rising to the challengescdn.advent.com/cms/pdfs/papers/ir-saip-2015.pdf · technology is an enabler...

Rising to the Challenges

South Africa Investment Panorama2015

Gold Partners

This report has been prepared for Professional Clients only and is not for private clients

Founding Partner

Technical Partner

Insight Discovery South Africa Investment Panorama 2015 Rising to the Challenges

2

Welcome to Insight Discovery’s first South African Investment Panorama.

As is the case with our flagship Middle East Investment Panorama, this report seeks to answer one key question: what is it that independent financial advisers (IFAs) want from the asset management companies, platform operators and other financial services companies that they deal with?

We think that this research is unique and important because we identify

the issues that really matter to IFAs. A highly sophisticated industry will, over the coming year, face a number of challenges and opportunities - only some of which relate to the general move towards compensation by fees for service.

Understanding these issues is paramount for any asset management company or LISP platform operator that wishes to do business with the IFAs. In our research, we found that there are particular companies that have developed a very good idea of what it is that IFAs are looking for.

Our report is based on original research that was carried out in early 2015. The research involved interviews with 314 IFAs. Nearly two-thirds of our survey respondents are aged 50 years or over. Unsurprisingly, almost all have given some thought to succession planning, which is an issue that matters to the IFAs.

This report summarises the headline results from this survey, which we believe is one of the largest ever conducted amongst IFAs in South Africa. If you would like further information please email us at [email protected] and add South Africa Investment Panorama to the subject line.

The lengthy and detailed responses to our open-ended questions prove that

South African IFAs are incredibly passionate about their industry. For example, over two-thirds of all respondents took the time and trouble to give us feedback to open-ended questions such as ‘What is your summary opinion of the RDR document released by the FSB?’. 222 IFAs answered this optional question, a staggering response and something we rarely observe when conducting similar studies in other parts of the world. We have added some of this feedback, positive, neutral and negative statements, to this report.

As ever, we are very grateful to our Founding partner Investec and Moonstone Information Refinery, who helped generate such a high response rate to our survey. We also thank the survey respondents, who were generous with their time and comments.

Nigel SillitoeChief Executive OfficerInsight Discovery

Foreword

3


2015-16 is going to be a challenging year for many IFAs in South Africa.

Regardless of the final form of the FSB’s Retail Distribution Review (RDR), the burden of regulation is rising. This will contribute to higher operating costs, and at a time that fees are under downwards pressure, as the industry moves from commission-based remuneration towards compensation by fees for service. A majority of IFAs think that cost pressures on LISP platforms could lead to a major consolidation.

Nevertheless, there are reasons for optimism. There is widespread acceptance that professional standards need to improve and that the Financial Services Board (FSB- the regulator) should play a key role in this. Technology is an enabler for the IFAs and their clients. The new UK regulations governing Qualifying Recognised Overseas Pension Schemes (QROPS) are seen as providing an opportunity for new business – and even for IFAs who are not currently advising clients on QROPS.

All this is in the context of an industry that is sophisticated in many ways. IFAs use fund ratings from specialist agencies, but use a number of criteria to select asset management companies and LISP platforms. Open Architecture is the norm. Well over four-fifths of all IFAs use LISP platforms. Many IFAs build tailored portfolios that are based on specific ‘building block’ funds. About half use multi-asset funds.

One indicator of the sophistication of the industry is that it looks for

opportunities beyond South Africa. Virtually all IFAs use funds that are domiciled outside South Africa to some degree. IFAs are lifting their clients’ allocations to global equities (developed markets) and consider that the outlook for markets is the most important single topic at conferences that are hosted by LISP platform operators and asset management companies. More than one third of IFAs expect to lift their clients’ allocations to ETFs in the coming year.

For asset management companies and LISP platform operators who want to do business with the IFAs, it is important to provide good service and a steady flow of information (with over 80% of IFAs expecting to hear from managers at least monthly). However, it is also important for asset management companies to build a brand among the end investors who are the clients of the IFAs. Some 40% of IFAs have been asked by their clients for specific funds from particular fund companies in the last year. The asset management companies who appear to best understand the IFAs and their needs are Allan Gray, Coronation, Investec and STANLIB.

