Recently I wrote about how the new life assurance commission regulations can be side-stepped via the linked-investment service provider (Lisp) industry.
Lisps are supposed to be administration platforms that enable you to access numerous investments, including life assurance products, through a single entry point and to switch between the underlying investment products. But too often you are provided only with the illusion of choice.
The Lisp industry has always engaged in rather questionable behaviour. Among other things, the industry was responsible for introducing luxury foreign trips as a perverse incentive for financial advisers to direct your investments through its platforms. The industry also demanded kickbacks from unit trust management companies to list their products on Lisp platforms.
Although most of the bad practices of the Lisp industry have been cleaned up (due to the pressure of bad publicity), I still have major concerns about the industry.
My concerns are the protection of your money, your freedom of choice and the illusion of choice. In a nutshell, it must be asked whether Lisps exist simply to enable financial services companies and financial advisers to take another dip into your savings and investments.
One would assume that if a financial services provider claims it is offering a service that gives you wide investment choice and the ability to switch between those choices, this is what it should be doing, without qualification.
The Lisps claim they do not offer investment advice and insist that you consult a financial adviser to obtain such advice. In so doing, the Lisps are telling you that financial advisers are investment managers, which they most definitely are not.
But assuming that they are, in terms of the Financial Advisory and Intermediary Services (FAIS) Act, advisers are required to provide you with appropriate advice and steer you into suitable products.
The right advice
So, if your financial adviser advises you to use a certain Lisp, he or she should ensure the following, among other things:
- The Lisp provides a sufficiently wide range of investment choices to meet your needs. Your financial adviser must be able to choose the correct underlying investment from a selection of investments, taking into account the costs of the underlying investment, its past and potential sustainable performance, and the risk the investment manager takes to achieve that performance.
- The costs of the Lisp are competitive. Remember that a Lisp is merely an administration platform. This raises the question why, when a Lisp has nothing to do with the performance of your investments, it charges you a fee based on a percentage of your assets instead of a straight rand fee.
If the Strate platform charges a set fee for the clearance and registration of shares, there is no reason why Lisps cannot do the same. Perhaps Strate could consider offering a service to compete with the Lisps.
- The Lisp platform is efficiently, properly and honestly administered. This raises the question why so many financial advisers placed investors' money, via the now under-curatorship Lisp Ovation, in the unregistered Common Cents money market fund without ensuring that the fund was in fact properly registered in terms of the Collective Investment Schemes Control Act.
Angus Cruikshank, the owner of Ovation, stole more than R200 million from Common Cents, which resulted in the Lisp being placed under curatorship.
But virtually from the very start Lisps have undermined their reason to exist - namely, to offer you wide investment choice at a cost. There has been and too often still is only an illusion of choice.
It did not take long before the Lisps started to claim kickbacks (what they politely called rebates) from unit trust management com-panies to host the companies' funds on their platforms.
What made these kickbacks even more despicable was that most Lisps did not properly declare the kickbacks to investors or pass back the money they had earned to investors via lower fees.
Some Lisps did, however, pass on a percentage of the kickbacks to financial advisers, either directly or indirectly. Again despicably, most of these financial advisers did not inform their clients of this or pass on the benefits to their clients.
When the practice of paying kickbacks was exposed, the Lisps initially reacted with the typical contempt too many people in the financial services industry have for investors. They attempted to justify their awful behaviour rather than pay back the money to investors.
Increasingly, many of the better unit trust management companies refused to pay up. In terms of the FAIS Act's general code of conduct, any rebates paid by a unit trust management company should be passed on to investors.
When choice isn't choice
But now some of the Lisps are working some new angles that again create the illusion of choice. These moves include:
- Limiting choice. Only unit trust funds that meet requirements defined by a particular Lisp are listed on the Lisp's platform. Now this is interesting as Lisps claim they are administration platforms, yet they are making what can be considered to be advice decisions.
An interesting fact is that the unit trust funds offered by a company that is associated with a particular Lisp always make it on to that Lisp's platform.
There is also increasing evidence that Lisps do deals with each other. In other words, if Lisp A lists the unit trust funds of the company associated with Lisp B, Lisp B will list the funds of the company associated with Lisp A.
As most of the big financial ser-vices companies have Lisps and all of them have unit trust management companies, it is quite easy to identify what is going on.
- Anti-competitive pricing. The Lisps of at least three companies, Momentum, Old Mutual (Galaxy) and Investec, charge you less if you choose unit trust funds from their selected range of funds but increase the Lisp fees for those funds not from their selected range. So, although you may have a very good reason to choose a unit trust that is not from the range, you may be discouraged by the additional cost.
Riaan van Dyk, the former chairman of the now defunct Linked Investment Service Providers' Association (Lispa), says the practice is not anti-competitive but is aimed at giving you a better deal. In effect, he says, when you select a unit trust fund of a management company associated with the Lisp, you do not pay the Lisp fee of about 50 basis points (0.5 percentage points).
To me, the fact that you benefit may be coincidental. First, the benefit may or may not be illusory; it depends on the cost of the under-lying unit trust fund.
Second, the name of the game is assets under management. The more assets a company can amass, the more it earns, because it is charging fees that are a percentage of assets under management. So, although a company may be losing income in one area, it is hoping to earn a lot more from bulking its assets under management.
These two tactics result in the smaller, independent unit trust management companies losing out. They also undermine competition. Perhaps the Competition Commission should take a look.
The main question you need to ask yourself is whether you actually need to use a Lisp, particularly when it is merely being used to channel you into the products of one or two particular companies.
You may be far better off selecting funds from one or two of the better unit trust management companies without the aid of a Lisp. Nowadays, most companies have the full range of unit trust options. This approach is likely to be far cheaper in the long run.
- Cameron is the author of Retire Right (Zebra Press), which is now in its second edition.