An an­swer to com­pli­cated in­vest­ment choice

Or just an­other layer of fees

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­week.co.za

A LOT OF IN­DI­VID­UAL in­vestors prob­a­bly have their money in­vested in unit trust funds or an­nu­ities through a linked in­vest­ment ser­vice provider (Lisp) with­out re­al­is­ing it. Es­pe­cially lump sum in­vestors – they will con­sult a fi­nan­cial ad­viser, hand over the money and in turn it goes to a Lisp.

The in­vestor would have been in­formed of this, but it’s just part of the de­tail. The Lisp will place the funds with the ap­pro­pri­ate as­set man­ager or com­pany run­ning, for in­stance, liv­ing an­nu­ities.

There are two ways of look­ing at Lisps. A con­ve­nient and value-adding ser­vice that looks af­ter and pro­tects the in­vestor, or just an­other link in a food chain that’s stretched any­way. And of course, even if you ac­cept the first view of Lisps, they do add an­other layer of fees in an in­dus­try un­der fire for charg­ing clients too much.

Not sur­pris­ingly, Ri­aan van Dyk, CEO of Mo­men­tum Wealth and chair­man of the Linked In­vest­ment Ser­vice Provider As­so­ci­a­tion, ar­gues there are ben­e­fits, many still un­tapped, to us­ing Lisps. They are trans­par­ent, flexible and per­haps most im­por­tantly of­fer re­tail in­vestors a mea­sure of pro­tec­tion in be­ing able to quickly switch a client’s money to a dif­fer­ent as­set man­ager or com­pany. “The best pro­tec­tion that con­sumers have is the abil­ity to take their money else­where,” he says.

From an in­vest­ment in­dus­try per­spec­tive, Lisps are a valu­able source of busi­ness. Es­pe­cially for unit trusts. Latest stats show 29% of As­so­ci­a­tion of Col­lec­tive In­vest­ments (ACI) sales are via Lisps.

But Lisps have also helped fos­ter a more open at­ti­tude to ex­actly where a client’s money goes and how it per­forms. Van Dyk reck­ons a num­ber of the newer unit trust man­age­ment com­pa­nies have, in­di­rectly at least, styled their busi­ness for the Lisp en­vi­ron­ment.

But while in­ter­me­di­aries of­ten use Lisps as well – as long as the client is pre­pared to pay the ex­tra fees, they are con­ve­nient and of­fer pro­fes­sional in­vest­ment ad­vice – this is per­haps the great­est threat to Lisps.

Most of the money – 38% – go­ing into unit trust sales is from in­ter­me­di­aries. And while FAIS leg­is­la­tion weighs down on bro­kers and they might find an easy out in Lisps, oth­ers want to keep con­trol of their clients’ in­vest­ments and earn higher fees in the process.

This can be seen in the pro­lif­er­a­tion of white la­bel funds, funds set up by an in­ter­me­di­ary un­der a dif­fer­ent name but run by an as­set man­ager un­der an ar­range­ment with the bro­ker. The latest es­ti­mate from San­lam In­vest­ment Man­age­ment is that nearly a third of the funds on the mar­ket are white la­bel or bro­ker funds, though they ac­count for much less in terms of to­tal in­dus­try as­sets.

So at present it looks like part of the broking in­dus­try is up against the Lisps. The prob­lem with this is the choice for in­vestors be­comes over­whelm­ing. What should in­vestors do?

In­ter­est­ingly, about 15% of unit trust sales are still di­rect. Th­ese are in­vestors with a lit­tle know-how, who know what they want and do it them­selves. Hats off to them.

But for other in­vestors the de­ci­sion on where to in­vest their money might be com­plex. Van Dyk says 98,5% of Lisp in­flows are dis­cre­tionary lump sum in­vest­ments. This means the amounts are prob­a­bly large rel­a­tive to the to­tal net worth of the in­vestor and aimed at some­thing im­por­tant like re­tire­ment sav­ings. For many in­di­vid­u­als it’s a dif­fi­cult de­ci­sion – do they go into a re­tire­ment an­nu­ity, liv­ing an­nu­ity, preser­va­tion fund or just unit trusts?

This is where Lisps can play a valu­able role. The fees they earn are not dic­tated by com­mis­sions, so there should be some cer­tainty they will act in the best in­ter­ests of the client.

How­ever, the line blurs when the Lisp is con­nected to a par­tic­u­lar as­set man­ager. So the client should check and be happy with the fund or prod­uct provider the in­vest­ment is go­ing to.

The life com­pa­nies are also com­ing back at the Lisps through the so-called new gen­er­a­tion prod­ucts that of­fer more choice and are more trans­par­ent.

This is where the Lisps orig­i­nally took the gap, set­ting up an open and flexible ser­vice in the face of the now well-doc­u­mented draw­backs to life prod­ucts like tra­di­tional re­tire­ment an­nu­ities. But the life com­pa­nies can now claim they have sim­i­lar of­fer­ings, though it might take time for in­vestors to be­lieve that.

And look­ing at as­sets un­der man­age­ment and growth in the Lisp in­dus­try, it has be­come well es­tab­lished. Van Dyk says as­sets at end-Septem­ber stood at R191bn, and have been grow­ing at 21,7% a year since 2000.

So for in­vestors with a lump sum and dif­fi­cult choices, or the in­vestor that just wants some­body else to make the de­ci­sions, Lisps might still be the way to go.

Look­ing af­ter lump sums. Ri­aan van Dyk

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