Wanted: Low-cost, low-pre­mium, flex­i­ble sav­ings so­lu­tions

CityPress - - Business -

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.

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