Retail Distribution Review (RDR) – is it worth the bother and all the additional cost incurred for implementation and monitoring?

South Africa need independent financial advice now more than ever before.Retail Distribution Review (RDR) – may be detrimental to personal savings_1

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 to them.

At a forum discussion on the RDR I attempted to represent the true plight of the consumer, as experienced in responses to articles published in The Star Workplace over a six year period. I was quietened and now know that none of the points made below were even considered.

This representation to the forum was:

  1. That SA differ from the UK and Australia in that we are a young country with droves of new
    Retail Distribution Review_long version_2
    Click to enlarge

    consumers that do not understand financial instruments to the same extent as those may in first world countries

  2. That no one (or very few) is willing to pay fees for advice, but if they knew the true facts, they may remain satisfied with a commission based advice system.
  3. Even in the USA (another first world country) less than 5% of consumers were willing to pay for advice and they continued the status quo as before, paying commissions rather than subjecting consumers to high fees for service.
  4. Why are we not following the USA example rather than the draconian examples of the UK and Australia that rendered so many negative results for the consumers?

Excluding independent advisors at this time in South Africa will be folly.

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

In howtomakesense I am trying to see whether the intended goals can 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.

True in howtomakesense character comparative tables at the end of the article with interpretive notes, measure the true “what if” results, comparing

  • colluded insurer results to
  • compromised banks to
  • the JSE (the vestige of free enterprise) and
  • compare these over the last five years and
  • going back 20 years.

 

We can then measure the impact choice will have on long term savings and in making sufficient retirement provision.

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). The discussion paper, released on 7 November 2014, sets out to redefine a number of critical concepts in the intermediated distribution space as well as determine fair levels of remuneration for advisers in the investment, life and short term insurance disciplines. It proposes far-reaching reforms to the regulatory framework for distributing retail financial products to local consumers 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, states that a precursory viewing of the document suggests that the FSB has been mindful of the requirement for differentiated fee structures on products that are marketed to low income consumers…. the FSB will level the playing field between adviser and product supplier in ensuring fair outcomes for consumers. He is further quoted in the article saying: “We believe that the regulator is committed to ensuring sustainable financial advice for local consumers following the RDR implementation.”

According to Andrew Bradley (representing big business), chief executive of Old Mutual Wealth admits that “The RDR is substantially based on the UK RDR and Australian FOFA, but adapted for our South African market [how?].  When we launched Old Mutual Wealth last year we positioned it in anticipation of RDR legislation [possible proof of collusion as they already knew outcomes]. We have learnt from our colleagues [not the consumer results] in the UK and associates in Australia, who have implemented the legislative changes successfully. Cover magazine, January edition.

Some of the results at consumer level in UK and Australia reveal that:

  • Financial advisers were forced to leave the industry in droves after they imposed their RDR. This surely cannot be successful as Bradley claims. Can we applaud such results in SA?
  • As a direct result, each UK citizen with less than £200 000 (about R3,6 million) no longer qualifies for advice and may only receive guidance (not even a defined term) via a call centre. [Since so many advisors left the industry their government was stuck with a problem as there was no one left to advise consumers. They enticed many out of retirement to man the call centre – to help/guide the people. This could have been prevented if they contemplated the impact on reform better – something we have the opportunity to do in SA and aren’t.]
  • A financial plan in Australia now costs the equivalent of R35 000. There are too few advisors left and they now command very high fees. They are not becoming millionaires in their own right as there are very few buyers. This was avoidable under the old dispensation when advice then (as in SA now) was free.
  • In SA currently the law requires that a needs analysis is conducted (similar to most financial plans); facts analysed; and, solutions (products) recommended. The analysis is free and the insurer pays commissions – on average R3 000 to R12 000 and massively less expensive than an Ausie financial plan, gained for “free”

Advice will only be for the elitist few (not the broad base consumer) who are willing to pay fees.

  • On survey in the USA it was found that the number of consumers who were willing to pay a fee for advice was below 5%.
  • Thus 95% were not willing to pay and preferred the commission for service basis for consulting on financial matters.

Why South Africa is modelling after the other two countries is strange but fits the conspiracy idea. You see “independent” and “colluded” are diametrically opposed terms. The process of conspiracy is to eliminate everything that does not fit – in this instance the independent financial adviser.

Facts about advisers/brokers that is not revealed is that, on survey, more claims that are submitted when a broker is involved will be settled: more equitably; and, for higher values. This is due to the fact that many study the difficultly worded, legal policy documents on behalf of their clients to ensure maximum settlements. This service is impossible for call centre based people with little experience and reading off scripts.

