Government aims to ban investment??commissions

2014-11-23 15:00

Will the Treasury’s recommendations make you save more, asks Maya Fisher-French

This month, the Treasury released two important documents that aim to improve the savings rates in South Africa.

The first paper, the Retail Distribution Review, made several recommendations about how intermediaries should be remunerated, and a second paper outlined government’s plans to introduce tax-free savings accounts.

A key recommendation in the Retail Distribution Review is that product providers may no longer pay commissions and advisers will have to charge an advice fee paid for by the client. The report states that this “advice fee must be explicitly agreed upfront with the customer” and that “ongoing fees and/or commission may only be paid if ongoing advice and services are indeed rendered”.

The aim of these recommendations is to remove conflicts of interest that may undermine suitable product advice and fair outcomes for customers. For example, advisers will not be encouraged to sell products with a higher commission structure because payment would be the same irrespective of the product.

It will also reduce penalty charges on contractual savings products like retirement annuities and endowment policies as commissions will not have to be recouped.

As part of its attempt to reduce the complexity and costs of financial products, in its recommendations on tax-free savings vehicles the Treasury stipulated that only savings products that are “simple to understand, transparent in their disclosure, suitable for the majority of individuals” and that allow an individual to access the funds within seven days will qualify for tax-free savings vehicles.

While I thoroughly support the idea of removing conflict of interest, reducing complexity on investment products and encouraging best advice, I do wonder whether these policies will be effective in increasing the savings rate in South Africa, where investments and savings have to be force-fed to most people.

In 2013, nearly 300?000 new endowment policies were sold, with a total value of R3.2?billion.

The average premium was R450 a month. Of these policies, only 16?000 were done directly; the rest were sold by brokers. Whether you love or hate endowment policies, they remain the biggest savings vehicle in South Africa after retirement funds – the only reason for this is that the commission paid by product houses is incentive enough to make advisers actively go out and sell them.

Without this massive, incentivised broker force, would South Africans continue to save R3.2?billion a year? Will the new tax-free savings vehicles, which are envisaged to replace endowments, be incentive enough, or do potential savers still need the push from a sales force to make the investment – and if so, would advisers be prepared to go out and actively sell tax-free savings vehicles?

The recommendations of this paper would require a serious mind shift for potential investors around paying for advice. If the model is changed and clients paid the adviser directly for the advice, how many of those 279?000 clients who used an adviser would be happy to pay a separate advice fee and how would that advice fee be recouped?

There are only a handful of advisory practices that have moved to a fee-based model. Some advisers charge an hourly fee and others charge an annual fee on the total assets managed by the adviser.

A qualified adviser can charge from R700 to R2?000 an hour for advice, and the annual fee can range from 0.25% to 1% of the assets under administration.

The problem is that these practices tend to focus on clients who already have built-up assets – these are investors who have sufficient capital so that the adviser will be earning a relatively good annual fee from the start.

How many clients who just want to start saving R300 a month would be willing to pay the hourly fee, and how many advisers would be prepared to undertake the work involved for 1% a year on a low balance?

In an ideal world, savers would invest directly in low-cost, no-frill products and would not need the services of an adviser. However, South Africa’s track record in this regard is fairly dismal.

The Treasury has stated in the document that it may consider a separate fee model for lower-income earners, to address this issue, but how they will determine “low income” and what products it would cover remains to be seen.

The industry and consumers have until March 2015 to provide comment. We would welcome comment from our readers, so please email us at and give us your views:

.?Are you happy to invest directly without an adviser? Have you done so already?

.?Would a tax-free savings vehicle make you more likely to save?

.?Would you prefer a model where you pay an adviser directly either through an hourly or annual fee?

.?Are you happy with the existing structure where the product house pays the adviser a commission for advising and selling the product?

Tax-free savings vehicles

From March next year, people will be able to contribute R30?000 a year (or R2?500 a month) to a tax-free savings vehicle, and the growth, dividends and interest earned on the investment will remain free of tax.

A lifetime limit of R500?000 currently applies, although this could be reviewed.

In order to prevent “procrastination”, the R30?000-a-year limit cannot be rolled over – in other words, if you have not taken advantage of the annual saving, you will lose the benefit.

In order to prevent unnecessary withdrawals, individuals will not be able to replenish any funds they have taken from the investment and will still be limited to a maximum contribution of R30?000 a year.

Funds can be transferred from one tax-exempt product to another with no impact on annual or lifetime limits.

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