There has been a lot of behavioural finance literature over the years about a concept called the “misery of choice”. In a famous example of this, some people in a supermarket could not make a choice when they were confronted with 20 kinds of jam and were more comfortable with just three.
With the growth of streaming many of us are confronted with more than 1,000 choices. On a long-haul flight on Qatar Airways or Qantas I can spend the full 12 hours flicking through options and not watch a whole movie.
With about 2,000 unit trust options for their clients, financial advisers find it difficult to sort the wheat from the chaff. The Gen Z generation, the under 30s, take sorting through thousands of options for granted. And all of us had plenty of practice during Covid.
It is fun with pin money to buy a speculative portfolio of shares on EasyEquities. If one or two turn out to be dogs we can chalk it up to experience. But the consequences of a bad choice with retirement investment and other long-term savings can be catastrophic.
Financial advisers could spend years in court if they put client money into badly performing unit trusts or invested them off-market in openly speculative sectors such as crypto.
Once the primary reason for going to a financial adviser was so that they could pick funds for you. In the early 1990s, when there were between 30 and 50 unit trusts on the market, it was reasonable to expect an adviser to have a working knowledge of all these funds, just as a general practitioner would have a working knowledge of the 50 most prescribed medicines.
But with 2,000 unit trusts (far more than the number of shares on the JSE) it’s not surprising that fund picking has become a cottage industry in its own right. The practitioners are called discretionary fund managers (DFMs). They play the role that asset consultants play in the pension fund market. Often they are related — Momentum, for example, operates in both fields, as does Alexforbes, which recently relaunched Investment Solutions as its DFM brand.
The growth of do-it-yourself platforms such as EasyEquities is a counterforce to the highly paternalistic model of traditional financial advice
Another DFM is Morningstar, part of the leading unit trust data provider of that name. In effect it competes with the DFMs which are the clients of Morningstar’s data unit.
But there is a long tail of DFMs that will probably put their clients into funds they would have chosen anyway, such as the Coronation Balanced Plus, Allan Gray Balanced or Ninety One Opportunity funds.
Clients shouldn’t pay an extra layer of cost. It should be taken out of the independent financial adviser’s (IFA’s) (frankly already generous) 1% fixed fee. But it does extend the food chain.
Increasingly, the lone wolf IFA is an endangered species. The cost of compliance and the need to invest in technology make independence impractical. In South Africa, unlike the UK or Australia, it remains an option to be a tied agent. Old Mutual, Sanlam and Liberty (and, on a much smaller scale, Momentum) all have well-run national tied agency forces — and at the top end can provide a service which competes with good IFAs.
They are obliged to use the in-house platform — Sanlam agents must use the Glacier platform, for example — but the underlying unit range is comprehensive.
Tied agents aren’t employees and live on the commission and fee income they generate, but they enjoy a lot of backup when it comes to bread-and-butter issues such as administration and compliance. The core skills of most advisers are still sales and relationship building.
At the other end are the vertically integrated businesses which did not come out of the traditional life offices. PSG Wealth stands out for the breadth of its network. In small platteland towns the choices are likely to be restricted to PSG and maybe a Sanlam or Old Mutual agent above the panel beater.
PSG clients know they are going to be offered a limited menu, with the vast majority of money invested into PSG’s own suite of multimanager funds.
This gives peace of mind for those who are happy with the “any colour you like, as long as it’s black” approach to investments.
Citadel operates a more sophisticated model than PSG. It manages its index trackers in-house at a much lower cost than they would pay a provider such as Satrix, for example. But Citadel has a much smaller footprint than PSG and is more skewed to the high net worth market.
The growth of do-it-yourself platforms such as EasyEquities is a counterforce to the highly paternalistic model of traditional financial advice.
At the very least there should be pressure on adviser fees. These have been more stable than those anywhere else in the investment food chain — platform (linked investment service provider) fees have been falling for at least 20 years, and so have fees for unit trusts themselves, which often have a heavily discounted wholesale class.
It is time that clients negotiated more actively with advisers and asked them to charge 0.5%, for example, or otherwise shop around. There are no prescribed fees, and advisers don’t operate as a cartel.
