If National Treasury is serious about its industry and retirement reform proposals then we had better get our house in order, and quickly at that for it seems that they are keen to dis-intermediate the financial advice industry. In fact it appears that there is a growing “anti-commission” and by consequence “anti-advisor” trend happening in the financial services industry.
This seems to be backed by a drive from many of the financial services companies that are advertising products with “no fees and no commissions” thereby appealing to the consumers’ rather jaded opinion of the financial advice industry. Much of the advertising in the financial services space at the moment appears to be aimed at “cutting out the middleman” and saving “huge” amounts in commission and fees. A few quick examples are the ad campaigns of 1Lifedirect, Frank.net, RSA Retail Savings Bonds, Fedbond and Nedbank savings bonds to name a few. And yet in each instance, the promise of “massive” savings by going direct is actually nothing but empty promises.
Let’s examine a few of these promises:
Save up to 22% with 1LifeDirect/OutSurance Life/Frank.net – I have no idea how they arrive at 22% but in every instance we have investigated they are significantly more expensive than life cover through just about any traditional company even with full commission on it. On top of that, going direct for life insurance also exposes you to other risks. The direct insurers claim that they cut out the need for paperwork. Far from this being a pro it could turn out to be a real negative the next time you apply for insurance cover; no paper work means that you have no record of what you answered on the medical questions and no record of answers significantly increases the risk of accidental non-disclosure. As a consequence, this significantly increases the risk of a claim being repudiated by the insurance company (because of the accidental non-disclosure). You would be better off using (and paying for) the services of a reputable financial planner.
RSA Retail Bonds – “There are no charges, commission or costs when you invest in RSA Retail Savings Bonds. This means no unnecessary fees eat into your investment.” At least that’s what they claim but they don’t mention that while you may get a reasonable rate, if you draw all the income, there will be no capital growth and while that may not sound serious to you now, if you invest for 5 years the purchasing power of your capital will have decreased by around 26% of its original value (assuming inflation of 6% pa). So while your capital is guaranteed by government, it is only the nominal amount that is guaranteed and your R100000 initial investment will only be worth around R74000 5 years later. Now if you sought some financial advice you might be offered an “enhanced income fund” as an alternate to the RSA Retail Bond. In this instance, based on a realistic performance of around 7.5% pa, you could reasonably expect to get an income equivalent to the RSA Retail Bond as well as the potential for some capital growth on the funds. Yes there would be some risk and yes there would be some fees but I know that I would rather pay a fee and probably keep up with inflation than pay no fee and definitely fall behind it!
Nedbank’s Just-invest – “get a great rate of up to 5.25% – no fees or commissions” I forgot to add in that “T’s & C’s apply” and in this instance, unless you have more than R525000 you are not getting 5.25%! In fact, unless you have more than R50000 you would definitely be better off in a money market unit trust account (or even an enhanced income fund). But then you would not know that unless you were prepared to pay for advice…
For the record, I have no problem with people going direct. To me it is much like fixing the toilet at home – I can do it but it will take time and effort and I might not have the necessary tools. Either I invest the time and energy or I pay a plumber to do it for me. In the same way, if a broker/advisor can’t add value to the client and he/she knows what they want and has the time to do it then there is no reason that they should not go direct. They just need to be aware that it may not always be the best option and that while in some cases it may appear to be cheaper it could turn out to be a very costly exercise.
And not using an advisor does not necessarily result in financially better off consumers, in fact, research* has consistently found that “consumers with a financial planner are financially better off than those without advice.”
So beware, sometimes cutting out the middle man just leaves a gaping hole.
* FPA® and Ameriprise® Value of Financial Planning study conducted by Harris Interactive, August 2008. The Financial Planning Association (FPA) and Ameriprise Value of Financial Planning Study: Consumer Attitudes and Behaviors in a Changing Economy,