An answer to complicated investment choice
Or just another layer of fees
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