Don’t be­come a ca­su­alty of fi­nan­cial ser­vices war

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

An in­creas­ingly nasty war is rag­ing in the fi­nan­cial ser­vices in­dus­try, with com­pa­nies fight­ing for mar­ket share. The foot sol­diers are in­ter­me­di­aries, who are en­cour­aged with high com­mis­sions. The main ca­su­al­ties are con­sumers.

I wrote a col­umn ear­lier this year that warned about the war, but it seems to be in­creas­ing in in­ten­sity rather than di­min­ish­ing. One of the rea­sons the bat­tles are heat­ing up is the eco­nomic down­turn. In­di­vid­u­als have less money to spend. This means they have less money to in­vest in fi­nan­cial prod­ucts, which in turn means lower earn­ings for fi­nan­cial ser­vices com­pa­nies and their sales forces.

Con­sumers be­come ca­su­al­ties of the war when they are switched from one fi­nan­cial prod­uct or prod­uct provider to an­other. Too of­ten, only the in­ter­me­di­ary and the prod­uct provider ben­e­fit. In fact, you, the con­sumer, will suf­fer se­vere fi­nan­cial loss, but you will be given all sorts of strange rea­sons why you should switch.

For ex­am­ple, two com­pa­nies that should know bet­ter, Al­lan Gray and Barnard Ja­cobs Mel­let (BJM) Pri­vate Client Ser­vices, re­cently is­sued me­dia state­ments that en­cour­aged mem­bers of re­tire­ment an­nu­ity (RA) funds to can­cel their poli­cies and con­sol­i­date their re­tire­ment sav­ings in one prod­uct, but they were not given any warn­ing of the down­sides, such as dis­in­vest­ment and rein­vest­ment costs.

Per­sonal Fi­nance did not pub­lish the me­dia re­leases but re­ferred them to the Fi­nan­cial Ser­vices Board (FSB), which has rapped BJM over the knuck­les.

Even worse was the greed-en­cour­age­ment tac­tic used by one An­dre Matthews of fi­nan­cial ser­vices com­pany Av­o­cado three months ago, when he told in­ter­me­di­aries that there was plenty of money to be made by en­cour­ag­ing in­di­vid­u­als to move out of life as­sur­ance in­vest­ment prod­ucts. Per­sonal Fi­nance has al­ready re­ported that, as a re­sult, the As­so­ci­a­tion for Sav­ings & In­vest­ment South Africa fined Av­o­cado R9 000. Av­o­cado is also the sub­ject of an FSB in­ves­ti­ga­tion (see “FSB did act against Lead­er­guard bro­kers”).

WAR PROF­ITS

You need to be aware that there are in­ter me­di­aries who have re­alised that they can reap sig­nif­i­cant ben­e­fits in this war and who are egging on each other, while not fully ex­plain­ing the con­se­quences of switch­ing to you, the con­sumer. They of­ten use emo­tive ar­gu­ments rather than facts to con­vince you to change prod­uct providers.

The melt­down in in­vest­ment mar­kets is also pro­vid­ing use­ful am­mu­ni­tion for the un­scrupu­lous, be­cause they can use poor in­vest­ment re­turns as a rea­son to switch prod­ucts.

How­ever, you are likely to have earned poor re­turns, to a greater or lesser ex­tent, no mat­ter where you were in­vested. The cri­sis has been as deadly as mor­tar bombs drop­ping into trenches, where in­vestors are try­ing to take cover. Chang­ing trenches will not nec­es­sar­ily pro­tect you from the in­com­ing shells of volatile in­vest­ment mar­kets.

FIGHT­ING ON TWO FRONTS

The war is tak­ing place on two main fronts: RAs and risk life as­sur­ance. Next week, I will deal with the im­pli­ca­tions of the war on RAs; the fol­low­ing week, I will dis­cuss the con­se­quences for risk life as­sur­ance.

Of­ten, the war in­volves the old “bat­tle­ship com­pa­nies” be­ing taken on by the younger and more ag­ile “tor­pedo boats”. But the bat­tle lines are not that clearly de­fined; most of the pro­tag­o­nists seem happy to at­tack any per­ceived com­peti­tor if the op­por­tu­nity arises.

What has made it eas­ier for the “tor­pedo boats” is that many of the older prod­ucts and prac­tices are sim­ply no longer ac­cept­able. This has fa­cil­i­tated the mas­sive growth of, for ex­am­ple, as­set man­age­ment com­pa­nies, such as Al­lan Gray, In­vestec and Corona­tion, that have pro­vided con­sumers with in­vestor-friendly, unit trust-based in­vest­ments.

An­other ex­am­ple is on the life as­sur­ance side, where com­pa­nies such as Dis­cov­ery saw the ad­van­tages of sell­ing stand-alone risk life as­sur­ance, and started a price war in the process.

The prob­lem is that some of the weapons are also, in my opin­ion, dirty. For ex­am­ple, you may be sold a prod­uct that is os­ten­si­bly cheaper, but the re­duced price is linked to some­thing else, such as join­ing a fit­ness pro­gramme and/or us­ing an­other prod­uct. If you don’t keep to the con­di­tions, the prod­uct may very well be more ex­pen­sive.

But the in­creased com­pe­ti­tion is forc­ing the old bat­tle­ships to un­dergo ma­jor re­fur­bish­ments. While it is a slow process, changes are start­ing to hap­pen.

And the bat­tle­ships are also fight­ing back. For ex­am­ple, Old Mu­tual is con­tact­ing cus­tomers who can­cel their risk poli­cies or give in­struc­tions to trans­fer their RAs to es­tab­lish whether they have been prop­erly ad­vised.

If you were im­prop­erly ad­vised, Old Mu­tual pro­vides you with the cor­rect in­for­ma­tion.

And if you have been im­prop­erly ad­vised, you can and should com­plain to the FSB about the in­ter­me­di­ary who ad­vised you. In a worst case sce­nario, the FSB can ban the in­ter­me­di­ary from the in­dus­try.

The FSB is in­creas­ingly tak­ing action when the rules of war are bro­ken. Last month, it can­celled the fi­nan­cial ser­vices provider li­cences of 69 en­ti­ties.

Iron­i­cally, the war was sparked by con­sumers who had be­come fed up with the old prod­ucts and poli­cies. For ex­am­ple, con­sumer com­plaints to the then Pen­sion Funds Ad­ju­di­ca­tor, Vuyani Ngal­wana, about the con­fis­ca­tory penal­ties im­posed by life com­pa­nies when you re­duced or stopped pay­ing the pre­mi­ums on life as­sur­ance in­vest­ment poli­cies and RAs led to gov­ern­ment in­ter­ven­tion.

One of the ways of deal­ing with the prob­lem was to force the mar­ket to be­come more com­pet­i­tive. One of the in­ter­ven­tions was to al­low sav­ings ac­cu­mu­lated in RAs to be trans­ferred be­tween prod­uct providers.

The reg­u­la­tors im­posed rules to stop con­sumers from be­ing ex­ploited, but, as in any war, the com­bat­ants all too of­ten ig­nore the rules, and there is what is po­litely called col­lat­eral dam­age. In this case, the col­lat­eral dam­age is in­vestors who re­ceive in­ap­pro­pri­ate ad­vice.

Over the next three weeks, I will ex­plain how you can avoid be­com­ing one of the ca­su­al­ties of this un­seemly war.

Cameron is the au­thor of Right (Ze­bra Press)

Re­tire

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