By the numbers: key take-aways

60% of IFAs say that changing regulations are the main

challenge facing them. There are very mixed views about the Retail Distribution Review (RDR) regime that has been proposed by the FSB.

97% of IFAs think the FSB should do more to monitor unregulated

schemes/ products. Furthermore, 91% of IFAs think the investment industry’s image/ reputation is tarnished because of unregulated schemes/ products

69% of IFAs believe that the downward pressure on fees is

the main challenge.

80% of IFAs see technological change as the biggest opportunity.

63% of IFAs are members of professional bodies.

23% of IFAs believe that there is a lot of room for improvement to

professional standards. Virtually all think that the FSB should do more to monitor unregulated schemes and products

87% of IFAs work with products of three or more asset

management companies.

90% of IFAs use offshore funds to some degree.

54% of IFAs will be lifting their clients’ weightings to global equities

(developed markets) in the coming year. At least one third are cutting weightings to each of South Africa equity funds, multi-asset (high equity) funds and cash.

84% of IFAs say that fund ratings from independent agencies are

important as a fund selection criterion.

85% of IFAs recommend products from LISP platforms.

Executive Summary


4

Technology is transforming the IFAs’ business for the better. Some 83% see

the additional information that is available to investors as being a major opportunity. Electronic processes are seen as a major opportunity by 80%. Conversely, the IFAs are evenly split in their views on whether DIY investment offerings are a major opportunity or a major challenge. The main challenges are changing regulations (according to 60% of IFAs) and downward pressure on advice fees (according to 69%).

Overall, an air of caution prevails. Given the chance to identify additional opportunities and challenges beyond the five items that they were asked to comment on, about twice as many IFAs highlighted challenges rather than opportunities. The most commonly mentioned opportunity is the further professionalisation of the industry, even if this means that the total number of IFAs is reduced. The most commonly mentioned challenges are the growing burden of regulation and rising costs in general. When the IFAs were asked to identify just the single most important factor affecting their business, by far the most common response was increasing regulation/compliance needs.

Changes in fees – and in particular the movement away from commissions

towards a fee-for-advice model – was the second most common response.

Some 75% of IFAs have given consideration to succession planning. A further 19% say they have done so, but only because they have had to ‘put something on paper for FAIS.’ Some 62% have an internal succession plan which means that their clients will be taken over by a colleague at the same firm. Conversely, the remaining 38% have made arrangements with another IFA outside the firm to take over the clients.

It appears that there is room for improvement in the professionalism of the IFAs. Some 37% are currently not members of any industry body or organisation. Some 23% believe that professional standards have much room for improvement. Of those IFAs who are members of industry bodies, just over two thirds are members of the Financial Planning Institute of Southern Africa (FPI). Some 28% and 16% are members of the Financial Intermediaries’ Association of Southern Africa (FIA) and Masthead respectively.

The IFAs see that the FSB has a key role to play in the professionalisation

of the industry. Virtually all IFAs think that the regulator should do more to monitor unregulated schemes and products. Some 91% believe that the image of the industry has been tarnished by unregulated schemes and products.

Meanwhile, there are very mixed views on the retail distribution review (RDR) document that was released recently by the FSB. The RDR was mentioned as both an opportunity and as a challenge by different IFAs. A sizeable minority of IFAs see it as a ‘welcome change’ that will boost professional standards, and/or a move that validates they have been doing business anyway. A large number consider that the RDR will increase regulatory red tape and associated costs. A significant number of IFAs consider that the RDR as proposed indicates that the FSB has insufficient understanding of the IFAs’ business.

The UK regulations governing Qualifying Recognised Overseas Pension Schemes (QROPS) currently matter to only 14% of IFAs who actually advise clients on the transfer of pension assets to QROPS. However, nearly one third of IFAs expect that their QROPS business will grow over the coming 12 months. Nearly half of IFAs say that it is too early to tell what will be the impact of the new rules, which will remove the minimum income requirement and make it possible to withdraw 100% of a money purchase pension fund from age 55. Nearly one quarter believe that the new rules will make QROPS more attractive.

In relation to QROPS, the IFAs work with a wide variety of trust companies and international life companies. Among international life companies, RL360 and Friends Provident International (FPI) appear to be the most popular. Life insurers are selected on the basis of a number of criteria, including accessibility, fees, fund range and flexibility.

Only 7% of IFAs manage white label broker funds. Some 54% of IFAs disagree with white label broker funds, while another 38% say that white label broker funds may be of future interest.

Opportunities and challenges

Frustration over tax clearance for foreign allowances Source: Moneyweb, 16 April 2015

Despite exchange control relaxation, nothing has changed, says industry.JOHANNESBURG – Although exchange controls were relaxed earlier this month, some industry players say Sars’ procedures still leave them in the same position they were before: that is they get tax clearance on amounts up to R4 million – within a few days – but are referred for audit where amounts exceed R4 million.

In the February Budget Review, National Treasury indicated that South African residents’ (individuals only) foreign capital allowance would increase from R4 million to R10 million per calendar year from April 1 this year.

This created the expectation among several industry players and applicants that tax clearance for the increased amount could be obtained in the same fairly quick fashion, as was the case for the R4 million limit. Taxpayers need a tax clearance certificate to convert their rands to foreign currency.

Moneyweb understands that tax clearance certificates were issued within two to seven days for applications up to R4 million.

Where larger amounts were involved (South Africans could externalise amounts in excess of R4 million before April 1) a tax audit was done and it could take several months to obtain a tax compliance letter.

However, a number of industry players say the current Sars process effectively leaves them in the same position they were before April 1 – when an application for more than R4 million is made, the application is referred for audit

5


Rate the three most important factors influencing your decision to deal with asset management

IFAs are exponents of Open Architecture. Only 13% say that they

use the offerings of just one or two asset management companies. A much greater number – 49% – use the offerings of three to four asset management companies. The remaining 38% work with five or more asset management companies.

In selecting asset management companies and funds, IFAs consider a variety of criteria. The absolute size of the company’s total AUM, the risk adjusted performance of the fund, the quartile ranking of the fund and the length of time that the fund has been in operation are all of first importance to 38-46% of IFAs. Sales support, TERs and minimum fund size are relatively unimportant.

Fund ratings from independent agencies such as Morningstar are important to 88% of IFAs. A similar number like asset management companies to have fund risk ratings on the fund fact sheets. A broad variety of agencies are used. Morningstar, Glacier Shopping List and Fundhouse appear to be the most popular.

Asset management companies need to provide offshore fund options

if they want to do business with IFAs. Some 55% of IFAs use offshore funds. Another 27% use offshore funds that are denominated in rand, while a further 7% use offshore funds that utilise a client’s offshore allowance.

IFAs are overwhelmingly (94%) in favour of the ‘clean pricing’ of funds that has been proposed by the FSB and consider that ‘clean pricing’ has made it easier for them to explain the costs to fund investors. Some 83% of IFAs think that asset management companies provide enough investment information for the IFAs to meet their FAIS reporting requirements: however 34% consider that the information is too complex for the IFAs’ clients to understand.

IFAs tend to like asset management companies to send marketing

updates and information via e-mail either monthly (57%) or weekly (25%). Only 4% need daily updates. Some 61% like to receive information via the Internet (or e-mail): however 37% say that they like to receive information electronically and in printed form.

Asset management companies

How do you predominantly access funds from asset management companies?

n From the asset management company 14.0%n Through a LISP platform 70.1%

n Indirectly through a life insurance platform 15.9%

46.0%

45.5%

43.6%

38.0%

35.1%

35.0%

29.5%

29.3%

23.6%

17.3%

14.3%

17.5%

28.6%

26.5%

33.0%

37.7%

35.0%

41.0%

31.7%

31.1%

43.6%

46.4%

40.0%

36.5%

25.9%

29.9%

29.0%

27.3%

30.0%

29.5%

39.0%

45.3%

39.1%

39.3%

60.0%

Assets Under Management

Risk Adjusted Performance

Top Quartile Performce Ranking

Fund Maturity

Independent Ratings

Brand recognition

Fund Manager Tenure

Innovation

Service proposition/sales support

TERs

Local Support

Minimum Fund Size

Rank1 Rank2 Rank3


6

LISP platforms are an essential channel through which asset management

companies reach IFAs. Some 85% of IFAs recommend products from LISP platforms to their clients. Some 70% predominantly access funds through LISP platforms. The remaining IFAs are about equally divided between those who buy directly from the asset management companies that they deal with and those who buy funds indirectly through life insurance platforms.

