What are the chances of your retirement fund trustees (and in the end you) being punched out of the ring because your fund's advisers and asset managers are in cahoots?
Last week, at the annual conference of the Institute of Retirement Funds (IRF), I spoke about conflicts of interest and how this can put your retirement savings at risk. It is an issue that both you, as a member of a retirement fund, and your trustees should take very seriously.
The issue of conflicts of interest has been highlighted by failures in corporate governance in South Africa and abroad.
At stake in South Africa is a R1 000 billion pot of gold. A mere one percent in asset management fees a year of the savings of ordinary South Africans amounts to R10 billion.
This is only the start. Up for grabs are fees for advice, commissions for risk assurance products, commissions for investment products, and fees for legal advice.
Service providing companies roll out the red carpet for trustees, offering them anything from weekends at luxury golf estates, to trips overseas, to excessive gifts.
In an attempt to corner as much of the riches as possible, many financial services companies in South Africa provide a virtual one-stop service to retirement funds. This "one-stop" service is a cause of serious conflicts of interest in both the retirement and medical schemes industry.
Conflicts of interest can result in your fund not receiving the most appropriate advice or the best service. Conflicts of interest occur when:
- One company offers two or more services. For example, fund consultants recommend their own or associated companies to provide asset manager and/or multi-manager services, group life assurance, investment products, fund administration and trustee training;
- A fund polices itself because it has the consultancy company and its own or associated companies providing services;
- Asset managers place money in their own holding and/or associated companies;
- Asset managers use retirement fund money to make strategic investments and buy a large stake in a company, as in the case of Fedsure and Saambou; and
- The administrator serves as a trustee and/or principal officer of an umbrella retirement fund, such as an industry fund.
What you need to know
As a member of a retirement fund or as a trustee of one, you need to ask yourself whether it is possible to receive appropriate advice on a sustainable basis where a declared or undeclared conflict of interest exists.
To me, a conflict of interest occurs when it is possible for two or more parties to collude to the disadvantage of another party. It is not a question of whether they will collude.
The problem is not whether a company offers all the services, but how and which of the services are used by a single retirement fund.
To be fair to the "one-stop" companies, they face a problem. Normally they start off as actuarial consultants that give both investment and assurance advice.
On the investment side, they develop the expertise to provide in-depth reporting on the "best of the asset management breed". The advisers develop the ability to provide multi-manager service, which generates a higher income than mere advice.
Multi-management, which means selecting a number of different asset managers from different companies, is also a temptation for your trustees. They can claim they do not have the expertise to choose an asset manager, while a skilled multi-manager selecting asset managers can be the answer for you as a member.
At the IRF conference there was also a panel discussion on the issue. Howard Walker of Alexander Forbes, which is probably the biggest one-stop service company, argued that his company has strict codes of ethics, fire walls between the different service providers, always declares any potential conflicts of interest and acts in the interests of its clients.
This may be the case now, but will it always be like this and has it always been so with other companies?
Trustees cannot rely on these assurances for the following reasons:
- Corporate governance is not what it should be. The collapse of Regal Bank and Saambou are examples of a failure of corporate governance in the financial services industry;
- The South African financial service industry has a tendency to side-step compliance and the spirit of the law and use regulation arbitrage. Evidence from a long list ranges from side-stepping commission regulation on life assurance products to the abuse of the "asset swap" foreign investment mechanism; and
- The protection systems provided by institutions such as the regulators to auditors have not come up to scratch in controlling aberrant service providers.
The trustees of your retirement fund are required to act prudently and in the interests of the fund.
Taking advice from consultants is no guarantee that the trustees have carried out their fiduciary duties. A declaration of conflict to trustees may also not be sufficient protection.
You must ensure your trustees can show you that they have applied their minds properly when deciding on service providers. This should include:
- Following a proper process in selecting service providers;
- A full investigation of service providers, including such things as whether an asset manager has made strategic investments; shares or share options held by service provider directors in the service provider companies; and whether the safest route is to use separate service providers.
- Your trustees need to sign proper contracts with service providers, which include details of all potential conflicts of interest; declarations of all fees/commissions; and escape clauses which will allow contracts to be cancelled in cases of conflicts of interest.
Fortunately, the government is considering changes to retirement regulations that will force retirement fund trustees to apply their minds properly on issues such as conflicts of interest.
Conflict of interest situations should be avoided at all costs.
It is in your best interests to establish from your fund trustees whether conflicts exist with your fund. If you are unhappy with the situation, you have every right to state your dissatisfaction. Remember, it is your money and the decision-making does not lie entirely in the hands of a service provider or your trustees.