Many individual financial intermediaries and even major companies believe they can simply ignore or sidestep the Financial Advisory and Intermediary Services (Fais) Act.
So the message sent out by the ruling of the Ombud for Financial Services, Charles Pillai, against Rob Spendley for the advice he gave to a Port Elizabeth couple, must come as a warning signal to the entire industry. Spendley has been forced to step down as vice-president of the Association of Professional Underwriters (more popularly known as Luasa).
Pillai has given notice to the industry that neither he nor the Fais Act are to be trifled with. And it is about time.
I still fear, however, that it is going to take a few more tough rulings to really get the industry to toe the line and ensure that we, as consumers of financial services products, are given appropriate advice, particularly advice that is not based on the commission structures of products.
What worries me is when big companies aid and abet their sales forces to flog products that are not in our best interests and create products that are structured around commissions rather than being appropriate to
our needs.
In the United Kingdom, where similar legislation to the Fais Act was introduced in the 1990s, it took some fairly severe action by that country's the regulators to force the big companies to obey the law. These steps have included:
- Forcing life assurance companies to pay back millions of pounds in compensation for mis-selling pension products to ordinary people.
- Forcing many of the UK's large banks and assurance companies to pay compensation, again to the tune of millions of pounds, to people who were missold mortgage endowments.
These products, which were also sold in South Africa, were based on you only paying the interest on a mortgage bond and using the amount you would have used to repay capital for a life assurance investment policy. The theory was that by the time you were due to repay the homeloan in full, the investment policy would have accumulated sufficient capital to repay the loan and have some money left over for you. This did not happen.
- One of the major life companies, Norwich Union, was ordered to remove its entire sales force from the field and retrain them.
Methinks a bit of this medicine is needed locally.
Let me give you an example of how major companies in South Africa aid and abet inappropriate advice.
Over the years, many pensioners have been left destitute because of the mis-selling of investment-linked living annuities. It is not that a living annuity is bad product, but it is a very sophisticated product.
Initially, living annuities were only offered by linked investment services product (Lisp) companies, which claimed they were only administrative platforms that enabled individuals to select from, and switch between, a wide range of underlying investments, mainly unit trust funds, offered by a wide variety of asset management companies.
The Lisp companies did not and still do not require financial advisers to have a high level of investment knowledge, apart from the minimum required under Fais (and the minimums are indeed low).
Instead, they offer high commissions and other perverse incentives, such as luxury foreign trips to drive advisers to sell, sell, sell.
As Personal Finance has reported in the past, these practises have left too many pensioners facing destitution.
But this has not stopped financial services companies, including the life assurance industry, from offering an increasingly wider investment choice, while at the same time claiming this is to the client's advantage.
This wide investment choice is really suitable for only a small number of very wealthy individuals, who can employ skilled specialist advisers - of which, sadly, there is a limited pool - to keep track of their investments' performance.
Most consumers, who are encouraged to use these wide-choice products, are simply subsidising this handful of very rich individuals.
One of the reasons why wide choice is offered is because both the companies and the advisers make extra money.The most common mistake that investors and their advisers make with these wide investment choice products is that they tend to select the best-performing sectors and/or funds when they are at or near the top of a performance peak before a trough. They then switch out of the fund when it starts losing ground, only to switch into the next top performer ... all the time losing money.
Investment is a marathon, which has as its main intention the protection of your savings against the ravages of inflation. It is not about speculation. You can go to casinos for that.
Most investment managers will provide varied performance over years. If you select an asset manager on a sound basis in the first place, then there is no need to keep switching. Also, most asset management (unit trust and life assurance) companies offer funds that specialise in different sectors.
However, a balanced/managed fund will meet the long-term needs of most people. Trying to guess what markets will do or switching investments is more likely to result in you losing your capital rather than making any gains - and you will be paying more in costs for the pleasure .
The problem is compounded by financial intermediaries who do not have the foggiest idea of what they are doing when they give investment advice. Should they be challenged by the ombud to account for investments that have gone wrong for their clients, many advisers would find it very difficult to prove to Pillai that they gave "appropriate" advice as is required by the Fais Act.
The problem of living annuities, however, does not seem to have embarrassed either financial services companies or financial advisers. Increasingly, these wide investment choices are being offered to an ever wider audience.
For example, one of the main problems with umbrella retirement funds, which offer a wide choice of investments to often very unsophisticated investors, is that there is no requirement for advisers to give proper advice to such investors.
Thankfully, the Government's draft paper on retirement reform suggests limiting wide investment choice.
But the problems of financial services companies ignoring the requirements of Fais go further than this.
Many companies are still accepting business from advisers who are not registered under Fais. (This is one of the significant flaws in Fais in that it does not make it obligatory for financial service companies, apart from life assurers, to accept business only from Fais-licenced intermediaries. However, I understand that there are plans afoot to change this. Draft legislation is being prepared that will make it compulsory for product providers to only accept business from licenced intermediaries.)
Then there is the strange problem that the Financial Services Board is facing of registered financial intermediaries who can't be bothered to go to their local post office to collect their Fais-licence certificates. The law requires them to display their licence certificate in their offices.
The failure of intermediaries to collect their licences is worrying as it means many consumers cannot be sure that they are doing business with a licenced intermediary.
If you do not insist on doing business only with a licenced intermediary, you are putting yourself at unnecessary risk.
Sanlam offers you a useful tool
Sanlam has created a useful new index, the Sanlam Asset Liability Index, which is designed to help people who are saving for retirement and retired people with investment-linked living annuities keep on track.
Johann Swanepoel, the asset consultant at Sanlam Investment Management (SIM), says most people pay close attention to the state of their assets as they save for retirement and continue to do so after they retire.
Most of us, however, forget to consider how our "liabilities" are doing. In this case, the liabilities
are the pension you will receive or are receiving.
Swanepoel says you may be pleased that your investments have increased by 20 percent in a given year, but if interests rates come down, the cost of an annuity goes up.
In short, if interest rates fall, you will receive a lower pension. Guaranteed annuities (pensions) are calculated on the basis of current interest rates when you retire. So, if you do not take interest rates and the cost of an annuity into account, you may find you will be receiving a far lower pension than you expected.
The Sanlam index will help you decide how much you will need to save for a comfortable retirement as it takes into account your assets and the liability of your pension income.
The index that has been compiled by Sanlam to offset liabilities against assets is dynamic. It will be regularly updated and is available free of charge on Sanlam's website www.sanlam.co.za The site features a guide that will help you to use the index to assess your situation.
Every month, you will also find comments from SIM on short-term changes in assets and liabilities and asset/liability comparisons over longer periods. Now this is what I call a useful planning tool.