News Article : Old Mutual responds to excess fees criticism
|Category:|| Advisers & Brokers : Commission & Fees|
|Posted:||11 Sep 2015|
System defaults and the epidemic of one
‘We have investigated and can confirm that this was an isolated and accidental error and has not affected any of our other clients.’
I now have a new Tax Free Savings Plan with no upfront fee, no ongoing advice fees, and no automatic increase.
Old Mutual has also provided a comprehensive response to the misfortune of my Tax Free Savings Plan experience. Have you paid too much for your Old Mutual Tax Free Savings Plan?
And if I were to reproduce everything Jean Minnaar sent me, as is, I would become a born-again Old Mutual brand ambassador.
Suffice to say the following:
- I think the Tax Free Savings Plan is a really good start by government to encourage poorer South Africans to save. My problem is not with the investment concept.
- I didn’t cancel my contract with OM. Old Mutual have really good offshore fund options. So despite a pretty awful customer experience that would have deterred many other investors, I hung in there. My problem is not with the product structure or with the company.
- My problem is however with the way the investment is being sold. The maximum upfront costs are too high and nullify the entire purpose of the Tax Free Investment.
System defaults – automatic premium increases
In my opinion, system defaults such as the 10% automatic premium increase are a hangover from an insurance administration system that is sales and not advice driven.
According to OM they have allowed scheduled increases for the following reasons:
- Most of their customers contribute less than the maximum R30 000 p.a. limit and OM is encouraging customers to keep pace with income increases and to reach this limit.
- The OM system will alert the investor when the upper Tax Free Investment limit is reached.
- Amounts invested in excess of the tax-free limit are channelled towards the Old Mutual Invest Flexible LISP plan without additional fees.
This is disturbingly reminiscent of the way Retirement Annuities are oversold. A certain investment portion benefits from a beneficial tax dispensation, but amounts in excess don’t.
Although new generation RAs are better structured cost wise, it is important to get independent financial advice whether amounts above the tax benefit limit should actually be invested in an RA structure, or better placed elsewhere.
Although Treasury may increase the annual limit of R30000, it remains to be seen whether, like the Retirement Annuity dispensation, the allowance stagnates for decades while government stumbles from one contradictory policy objective to the next.
System Defaults - Upfront Advice Fees
Although the Old Mutual Invest Tax Free plan allows the facilitation of negotiable upfront financial planning and advice fees (not a product advice fee, but a financial planning fee which should be accompanied with a FNA and recommendations across various needs) that are agreed between customers and advisers, up to 1 month’s premium, it is this I reckon wholly inappropriate for the Tax Free Savings Plan.
Considering that the investment is aimed at promoting savings, a gaping upfront R2500 deficit is not a great way to start this process. In my case, I didn’t want advice and explicitly said so.
Here is what I wrote to that OM agent at the time:
I will not be taking up a tax free investment with OM through you. The reason is simple:
You would have had me pay R2500 (The first month’s investment) towards a dubious ‘advice’ fee. Whereas I had already acquainted myself with the possible underlying funds, and you contributed nothing further to the information I already had. I understand your need to earn an income, but this fee would constitute daylight robbery.
Here is what is says on the website:
- No advice fees are applicable when you invest online.
- Asset management fees of 1.08% a year will be deducted from your returns.
- Administration charges of 0.50% a year will be deducted from your fund value.
- The administration charge will be a minimum of R20 per month, unless a regular payment is set up.
- If you invest the maximum allowance per tax year, we will refund you HALF your administration charges for that tax year.
System Defaults - Ongoing Advice Fees
Ongoing fees may appear to be a far fairer way to distribute the so-called advice fee over time.
Ongoing fees can be either 0 to 3% of premiums (Up to R75 of R2500 per month) or 0 to 1% of assets. (All these fees exclude VAT where applicable.)
Old Mutual also noted that that these maximum fees are in line with other investment solutions in general including non-insurance players like Allan Gray, Investec and others. And that their solution is also used by a large portion of Independent brokers in their financial planning process.
OM opined these fees are reasonable for the services offered by financial advisers. But are they?
This is where we need to understand the type of market for which the Tax Free Savings Plan is most appropriate, and why OM properly sees it as an Emerging Market product.
The Tax Free Saving Plan and the coming of RDR coincide where most middle-income and poorer people can no longer afford financial advice.
It is an unfortunate consequence of compliance & hyper regulation that proper financial advice is increasingly only available to high net worth customers.
Many South Africans will also never know the benefits of independent financial advice and hence will never want to pay for it.
So what fees should you be paying for your Tax Free Savings Plan?
Personally I was prepared to pay an upfront fee of R350 for the time it took to complete the product application forms - Nothing further and certainly no ongoing fees.
And is the Tax Free Savings Plan a product for which one needs extensive financial advice? Surely not since it belongs on the basics shelf of the financial supermarket.
If you need advice on the underlying funds to invest in then you should be prepared to pay a ‘reasonable’ upfront fee for it. And this is what OM should facilitate, possibly capping the fees even further to treat customers fairly.
Ultimately, the Tax Free Savings Plan belongs in a simple long term portfolio, which already includes an RA, a whole of Life Policy, and after other savings, such as paying extra on your house bond and paying off debt.
I know that insurance companies and banks like to call their agents financial advisers, and many are well qualified and focus on building long term relationships on trust and with good advice.
But there is a primary conflict of interest made double jeopardy when the insurance agent is in a gateway position to fleece the customer under the guise of an advice fee for a product where it is not justified.
Perhaps Treasury has to be more explicit about the goals of this type of product to prevent insurance companies and banks misunderstanding the role they play in protecting those less fortunate and safeguarding national saving initiatives.