My years in financial journalism have taught me a few things about the financial services industry, and one thing I realised early on was that everyone is in it for their own interests, and the best you can hope for is that your interests and their interests are aligned.
There is no such thing as altruism in the world of money. Industry players need to justify their place in the lucrative sector. Don’t be fooled into thinking they’re in it for you. Their products may indeed offer worthwhile benefits (where would we be without car insurance or life cover, for example?), but the fact is that their upmarket lifestyle is at stake if they don’t succeed in convincing you that you need what they have to sell, and this bias underpins 99% of consumer-directed media content that, on the surface, appears informative and objective.
The profit motive is, of course, basic to any business. But in other lines of consumer goods, to my mind, the motive to sell and make a profit is more overt and unambiguous. In the financial sector, the marketing emphasis is more on “advice” and “thought leadership” than on in-your-face advertising, although there is that too, some of which is misleading in the extreme.
Another difference is the nature of the product. If you get tired of one brand of breakfast cereal, you can simply try something else the next time you go shopping. That is not the case with most financial products. Once you are committed to one, it’s difficult to extricate yourself from it and choose something else, and if you do, there may be a hefty price to pay, either to the provider in the form of administration costs or contractual penalties, or to the taxman if, for example, you trigger a capital gains event when switching investments.
Life insurance policies are the worst in this respect. This is one financial product where you cannot afford to chop and change; you have to get it right the first time. The older you get, the more you pay for cover; it’s as simple as that.
A further difference, which stems from the previous one, is the persistence of outdated distribution models. Distribution networks of commission-driven advisers selling insurance and investment products have not changed perceptibly in the past three decades, despite the evolution of financial products, regulations governing the industry becoming increasingly consumer-focused, and technological advancements. Why? Because there are tens of thousands of older South Africans who are stuck in products sold to them 20 or 30 years ago – so-called “legacy” products – and advisers that service them.
Resistance to change
Vested interests in financial products and business models are directly proportional to assets under management. Take the unit trust fund industry. Unit trusts have been around for decades, although it is only in the past 30 years or so that the industry has mushroomed.
The funds have traditionally been actively managed, meaning that a fund manager actively researches and selects the underlying investments. The model proved extremely lucrative for asset management companies – they were charging annual investment management fees of up to 3% of assets plus a performance fee if they surpassed a benchmark.
Then along came passive exchange-traded funds (ETFs), which merely replicate an index, negating the need for highly paid investment analysts. They didn’t promise anything other than the performance of the index, at a fraction of the cost. (The first ETF in South Africa, the Satrix Top40, which invested in the top 40 companies on the JSE, was launched in 2000.)
This precipitated a shake-up for the active managers, most of whom cannot outperform passive ETFs over longer periods. They drastically cut the fees they were charging, for a start.
Yet the active fund industry is very much the dominant investment player in South Africa today – according to the Association for Savings and Investment South Africa, total assets under management in local collective investment schemes are about R3.3 trillion. Of that only R129 billion (according to Satrix) is invested in ETFs – that’s about 4%. Admittedly, there are many passive unit trusts on the market, but it’s safe to say that the vast bulk of South Africans’ savings is in actively managed funds. Compare that with the US, where in 2022, assets under management in passive index-tracking funds exceeded those in active funds (again according to Satrix).
The point I’m making, perhaps somewhat circuitously, is that there are vested interests in keeping assets where they are and resisting change, on the one hand, and attempts by new kids on the block to grab a slice of the pie, on the other.
If you keep this in mind, you will become more healthily sceptical of the arguments of thought leaders and the objectivity of media content. Much of what financial experts say may be relevant and useful to you; just know where they are coming from.
* Hesse is the former content editor of PF.