IFAs are generally happy with the features of the LISP platforms that

they use. Some 90% are likely to embrace and use applications for processing business online, although only 23% have clients who have been looking for this. Some 65% say that LISP platform investment reviews are understood by (and are not too complicated for) their clients. A greater number – 82% believe that LISP platforms provide enough investment information for the IFAs to meet their FAIS obligations. Meanwhile, some 57% consider that there should be more exchange-traded funds (ETFs) and passive funds on LISP platforms.

Some 42% of IFAs are concerned that cost pressures on LISP platforms

may lead to a major consolidation. There is a wide variety of views on whether LISP platform operators should be able to charge lower administrative fees for their group’s own funds.

IFAs choose LISP platforms that meet a number of criteria. Long-term

sustainability, pricing and administration are all of broadly similar importance as attributes. Servicing of clients is only marginally less important.

LISP platforms

In which of the following areas could LISP platforms look to improve their offerings to clients?

14.9%

21.6%

21.3%

3.1%

9.7%

28.4%

6.5%

20.5%

27.6%

5.1%

20.9%

18.3%

6.5%

20.9%

26.5%

7.0%

20.9%

18.3%

9.2%

20.5%

13.8%

9.0%

27.2%

20.9%

27.5%

14.9%

7.8%

24.6%

17.2%

9.0%

34.4%

1.1%

3.0%

50.0%

4.1%

5.2%

Expanding theirfund range

Online services during the sales

process

Online services fortransacting

Reducing theirfund range

Technicaltechnology support

Technicalinvestment/

product support

Rank1 Rank2 Rank3 Rank4 Rank5 Rank6

7


IFAs are evenly divided about making asset allocation decisions for clients

using specific ‘building block’ funds (47%) or delegating the decisions to managers through use of multi-asset funds (53%).

Looking forward, a majority of IFAs do not expect to change their clients’

exposures to different asset classes. A major exception is global equities (developed markets): some 54% of IFAs will be lifting weightings, and only 6% will be reducing weightings. Perhaps for this reason, some 35% are looking to increase allocations to equity exchange-traded funds (ETFs). Some 33%-37% of IFAs are looking to cut allocations to each of South Africa equity funds, multi-asset (high equity) funds and cash.

Some 40% of IFAs say that their clients have asked for specific funds from

certain fund companies in the last year. A broad range of funds were mentioned as being of greatest interest: however the balanced products of Allan Gray and Coronation really stood out as being funds that clients are specifically asking for.

Asset Allocation

From the following list of strategies, will you be increasing, decreasing or maintaining your clients’ exposure?

54.3%

34.7%

27.8%

27.6%

22.3%

22.1%

21.5%

21.1%

14.7%

13.3%

11.1%

8.6%

6.2%

39.6%

50.9%

67.6%

51.9%

66.2%

52.3%

64.5%

67.6%

54.3%

62.7%

56.4%

54.9%

56.7%

6.0%

14.4%

4.6%

20.5%

11.5%

25.7%

14.0%

11.3%

31.0%

24.1%

32.5%

36.5%

37.1%

Equity strategies-Global developed markets

Equity strategies-Exchange Traded funds

Multi-asset (balanced)

Equity strategies-Global emerging markets

Other strategies-Structured products

Fixed Interest-Global developed markets

Other strategies-Hedge funds

Multi-asset (low equity)

Fixed Interest-Global emerging markets

Fixed Interest-South Africa income funds

Other strategies-Cash

Multi-asset (high equity)

Equity strategies-South Africa equity funds

Increasing exposure Maintaining exposure Decreasing exposure


8

Interacting

Media & Demographics

If IFAs were to consider just one influencing factor in selecting a fund or

an asset management company, that factor would be the reputation of the company, which was mentioned as being of first importance by 44% of IFAs. Also important are investment process (40%), independent fund ratings (34%) and fees (31%).

However, if they were to consider two influencing factors in selecting a fund or an asset management company, past performance would be the most important. No fewer than 75% of IFAs ranked past performance as the first or second most important factor.

