  “They do not need to have the same knowledge as fund managers, but a skill set beyond the basic knowledge of investing will be advantageous,” says Singh. 

He adds that now, more than ever, brokers play an integral role in looking beyond fees to analyse the value propositions of like for like products. “There needs to be caution here. There is the risk of heightened fee fixation. Our recent Benchmark research shows that in terms of importance, cost and charges make up 20% of concerns amidst other more significant issues. Further, we have shown a change in costs does not significantly move the needle in terms of member outcomes,” says Singh. 

Relationships are key

Singh feels that ultimately, compliance with the new standard is really about relationships. 

“At the end of the day, while saving towards retirement is important, the process is not tangible. You are buying a relationship. You are looking to work with someone over a sustained period. It is about relationships, not just numbers. That’s an important value proposition to consider, especially as the new legislation comes into force. The whole industry will need to work together to ensure it optimises member outcomes,” says Singh. 

It also goes beyond the relationships that advisers have with clients. Advisers need to engage with product providers to find out what the drivers of costs are within their companies. 

Editor’s Thoughts:
Disclosing costs is not a bad thing as it can probably lead to proactive conversations between advisers and clients where value can be found, and trust can be built. Knowledge is power. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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