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New trends can only benefit the industry

24 April 2017 Jonathan Faurie

We are entering into an interesting phase in the future development of the financial services industry. Traditional ways of investing are being cast aside and the effectiveness of traditional retirement savings vehicles are being questioned. This has given rise to the unprecedented growth of umbrella funds in the industry. This has had a profound effect as individuals, and companies, are seeing the benefits of this. But do they really appreciate them?

Critical mass

As with the introduction of retirement annuities and mutual funds, umbrella funds will only prove to be successful if they gain critical mass. The more people that join them, the stronger they will become.

Dawie de Villiers, CEO of Sanlam Employee Benefits, says that this is already becoming a feature in the industry.

“The key trend over the past decade has been retirement fund consolidation – with massive growth of the umbrella fund market as employers continue to transfer to these funds from stand-alone arrangements. In fact, with a 17% market share (measured a year ago) and growing, multi-employer commercial umbrella funds now constitute the fastest growing segment of the South African retirement fund market,” said De Villiers.

FAnews spoke to Joanne Brown, Principal Consultant (Sales) at Momentum Consult, to find out more about the effects that this is having on the industry.

“It is, at first glance, fairly obvious that it is a good thing for the client as opposed to the industry from a costing point of view. There are significant cost savings due to the economies of scale achieved by the structures of these arrangements,” said Brown.

“For the industry, I would also say that the growth of umbrella funds is a good thing. The many freestanding funds still operating in the industry tend to attract high running costs. However, in the majority of cases, if one does the maths, the profit margin for the administrators and the specialist employee benefit consultants is low. They are extremely labour intensive and have become more and more so over the last ten years at least. This is due to increased legislation and increased policing and tightening of existing legislation,” said Brown.

Growing the pot

Growing retirement funds is the sole purpose of a retirement savings vehicle; and umbrella funds simply seem to be achieving this better (or more effectively) than other funds. The reason for this cannot fully be placed at the door of decreased costs; there must be another ingredient in this mixture. De Villiers pointed out that commercial umbrella fund arrangements grew assets under administration by 25% a year between 2011 and 2015. This was achieved while standalone funds struggle for growth.

“One of the reasons why there could be such a demonstrable difference – between the growth in umbrella funds vs standalone – funds can only be as a result of poor investment decision making. That being said there is more of a safeguard in an umbrella fund as Trustees are usually highly experienced employee benefit professionals where one or two of them is usually an investment expert and the fund uses the services of a reputable asset consultant,” said Brown.

Brown also adds that there is so much competition between umbrella funds and investment returns that it is a crucial element in the decision making process of an employer. They are therefore under a lot more pressure to perform than a standalone fund.

“Lastly, because of size of assets in a large umbrella fund, Trustees have leverage with asset managers in respect of investment management costs,” said Brown.

Millennial investors

The financial services industry is also welcoming a new generation of investors in Millennials. While new investors coming into the industry is not uncommon, the personality traits across previous investor groups were common. The same cannot be said about Millennials.

“Surprisingly I have found many Millennials are aware of the necessity of saving. I definitely don’t think they are any more averse to funds than the baby-boomers. In fact, I have detected quite a bit of enthusiasm from them. The electronic age has helped a lot where service providers keep pace with the latest and greatest methods of communicating,” said Brown.

Brown adds that she feels that Millennials are more aware but they are also more prone to racking up debt. Electronic gadgets have changed the game so they can be more impulsive in their shopping.

“But then I suppose so were we, just for different stuff. I believe that if we modernise the employee benefit industry – eliminate the dinosaurs and the rigid, tunnel-vision bullies, boys clubs – we could see a drastic turn and increase in interest,” concluded Brown.

Editor’s Thoughts:
Change is an ever present constant in life. Yet, it is always surprising to hear that people are afraid of change. I suppose it’s because we adapt to change at the last minute. Let’s face our fears and become early adopters of change so that we can improve the financial services industry to benefit all. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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