There are more claims at the ombud offices for deliberation from direct insurers than there are from insurers that support broker introduced business. Brokers are too eliminated through the true intent of the RDR.

Broker products through negotiations and in spite the commission element is becoming cheaper than direct insurer solutions. When they are gone the direct guys (like our common experience on banks) will run rampant on premiums – again with opposite results to the intent stated in the RDR.

Brokers offer additional cover, by requirement of law, when professional indemnity insurance must be added to a minimum level of R1,0 million – that can be accessed and possibly get a claim paid if proven that you were advised incorrectly.

With the direct insurer you become your own adviser. Question: Based on what knowledge and experience? They have you exactly where they want you as they will appear to be the ‘expert’.  

The poor performance returns by life companies have been blamed by them and the regulators on high advisor distribution costs (commissions), thus their motivation for the need to review. This is so untrue when taken under review.

A comparison of Old Mutual Smooth Bonus fund returns (one claimed solution to counter market volatility) to the All Share Index reveals that there exist an average difference of about 12% in favour of the ALSI, taken over 5 years on a year on year basis – see table below. Even if 3% broker commission is deducted there still exist a 9% (three times larger) discrepancy. The prudent consumer may want to know where the money has gone. No one will answer and even the regulators Ombud office will not have to rule on performance.

Some life companies will offer guaranteed returns over 5 years – highest around 7,5% per annum. See how this compares to the table below and see how much they are making off your investment – much more, ven double, what you are. Is that a fair outcome for the consumer?

There will be no resolve after the prudent advisor has left the market and you can no longer receive advice on other options, unless you are willing to pay fees, or, request that commissions per scales be maintained in your instance.

There is no fair outcome for the consumer and the CEO of the FIA, per above, will be failing his 14000 advisory constituents – and will be going out of business when his numbers are reduced by 75% as the case was in some of the success? countries.

What to do in true DIY howto fashion if the RDR is introduced. The steps below will give you better results. Beware of their dooms day talk about property, shares and equities. They wish to scare you so badly that they will appear to be the only solution:

  1. Invest in the ALSI directly and do not invest with insurers who will diminish returns by 9-12%
  2. Use bank platforms only to buy shares off their platform and do not invest in their savings platforms
  3. Consider other investment options like gold, property and certain other assets to accumulate long term wealth.
  4. Pay fees to advisers: Even if you paid an adviser a 3% upfront fee and you invested with the ALSI, you would be 60% better off over five years than putting money into Smooth Bonuses.

Effect on long term savings and retirement provision

To illustrate the effect that the different options may have on your long term savings ambitions is illustrated in the table below. By inserting a R1000 capital investment into each of the options.

Retail Distribution Review_long version_3
Click to enlarge

 

Line A: Illustrate that even over a term as short as 5 years the shares market easily outperformed all others. This despite claimed volatility. Volatility as a factor greatly reduces on investment terms that exceed 7 years.

Line B awards a rating to each of the 5 options considered and we note that the life offices and bank deposits rate the worst at numbers 3, 4 and 5.

Line C illustrates the difference between each on a year on year basis. Bear in mind that a 12% difference will cause a 50% worse result each 6 years.

This is clearly indicated in Line E when we see that the return from shares is nearly four times larger than that achieved by smooth savings plans (insurers); nearly three times that achieved by retirement annuities and nearly 5 times that of bank savings deposits. The results over 35 years (normal time frame for retirement provision will be even worse as per line H – when the 2,74 factor rises to a staggering 26,84 (R26 840, rather than R1000) as per below.

Line G suggest that you have to invest 2,74 times as much (R2740, rather than R1000) into retirement annuities to gain the same results as if you had rather gone to the stocks and shares market directly. Insurers are not direct and only give you indirect exposure to the JSE, but at fat profits for themselves.

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

Also he did not fit the colluded model, it appears, and had to give way to a more compliant conspirator.

Achievement of wealth is removed from the normal consumer if we buy into the hype that big advertising will produce. We must understand our options and if need be appoint an independent advisor to assist in a mammoth task. The payment of any fee will be outweighed by far greater results.

The good advisor will get you to invest in rating 2 in Line B. He will assist you to hold back and time investment moves into the more lucrative shares market, based on his study of market movements. For this pay him a fee, but for all short term and life risk insurance insist on the commission structures as it will cost you far less in the long run; grant you free advice; and, afford you additional claims opportunities if he should dare to err, against him directly if found professionally negligent.