Fortunately, attuned to the concerns of South African investors, these are also some of the issues on which the National Treasury and the Financial Services Board (FSB) are currently focused. The National Treasury's intentions have been succinctly set out in a recent policy document: "A safer financial sector to serve South Africa better" (also known as the Red Book). Its discussions relating to consumer protection have largely focused on three key themes: Ensuring that investors receive appropriate advice; ensuring that investors are offered proper disclosure; and ensuring that financial intermediaries are driven solely by serving their clients' best interests.
Historically, product providers' models have allowed intermediaries to earn upfront commissions on long-dated investments, whereby intermediaries receive a percentage of an investor's total contributions over their full investment term at the start of the investment. This, however, gives the investor little room to negotiate or renegotiate advice fees and may even result in punitive penalties should an investor exit the investment prior to the date originally agreed upon. In worst cases, it's been argued that an upfront commission structure may encourage the sale of inappropriate investments, as intermediaries may be driven by their own interests at the expense of their clients'.
Full disclosure, of course, is necessary not only when it comes to the fees associated with your investment, but also when it comes to its key features and your investment implications. After all, you need to be able to understand exactly how your savings are being invested in order to assess whether the product and the underlying unit trusts you have selected are appropriate to your needs and objectives. Having consulted your financial intermediary, you should feel completely comfortable with your investment decision.
Importantly, you should be aware of any risks associated with your investment and should be given a realistic indication of the returns you can likely expect. This should include a breakdown of the asset classes your investment will be exposed to, an indication of the type of investor the investment may be appropriate to and whether or not your investment offers you any guarantees. You should also be aware of all practical implications: What are your contractual commitments, obligations and rights? Can you change or cease your contribution amounts? What are your tax implications? Other important disclosures to look out for include the processes to be followed for lodging queries or complaints and whether or not your selected product and product provider are regulated by the FSB.
Ultimately, you should be able to understand the investment alternatives available to you and confidently be able to compare the different products at your disposal.
The FSB and other industry bodies are currently engaged in a number of related discussions and have established several working groups in a drive to improve the quality of information that investors are able to access. By working towards standard minimum disclosures set out in an easily understandable manner, it is hoped that investors will be able to exercise more control over their investment decisions and be better equipped to select appropriate investment vehicles.
It should also lead to a more meaningful discussion between you and your financial intermediary and, ultimately, to the dispensing of improved financial advice. And as we've emphasised before, appropriate advice is critically important, especially if you do not have the time, inclination or necessary understanding of investments to monitor financial markets and invest comfortably on your own.
