Alexander Forbes carves out a place for independent advisers
• Financial planners who depend on income from commission have to adapt to new landscape
Is the craft of independent financial advice under threat? The old-style revenue stream from commission is on the way out. Under SA’s Retail Distribution Review, it will no longer be possible to be paid upfront for a recurring premium investment policy from an insurer or other product provider.
In SA, there will be some exceptions at the bottom end of the market as it makes no sense to get an as-and-when fee of R3 a month on a R100 policy. The end of commission will have very little effect on the top end of the market, as most advisers have already moved to a feebased model. But though it aspires to be a profession, it does not charge professional fees on an hourly rate, instead charging a percentage of assets — known as an ad valorem fee.
Phil Young, a UK financial consultant, said at an Alexander Forbes IFA Symposium that in the UK, there had been a very limited move towards hourly fees and, unlike established professions such as law and medicine, there was no correlation between adviser charges and ability. In fact, very few independent financial advisers (IFAs) went out of business after the UK’s Retail Distribution Review and those who did were victims of a tough economy.
If anything, life is easier for established players. Newcomers will find cash flow tough unless they have access to a bank of clients at the outset. At least in the UK advisers can ask for an initial fee, which now averages 2.7% and in the bad old days of insurance bonds went as high as 8%. There must be scope to cut total investment costs in the UK, as in SA. In both jurisdictions, the adviser takes the biggest slice of the pie at about 1%, and there is a further 0.3% charge for designated fund managers.
They have only recently come into SA and carry out what used to be a core function of the IFAs, picking funds and setting out a strategic asset allocation. Platforms, or linked investment service providers, take a further 0.35%, not far out of line from SA. Fund charges, about 1.5% in the past, have fallen to 0.75%, but there are cheaper platforms online such as eVestor, which can do the whole thing for 0.5% with very simple products.
But the really disruptive gorilla is Vanguard, the US business that pioneered index funds. It charges just 0.3%; 0.1% for the platform, 0.2% for the fund manager and nothing for either the advisers or the designated fund manager, who are redundant.
The cheapest products in the South African market are closer to a 0.7% fee.
The closest to the Vanguard product is OutVest, a joint operation between index fund manager Core Shares and Outsurance, which will be wholly direct. It will offer a money market fund as well as four risk profiled funds.
But it isn’t necessary to take such a hair-shirt approach. Large platforms — such as Cofunds, Fidelity’s Funds Network and Old Mutual Wealth — can use their scale to reduce fees. The 2.4% typical annual cost can be lowered to 1.7%, with all the parties taking a cut.
Investors who want bigbrand active asset managers can still do so. No doubt in SA there will be a mix of the new age online products and the more complex intermediated ones.
So if there is still going to be a role for good IFAs, why are so many of them listening to Alexander Forbes’s proposal to give them a helping hand? Forbes has only been able to convert about 6% of its 1.4-million institutional clients into retail customers. It has tended to cherrypick only the top executives from the client companies for its in-house retail financial planning. And realistically, the vast majority of the rest of the members need help with debt as a priority rather than accumulating assets. Many of the top financial planners are spoilt as they only deal with people who are already wealthy and debt free.
Like the supermodel Naomi Campbell, most of these IFAs do not get out of bed for less than R10,000.
I can see that some IFAs might appreciate access to the Alexander Forbes financial wellbeing programme, though I am not sure how different it is from the counterparts offered by Discovery and Momentum. They will also get access to the Living Investment products, which look and quack like the Momentum goals-based products. We can just about forgive its tag line for Living Investments, that it connects client goals to the investment journey, with focus on the experience.
But I must applaud Forbes’s newish boss, Andrew Darfoor, for tackling some of the unpleasant issues around finance. He talks about nudging clients (without winking apparently) to build up a more effective way to get money and finances to address their specific hopes, fears and dreams. Not many people in his industry look at fears.
IFAs have a good idea of the value of their clients’ unit trusts, bank holdings and insurance policies, but Forbes can help them understand clients’ current state and identify what steps can be taken to change that state. Many people will be impressed by Forbes’s link to global consultant Mercer. In fact with its 34% stake, it seems likely that Mercer will buy out Forbes one day and paint it in its pale-blue colours. It certainly seems to provide more than an IFA would ever need, with nearly 31,000 global strategies.
The ace up its sleeve, Forbes believes, is access to Performer, the largest portfolio provided by the old Investment Solutions, an old-school balanced fund that has nothing to do with new age living investing. It has achieved inflation plus 8% annually over 20 years, so for the patient investor, it may provide better outcomes than most of the goals-based funds.
Forbes is an unusual business. It was once simply an actuarial partnership, then it moved to pension administration and later, some selected financial planning. With its multimanager, now called Alexander Forbes Investments, it gathered a lot of money in a short time. Many IFAs will be wary of Forbes as they had bad experiences in the past.
But becoming a Forbes affiliate might be a useful halfway house between independence and acting as an agent of one of the large insurance companies.
The danger is that the IFAs simply poach the clients, though Forbes will act against them. It is after all one of the most eager users of restraints of trade.
LIKE THE SUPERMODEL NAOMI CAMPBELL, MOST OF THESE IFAS DO NOT GET OUT OF BED FOR LESS THAN R10,000