Wanted: Low-cost, low-premium, flexible savings solutions
One of my greatest frustrations with the financial industry is the lack of simple, cost-effective, flexible savings products for people who want to start saving with R100 to R200 a month.
While R200 may not seem like a lot of money, just by investing that each month into a stock marketrelated investment account, you could have saved R46 000 within 10 years.
I often engage with the industry, especially the life insurers, around this issue and they always argue that providing products for less than R500 a month is very expensive.
There is the cost of collecting the money, the cost of managing the money and the cost of advice – these create fixed costs, which, ironically, mean that the less money you have, the more fees you pay as a percentage of what you are saving.
They argue that one of the big drivers of costs is sales distribution and paying for advice. For a customer to purchase the product, they need to engage with an adviser, who in turn has to fulfil the many legal requirements under the Financial Advisory and Intermediary Services Act. This costs the advisers in both time and compliance regulations.
The very regulation that is supposed to protect investors actually hampers the ability to deliver costeffective solutions.
I often write that collective investment schemes such as unit trusts and exchange-traded funds are great low-cost, flexible investment solutions compared with traditional life policy products such as endowments. Yet an adviser needs further qualifications in order to sell these products to clients and these more qualified financial advisers tend to focus on the higher-net-worth market.
The majority of “linked agents” – advisers working for life insurance companies – are only qualified to sell investments wrapped within a life policy, which means most customers are sold inflexible endowment solutions where they have to commit to a monthly investment over a set period of time.
What is needed is a no-advice, low-cost, simple product that anyone can invest in. So I confess that it was with some excitement that I heard David Lloyd, managing director of Liberty Investments, arguing this week that he believes it is possible to deliver an investment platform that can provide tax-free investments using the new government tax-free savings plan from as little as R50, while keeping costs low.
Lloyd says such an investment platform would allow customers to decide what level of advice they required and pay fees accordingly. The lowest cost would be a simple proposition of one product, the choice of two or three funds and no advice. There could also be a limited advice version with more products, slightly more fund choice and also investment tools such as portfolio selection and tracking towards goals, with fees linked to providing that advice.
Lloyd added that the fund selection should be limited so that investors were not overwhelmed with choices and that it should allow for ad hoc payments for people who cannot commit to monthly contributions.
While this is all still in a discussion phase, it is a promising start and I hope to see Liberty – and other product providers – thinking out of the box and delivering feasible options to get people saving.