Despite the millions spent by financial services companies marketing their ‘unique’ abilities, insights and offerings, the retirement industry is fundamentally uncompetitive.
That is the view of Steven Nathan, Chief Executive Officer of 10X Investments.
Referring to a discussion paper published by National treasury in July this year titled ‘Charges in South African retirement funds’, he says the requirements for a competitive market, as listed in the paper, are lacking. National Treasury laid down the following minimum requirements for a truly competitive market:
· Transparency of charges and product terms
· Comparability and portability of products between providers
· Financially informed and active consumers
Nathan sees fund management as a commodity service. “In a competitive market, consumers would compare products on the basis of quality and price. This does not happen in the investment industry.”
Fund managers imply they have a unique talent to validate the fees they charge, says Nathan. “There is no doubt that individual fund managers are highly skilled, but in the context of their peer group, their skills are mostly just average and so their product is essentially a commodity.”
This means they should be competing on price, but this is not the case as the industry maintains the illusion of skill, says Nathan. “Invariably, every fund manager owns top-performing funds in a particular category at a particular time. This is then marketed to death to create the impression of a singular ability, but the hundreds of underperforming or average funds are just ignored.”
Of course, it helps to have many horses in the race, as one is sure to come home eventually, he says.
“But this profusion of choice creates unnecessary complexity. Investors are being offered similar products in different formats. Savers struggle to compare these options. They are effectively disempowered and forced to rely on advisors to aid in their decision. This makes the market uncompetitive.”
Nathan compares the artificial complexity of retirement investing to that of the cellular phone market.
“Every network operator offers dozens of different bundles; the average consumer cannot decide which is the most sensible and cost-effective one. In the end, they opt for what the sales consultant recommends.
“In addition to this, just as cellular phone contract providers make it very difficult to change products (with too many options that are too complicated to understand and possible surcharges), the retirement industry also makes it difficult to change from one investment product to another, with the investor often suffering a financial cost.
In this, investors also pay too little attention to the level and impact fees, says Nathan.
“But then it is impossible to quantify the impact of fees if the fees are not quantified.”
He says neither the level nor the disclosure of fees is properly regulated.
“Without a standard measure of the cost impact, price comparisons are impossible. The paper argues that providers make it deliberately difficult for customers to compare prices, Treasury identified a “profusion of charges and charging structures” – to avoid price competition.”
According to Nathan, this complex pricing model necessitates and justifies the use of financial intermediaries, which further inflates costs and helps entrench the incumbents. “Uninformed investors are unaware of, and insensitive to the level of recurring charges, and do not push back. In this way, uncompetitive high fees persist.”
Nathan says National Treasury is sensitive to costs because it understands the impact fees can have on an investor’s retirement savings.
“Many savers think they are only giving away 1 or 2% in fees without fully understanding the long term impact, which is that they have between 40 and 60% less money at retirement.”
National Treasury has made a number of proposals to combat the lack of competitiveness in the retirement investing market, says Nathan.
“One proposal is that the industry must agree on a standard or default cost measure. Another is to eliminate costs that cannot be determined up front, such as performance fees. Thirdly, consumers need to be made aware of costs. The paper proposes the regulation of disclosure so that investors can compare the likely outcome of a high cost active product with the outcome of a low cost passive product.”
“We agree with these proposals and feel they are necessary in order to make the retirement industry a competitive market that serves investors rather than the industry,” concludes Nathan.