Life was simple for investors 30 or 40 years ago. Investment products were sold either by tied agents or independent brokers in insurance wrappers. There were upfront commissions which, though regulated, were generous enough for top agents to become well off. It was enough for life insurance to attract first-rate salespeople.
It was easy enough to criticise as for many years commissions were not even disclosed to clients. When it came to endowment policies, there was something called the “benefits illustration agreement”, which showed the growth in the investment assuming two potential average growth rates as high as 10%-15%, quite a meaningless projection.
For many of us — especially in the Johannesburg area — our first investment was a Liberty endowment. The policy document had a distinctive dark blue cover. It was unquestionably “sold” and not “bought”. Often people would agree to take out an endowment policy just to get the nagging agent off their back.
Liberty was an amazing training ground for independent brokers. It still has a first-rate agency force, though the Liberty brand now endures for sentimental reasons — the business is wholly owned by, and integrated into, Standard Bank.
Often these endowments policies were not good value for money, and the penalties were onerous for early withdrawals. Retirement annuities (RAs) were an easy sell in the 1970s when the top marginal rate of tax peaked at 72%. Clients often did not look much further than the tax deductibility and rarely examined the commission structure. RAs often had 30 year terms as the capital could not be accessed before age 55.
Many commentators, including me, were highly critical of the life insurance cost structures. The statement of intent in 2005 forced the life industry to reduce penalties on RAs, following the crusading work of then pension fund adjudicator Vuyani Ngalwana, who was man of the year in much of the financial media.
Almost 20 years on, it is not so clear that the decline of the life insurance industry as the main vehicle for harnessing the nation’s savings was such a good thing. The top end of the market is well served by advisers, including the elite members of the life office agency forces. The bottom of the market has a highly competitive group of companies, particularly Old Mutual, Sanlam and Metropolitan. There is also a large, informal, stokvel-based savings pot in the mass market.
But there is certainly a missing middle. Unit trusts were designed for this missing middle — regular savings for the middle class. The extent of regular savings (what the life insurers call recurring premium) is not disclosed in the Association for Savings and Investment SA (Asisa) statistics. But it has become a tiny proportion of the industry that is dominated by lump sum investments by the affluent — particularly in vehicles such as RAs, preservation funds and living funds.
In the retail market, brokers are now called independent financial advisers. They offer “advice” as it is formally called, and they often package this as solutions. They do not sell product any more, implying that “product” is a dirty word. I am not sure why.
Many “advisers” are scarily ignorant of the underlying products they sell. You would have thought an independent financial advisers would have a working knowledge of some of the larger products in the market such as Allan Gray Balanced or Coronation Balanced Plus, just as a general practitioner has a working knowledge of common drugs such as Augmentin or Epilim. Clients should be able to go to an independent financial adviser and come out with a prescription for the products that are appropriate for their circumstances.
Yet often advisers are not in a position to provide this most elementary kind of financial advice. Typically, advisers are spoon-fed model portfolios by discretionary financial managers. These offer model portfolios, which were known as wrap funds 20 years ago. These are yet another link in an already onerous food chain. Clients end up paying for the underlying fund manager, a multi-manager and/or a discretionary financial manager, platform and unit trust company fees.
The biggest bite often comes from the adviser. There are reports of 1% fees for these gatekeepers. Maybe worth it for the best ones such as Kim Potgieter and Warren Ingram — if they have any capacity to take on new clients; they both have full dance cards given their media commitments. Advisers see themselves as financial coaches, and in fact the Australian term “planner” seems a lot more appropriate.
Financial advice is a strange concept. Share tipping, done by the likes of our colleague the Finance Ghost is not considered “advice”, yet this is often the most helpful kind of advice. Advice also implies that the client doesn’t need to take it, but it is very rare for a client to go against their adviser.
The equivalent of the adviser in the institutional market, the asset consultant, would expect their clients to sign a disclaimer to say they had gone against professional advice — another reason the term “planning” is a lot more suitable than “advice”.
The financial planning practice of the future should be a multidisciplinary, one-stop shop, in my view. As well as picking funds for clients it should continue to offer life insurance, as the old school agents used to do, medical aid and short-term insurance. Why should people go to separate practices for each of these services?
• Cranston is a former associate editor of the Financial Mail.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.