Investment platforms – or linked-investment services providers (Lisps) – are expecting to play a greater role in your investment decisions in future, and they will be forced to make their costs more explicit and even possibly reduce them.
The impending release of proposals dealing with the way in which you pay for financial advice and the impending regulation of the financial services industry based on principles of Treating Customers Fairly (TCF), as well as competition from low-cost index-tracking retirement annuity providers are all having an effect on investment platforms and the products and services they offer.
You can use an investment platform to choose the underlying investments – typically unit trusts, but in some cases also shares, exchange traded funds (ETFs) and structured products which offer protection for your investments – for a discretionary investment, retirement annuity (RA), preservation fund, living annuity or endowment.
In recent presentations to financial advisers, two large providers of investment platforms, Glacier by Sanlam and Momentum Wealth, reported that the review of the costs of selling financial products in the United Kingdom had resulted in fewer financial advisers constructing portfolios for their clients.
A similar review of costs and commissions is due to take place in South Africa, with our own Retail Distribution Review (RDR) discussion document expected to be released at the end of June.
Jean Lombard, head of business integration and research at Glacier, says that in the UK advisers are focusing much more on giving advice about how much clients need for a particular goal, such as providing an income in retirement, how much to save to meet that goal and the alternatives if you cannot save enough.
He says UK advisers are using consultants or multi-managers to create portfolios for their clients.
Mickey Gambale, Momentum Wealth’s head of product development and marketing, said this week that investment platforms in the UK had benefited from the retail distribution review that took place there, and in South Africa they are likely to as well.
He says they are likely to become key to financial advisers who want to call themselves independent, and advisers will be able to offer a diversity of investments through the investment platform with its administration.
Gambale announced that Momentum Wealth would offer fees reduced by between 0.15 and 0.4 percent to investors using its platform to invest.
A core portfolio of funds selected by Momentum will be offered at reduced rates, while those wanting access to a wider selection of 2 400 funds, ETFs and protected investments through Momentum’s FundShop will pay these rates plus a monthly fee.
The core portfolio of about 50 rand-denominated funds (down from 120) will be offered to investors at an ongoing fee of 0.5 percent down to 0.23 percent, depending on the amount invested.
Gambale says the funds in the core portfolio, which includes Momentum funds, will be subject to due diligence by Momentum, which will ensure that they are leaders in their categories.
He says you do not pay VAT if you invest through a Momentum Life product, and therefore the fee for investing in, for example, a Momentum RA that invests in funds from Momentum’s core portfolio will be 0.5 percent.
In anticipation of the RDR, Gambale says Momentum will introduce “clean pricing” for its funds – that is, funds will be offered with transparent platform and fund fees, so that you can see exactly what you are paying for each link in the investment chain.
Currently, the fees are not transparent because unit trust companies pay Lisps rebates for bulking investors’ money and placing it with them.
The Lisp may use the rebate to reduce your platform fee – Gambale says Momentum has passed on its rebates since 2008 – but you will not see how the discount is applied, and the unit trust management fee on your fund will appear higher than it actually is.
Gambale says all investors will be moved to the “clean price” classes of funds on its platform. He says the move will not create a capital gains tax event or force RA fund members to realign their older funds that do not comply with regulation 28 on an individual level.
Momentum will also offer all investors the same tiered fees depending on the amount they invest in products sold via its platform. Gambale says this will align Momentum’s fees with TCF principles.
Last year, Investec announced it would introduce clean pricing on funds listed on its investment platform, Investec Management Services.
Patrick Sheehy, head of product development at Glacier, says Glacier has already put more than 100 clean-price funds on its platform and will accelerate the move away from funds that pay rebates rather than reflecting clean prices.
Sheehy says the difficulty with introducing clean prices is that some fund managers have not created a different fund class that enables them to apply discounted fees to Lisp investors.
Sheehy says Glacier has no plans to lower its fees ahead of the RDR, as it constantly tries to pass on efficiencies it achieves as reduced fees.
He says Glacier has a shopping list of funds on which it has done due diligence, but it has no plans to offer cheaper fees on these funds.
Gambale also announced that Momentum is introducing an offshore investment platform for individuals who want to invest in offshore funds domiciled in countries other than South Africa using their R4 million offshore allowance. The platform will offer access to 17 funds that have been approved by the Financial Services Board.
Gambale says Momentum’s international platforms will give investors access to 1 400 unit trust or mutual funds and almost 14 000 shares.
TAX-FREE SAVINGS
Momentum plans to launch an investment-platform savings product in August that you will be able to access through a financial adviser, without committing to a contractual term.
The adviser won’t earn commission. Instead, you will be paid advice fees as and when you invest.
The product comes ahead of plans by National Treasury to amend tax laws to enable financial services companies, from March next year, to offer you products in which you can save after-tax money free of any dividends tax, tax on interest or capital gains tax. You will be able to contribute up to R30 000 a year and R500 000 over your lifetime to such products. The growth on your savings can exceed these amounts.
National Treasury has, however, said that it will not allow contractual savings products on which you could incur a penalty if you stop your contributions.
Momentum’s product, My Savings Portfolio, will allow you to choose any of the underlying funds offered by its investment platform.
The product will also allow you to allocate a portion of your savings to an “Anytime Pocket” – a money market investment that you can access at any time for emergencies.
The minimum investment will be R500 a month, with a minimum of R250 a month allocated to a goal. You will be able to direct, for example, 25 cents of every rand you invest into the emergency fund.