Don’t become a casualty of financial services war
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”).
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)