The seminar topic that is by the most important for IFAs at conferences is the

outlook for markets, which is the single most critical topic for nearly half of IFAs. Perhaps because of the long experience of most IFAs, topics of least interest are new products, training (including the use of technology), tax updates and issues that are specific to South Africa.

Some 82% of IFAs have attended seminars arranged by asset management companies in the past six months, while 68% have attended seminars organised by LISP platform operators.

In relation to seminars hosted by asset management companies, 57% of IFAs

prefer to attend seminars that are hosted by several asset management companies, while 43% prefer to attend seminars that are hosted by just one.

The four asset management companies whose events are most useful to IFAs are Coronation, Allan Gray, Investec and STANLIB. The LISP platform owners whose events are most useful are Allan Gray, Investec, Glacier and STANLIB.

Some 71% of IFAs typically rely more online for trade and investment news.

The remainder typically rely on printed publications.

The most popular sources for trade industry news, based on the top three scores, were Moonstone Investment Indicators, FA News, Personal Finance, Financial Mail, Business Report and Money Marketing

Some 314 IFAs were interviewed. Three quarters had attained the FAIS

Category I certification, while almost all the remainder had attained the FAIS Category II certification.

Some 64% of the survey respondents were aged 50 years or over. Another 20% were aged between 40 and 49. The remainder were younger than 40 years of age.

9


Section


9

Question: What is your summary opinion on the RDR document released by the FSB? Positive sentiment:“The advisers who comply have no problem.”

“A very insightful document which reveals unethical practices. The IFA business model is enhanced by TCF and the FSB’s ability to regulate incentives. Innovative product providers should align their interests with IFAs to support the interests of the consumer.”

“I believe that RDR will have an impact on a large no. of firms, but certainly believe that if managed and implemented correctly by taking industry comments seriously, both the customer and advisor will be in a better position.”

“They have the right goals in mind and will help to professionalise the industry by promoting advice orientated advisers vs. sales orientated advisers.”

“I believe that a lot of additional responsibility is placed on the shoulders of independent advisers. Product providers need to be more accountable for designing uncomplicated products with more transparency on their costs/fees instead of highlighting commissions as their products major cost.”

“Brilliant, I endorse it fully.”

“This offers a bright future for new graduates and entrants to use technology to assist clients and grow their income.”

“90% positive 10% very bad.”

“It is the way financial services are going to work worldwide, get ahead of the curve and start implementing it now rather than a mad rush when the legislation is introduced.”

“I think it has some very valid points and some things which haven’t been thought through. I am optimistic.”

“Very positive. One aspect, churning, is the rot of our industry. It must stop.”

“Good idea. Will assist the professional advisors and restrict up front commission. Professional fees for professional advice.”

Negative sentiment:“It will kill independent IFAs.”

“I haven’t read the full document, but have attended workshops on it. My concern is that it might be in the best interest of a client to switch to a new financial product. This may be as a result of improved def, reduced fee, etc. In terms of RDR the advisor can’t get remuneration for replacing.”

“It is going to put pressure on IFAs to earn a decent livable income and encourage well established IFAs to rethink their future in the industry.”

“It will make it very difficult for the entry level IFA.”

“The real challenge is the commission and advice fee structure.”

“Long and some very stupid ideas. But a good consultation process so should bring about a better industry and level the playing fields.”

“It would devastate the small adviser and down grade advice to the middle ages of single supplier reps. Advice fee would be more costly and thus exclude 90% of our population in getting sound advice.”

“Market is still not ready to pay for advice.”

“It will be difficult for independent brokers to survive.”

“Will never work.”

“Good but not well thought out.”

“First world ideas in a 2nd world country.”

“Commensurate with what is happening elsewhere in the world.”

Neutral sentiment:“In the main, it’s a reasonable document, however, there are certain sections that don’t make sense such as Proposal Z.”

“There are both good and potential hazardous issues in the RDR document however it is probably best to wait and see what happens with all the submissions. these appear to be comprehensive!”

“Very thorough, but onerous. FSB needs to see certain rules in practice before making a final decision.”

“There is merit in what the FSB is trying to achieve, but areas of the document are targeting the wrong advisors.”

“While the document has good intentions, it will cause major upset in the industry in its current form. RDR should be done step wise, address the key concerns first.”

