Page 85 - Profile's Unit Trusts and Collective Investments 2021 issue 2

The CIS Industry

investors paid R1 billion in switching fees in 1999, money lost, from the investors’ point of view,
in charges. The majority of these switches would not have enhanced investment performance.
Churning appears to have been less of a problem in recent years, although some commentators are
still concerned that unit trust portfolios in the hands of investors are generally adjusted too frequently.
Retirement Products
In addition to changing cost structures in the industry, LISPs have also largely been responsible
for creating unit trust retirement wrappers that increasingly compete with more traditional
products in the life industry.
In contrast to the rigid “one-size-fits-all” retirement products that have typically been offered
by life houses, LISPs pioneered flexible vehicles that allow investors to tailor their portfolios
according to their specific needs. Within an RA, Investment-Linked Living Annuity (ILLA) or
preservation fund wrapper, LISP investors can choose a range of unit trusts to form a retirement or
retirement funding portfolio (subject, of course, to compliance with Reg 28). A feature of these
products is that investors can switch the underlying investments if market conditions or individual
circumstances change (again, subject to prudential rules).
Compared to direct investments in unit trusts, retirement wrappers offered by LISPs may have
tax advantages for some investors. Tax breaks are often available on contributions, and unit trusts
held via a retirement wrapper are exempt from dividends withholding tax (DWT) and CGT. Note,
however, that the proceeds of an investment held via a retirement wrapper are taxable on
withdrawal at retirement.
It would not be an exaggeration to say that these product innovations have changed the face of
the retirement industry in South Africa.

Financial Advisors (Brokers)
Brokers, or financial intermediaries, have always played an important part in the collective
investment schemes industry. Before 1998, initial costs, which included 3% commission payable
to brokers, were regulated by the industry. Since fee structures were deregulated, however,
financial advisors may be remunerated in a variety of ways, including trailer fees in the form of
ongoing commissions.
The proposals under the FSCA’s RDR (Retail Distribution Review), which are being
implemented in phases, are having an impact on the way that brokers interact with clients. The
suitability of financial products in the context of an investor’s needs is a key focus. Financial
advisors need to be able demonstrate that they recommended appropriate solutions; under the
RDR it is no longer feasible to fall back on legacy justifications like brand reputation or historical
performance data that ignores risk factors.
The RDR proposals seek to make the distinction between tied brokers and independent
brokers more clear-cut, especially as understood by consumers.
It appears that most South Africans need the services of brokers to help them with their
financial planning and investment decisions. As a retail investor, the differences between funds,
platforms, multi-managers and DFMs are bewildering – and that’s before facing passive vs active,
retirement wrappers, TFIAs, and other options.
Many management companies – either directly or via platforms – work through both “tied” and
“untied” (independent) financial advisors, where the former exclusively offer the products of a
single channel and the latter (in theory at least) offer a very broad choice.
According to the FSCA’s December 2019 update, financial services customers should be in a
position to clearly understand what services intermediaries provide and in what capacity they act.
The latter means that the nature of the relationship between an intermediary and one or more
product suppliers must be clear – customers have a right to know if any limitations or restrictions
imposed on the broker affect the advice given and the products offered. To this end the FSCA has
proposed new terminology that better reflects the relationships between advisors and product
suppliers (see box on page 81).

83
Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts