No more excuses for financial industry, costs must come down
The South African savings industry is interesting. On the one hand, South Africans are under-savers – they don't save nearly enough for retirement or emergencies. On the other hand, South Africa's financial services products typically come with pretty steep fees, and the industry has a reputation for incentivising aggressive selling of sometimes inappropriate products. On the one hand, reluctance to save, on the other, high costs associated with saving.
Government is betting that if they attack costs, and force industry to restructure to provide lower cost options, then the savings rate in South Africa will improve. Certainly reduced fees will make many South African savings products more attractive to consumers, but there's no real reason to think that lower costs will suddenly make savers out of South Africans. Indeed, it sometimes seems as if the hard sell is necessary to motivate people to invest at all. I hope that government is right, and that with the right, low-cost products available, South Africa will become a nation of savers. But I also worry that the human tendency to avoid long-term planning and delayed gratification will be stronger than the lure of good savings products. – FD
ALEC HOGG: Treasury's retirement and savings reform proposals are certainly long-term thinking. Since 2011, they've been implementing it and they're going to challenge the retirement savings industry to offer more transparent products at much lower prices. Mike Estment from NFB Financial Services Group is in the studio. We've hearing this in the budgets now for a few years and it was even more aggressive this year when Pravin Gordhan had his day in parliament. He's attacking costs in a big way. Does that have an implication for tens of thousands of people who are in the financial services sector, or the intermediaries who are providing these services now, going into the future?
MIKE ESTMENT: It absolutely does. It's almost like Francois Pienaar's comment at the end of the World Cup. He affected a couple of thousand people. Now, it's tens of millions. I think the big challenge is the culture of what goes on: in an institutional environment, it's very easy to sit in an armchair as an advisor, or as a consumer, investor, or saver, or a corporate or an actuary for that matter, and criticise. The institutions are challenged by a very serious range of needs, from the smallest retail investor to a very significant saving of either a group or a very wealthy individual. As a result, to deliver products at a price that is not affected by what we call in the industry – legacy – is tricky. Legacy is probably – and more often than not – used as some form of an excuse as well because it's easy off the tongue.
ALEC HOGG: Legacy.
MIKE ESTMENT: Legacy says that you have old funds, old investments, or old responsibilities that continue to haunt the system and therefore, there's a risk of that being manipulated into cross-subsidisation. In an industry as significant and meaningful as the retirement savings industry, what is also crucial, is you have to take away any excuses for people avoiding it or giving you good reason why they're not going to back the Fund. Treasury are trying to change culture at savings level. The paper and the documents that have come out, keep attacking the fees thing, and whilst there's massive room for movement there and significant opportunities for all sorts of touch points, it must never be lost on the man in the street and on the investor, as to their responsibility. They have to come to the party.
ALEC HOGG: But Mike, they never have. I've been doing this work for more than 30 years, and in 99 percent of that time people from the financial services sector have explained in graphic detail, how people do not buy savings products. They do not invest in their futures – because that's how we are as human beings – and that these products need to be sold rather than bought and if they're going to be sold, you have to have an incentive for the person selling it. Now, have they been spinning us a line all along?
MIKE ESTMENT: I think there've been areas of that market that have been excessively expensively put together. Whether that's done by institutions, distributors, or whoever is in the chain of mouths to feed – so to speak – is going to be exposed in the process of new generation products coming to market. You had this years ago, with the advent of Unit Trusts. It used to be all about key life insurers. They were the custodians of one's savings, either in the form of retirement funding, which is more through your business or through the company that employed you and paid on your behalf, or through discretionary savings in the form of endowments etcetera. When the Unit Trust industry became prolifically established and significantly established, it didn't have those so-called legacy issues. It had modern systems. It was unencumbered by any promises or obligations it had and it was able to come and in fact, outmanoeuvre these absolutely huge monolithic giant organisations. That probably, was the next step. More recently, there's been a proliferation globally and locally – to a lesser extent here – of passive investments or indexation…traded ETF's etcetera, so that will now move the cheese for the Unit Trust companies and the MANCO's.
ALEC HOGG: Can they survive? Can Unit Trusts survive at the kind of cost they've become used to living on – when you say three-and-a-half percent at least…some with five percent – as against ETF's that are under one percent?
MIKE ESTMENT: I think that one has to be very, very careful. To go on television and say 'it's three' or 'it's one'. One really has to have a good look and you have to find someone who is honest – that's the first point, and honesty starts at home. 'Are you genuinely interested in saving? Is it going to be sustained? Are you a good customer of an institution?' Indeed, if they are forced by advisors, intermediaries, their own acts, or new product propositions, to compress costs, which they can do – and there is room for compression – plenty, in some instances – then, what you have to be, is a serial investor. They're taking a bet that you're going to be paying that R100.00, R1.000.00, it could be a million Rand lump sum, or whatever the number is in, and you will not be in and out because therein lies the risk.
ALEC HOGG: We go back to that initial question: are savings products bought or sold? If they're being bought then the whole commission story will fall away because everyone will buy ETF at a very low cost, but that's not in human nature and it hasn't been, up to now, in South Africa's nature. Will this culture change …is it possible that they'll get it right?
MIKE ESTMENT: I think that it's going to be…this is a public/private partnership I guess, and the investor…the voter must come to the party as well. It's not just the government or the institution. Is the intermediary there for the right reasons? Are they farming or are they hunting? If I were looking for one, I'd be looking for a farmer, someone who's prepared to not frontload things, someone who's prepared to invest and obviously, have assets, resources, people, and influence – maybe – on the institution, to establish a more competitive proposition and price. If you have an advisory that is in fact, in the business of hunting, they acknowledge their responsibility, they acknowledge the importance at a macro/national scale, that they are professionals, and that they're there to improve your lot. If they're able to do that, that is also a very important catalytic part of this process.
ALEC HOGG: Why do you stay in the industry if you have all these challenges coming at you?
MIKE ESTMENT: It is lucrative. What we've tried to do – and this is not an opportunity to punt the business I work for – but what we've done is we've tried to be true to that farming mentality. If you invest and you own the field – as opposed to going in and mopping up the animals and moving onto the next field or forest… If you own that field and you invest in the field; if the weather's bad, you're actually there for the journey, and you build, develop, and pay for whatever goes into the ground and enjoy the benefit of the harvest, it is rewarding. There is room in this industry for savers, for participants and advisors. It's not about a broker or a smous that's pushing something at you. It has to be something that makes absolute sense. However, the trek is that you go through economic cycles, and the history of South Africa is that people will retire from a job to gain access to their retirement funds. It's the most tragic thing that could happen because the power of compound returns where the pricing is right – because if you price it wrong, you can do all the compounding and savings that you want to. If you have a cost profile of 3/4/5 percent as you said earlier, you lose the dividend and you lose some of your capital returns. That's crazy.