“Good principles, but perhaps not practical.”

“As a professional, this is required. However, the fees must suit the work we do.”

“Basically good in concept, but must not go overboard and make us into a nanny state, where clients can’t do no wrong or take responsibility.”

Selection of survey responses


10

Question: Over the coming year what is the single most important issue facing your business in terms of the regulatory environment?Positive sentiment:“Creating a value proposition linked to a fee menu to offer and calculate fees due.”

“Getting ready for RDR in terms of a clearly defined fee structure, which first needs to be costed, and then competitively priced in the market.”

Negative sentiment:“The risk of the regulator treating everybody as if they’re all criminals. I’ve been in this business for 31 years and have never in all those years had a complaint laid against me, yet the regulator seems to believe that I’m another ‘bad’ guy!”

“Managing to survive, it has become a costly business and the ever increasing danger of liability is decreasing our income stream.”

Neutral sentiment:“Preparing my business to be sustainable in case of reduced remuneration due to new regulations.”

“Changing our business plan to fall in line with RDR, awaiting RDR specs to do so.”

Selection of survey responses

11


Profiles

About Investec Asset Management Investec Asset Management provides investment products and services to institutions, advisory clients and individuals. Our clients include pension funds, central banks, sovereign wealth funds, insurers, foundations, financial advisors and individual investors.

It all began in South Africa in 1991. We were a small start-up offering domestic strategies in an emerging market. Over two decades of growth later and we’re an international business managing approximately $115 billion* for clients based all over the world.

Our culture is a reflection of who we are as people. Originally a reflection of our founders, like them, it still guides us today. At its heart is ‘the freedom to create’. People work best when they’re free to pursue and express their conviction. This approach attracts dynamic individuals – original spirits who want to pursue their passions and interests. Such personalities thrive in a non-hierarchical workplace, so we give that to them. We encourage honesty and discussion and organise and empower our teams to inspire diversity of perspective.

Our mission is to exceed our clients’ expectations. Achieve this, and we create profitable partnerships between our clients, our shareholders and our employees. A truly unique journey. Our emerging market growth story is unmatched. But there’s no magic formula to our success. We believe it’s down to the stability of our team, our enduring culture and our unwavering commitment to our clients.

About MoonstoneMoonstone Information Refinery (Pty) Ltd was established in April 2000 to provide an uncompromised, independent support network for all Financial Service Providers (FSPs) in South Africa. The provision of accurate information in refined format enables our clients to enhance their professional status. Moonstone personnel’s vast industry experience empowers it to add value to all levels of financial services practitioners through improved practice management. Our comprehensive compliance service, for example, includes assistance with Licensing, Risk Management and Training. Moonstone is also the Regulatory Examination Body of choice for most candidates. Our Mission is to ensure the continued existence of a robust and sustainable independent financial services environment through the delivery of accurate, objective advice, guidance and support to Financial Advisors.

About Insight DiscoveryFounded in 2007, Insight Discovery is a strategic research company which specialises in stakeholder engagement and leadership insights. Existing clients are mainly from the financial services sector and include regional banks, investment banks, asset management companies, insurance companies and private equity companies.

Insight Discovery is behind several established financial advisory reports, including Middle East Investment Panorama (MEIP), which is now in its sixth year and considered to be the definitive guide to financial services in MENA. South Africa Investment Panorama was modelled on MEIP Insight Discovery works closely with Universal Copywriters, a consultancy that works with global investment managers, private banks, institutional banks and publishers of corporate intelligence. It provides a wide variety of commercial writing/editing and research solutions.

Insight Discovery has won a number of industry awards for its reports. During 2014 it received the award Best Consultancy firm of the year from Global Investor, part of Euromoney.

Further details are available at www.insight-discovery.com, general email address [email protected]

Insight DiscoveryT +9714 5561495

[email protected] @Insight_Discov

www.insight-discovery.com

Design and production: www.pascaldon.com | email: [email protected]

This is for Professional Clients only and is not intended for Retail Clients

© Insight Discovery Limited, 2015. Reproduction without permission is prohibited

rising to the challengescdn.advent.com/cms/pdfs/papers/ir-saip-2015.pdf · technology is an enabler...

Documents