Retail Distribution Review (RDR) – may be detrimental to personal savings

Retail Distribution Review (RDR) – may be detrimental to personal savings_1South Africa need independent financial advice now more than ever before. In November 2014 the FSB released the Retail Distribution Review (RDR) as an attempt to grant consumers better results from investments, but may very well get contrary results.

The recommended “improvements” appears to entirely exclude the independent financial adviser from the value chain and if you the consumer think you need an adviser the two of you must negotiate the fee that you will pay. The fees were traditionally paid by insurers as commission.

Do you want to expose yourself to the insurer directly? Read on and decide.

In howtomakesense today I am trying to see whether the intended goals will be achieved and what the possible impact will be for us at grass root level. I also look at the impact and negative results that the UK and Australia model has reportedly had on their consumer.

According to Andrew Bradley (speaking on insurer sentiments), chief executive of Old Mutual Wealth (OMW) “The RDR is substantially based on the UK RDR and Australian FOFA, but adapted for our South African market.  …. We have learnt from our colleagues in the UK and associates in Australia, who have implemented the legislative changes successfully.” Cover magazine, January edition.

Let us look at some of the results in UK and Australia and see whether this would be worthy of consumer applause in South Africa:

  • Financial adviser numbers halved when forced to leave the industry in droves.
  • Now: Each UK citizen with less than £200 000 (about R3,6 million) no longer quilifies for advice and may only receive guidance via a centralised call centre
  • Now: A financial plan in Australia costs the consumer the equivalent of R35 000.

The most astonishing reaction came from the trade associations (the ones that protect the interest of the advisors), when on 10 November Gareth Stokes wrote for the Cover magazine. ”The Financial Intermediaries Association of Southern Africa (FIA) welcomes the long-awaited publication of the Financial Services Board’s (FSB) Retail Distribution Review (RDR) .that… sets out to redefine … fair levels of remuneration for advisers …. It proposes far-reaching reforms to the regulatory framework … that are aimed at addressing poor customer outcomes in the current system.”

“Justus van Pletzen, CEO of the FIA, which represents the interests of more than 14000 key individuals and representatives countrywide,…think…. the FSB will level the playing field between adviser and product supplier in ensuring fair outcomes for consumers.” He did not calculate the facts.

When I attempted to represent the true plight of the consumer at a forum discussion (they both attended), as per my experiences from responses to articles published here, I was quietened – and now know that none of the points made were incorporated into the draft. You were not heard.

Calculating the facts. In a comparison of: the Old Mutual Smooth Bonus fund returns (the claimed solution to counter market volatility); to the All Share Index (the volatile one, as claimed); to bank savings deposits, reveal that there exist an average difference of about 12% per year in favour of the ALSI, taken over 5 years year period. This despite the volatility that gave a minus return in one of the five years.

Even if 3% broker commission (consistently blamed for poor returns) is deducted there still exist a 9% (three times larger) discrepancy. The insurers are thus three times more expensive than broker commission, clearly indicating that they are managing the wrong end of the rainbow.

Pravin Gordan, who recognised the true perpetrations, was removed from office when he promised to take action against the true culprits.

The intended changes put the insurers and the FSB on the moral high ground and the trade associations nowhere, as it does with their constituents – the out ruled financial advisers. The big losers in my opinion will be the consumer, when considering the facts and comparing returns obtainable.

What the consumer should consider after implementation is:

  1. Invest in the ALSI directly and do not invest with insurers who will diminish returns by 9-12%
  2. Use bank deposit platforms only to even out on volatility in stock markets, but buy shares.
  3. Consider other investment options like gold, property and certain other assets to accumulate long term wealth. This is what I do and only buy risk from insurers, no investment.
  4. Pay fees to advisers: Even if you paid an adviser a 3% upfront fee (in the examples used) you would still be 60% better off over five years than putting money into Smooth Bonuses.

The expanded article with tables can be viewed on www.howtomakesense.co.za