The Association for Savings and Investment South Africa’s (ASISA) Retirement Savings Cost (RSC) Disclosure began on 1 March but becomes compulsory on 1 September for all ASISA members with commercial umbrella funds. The new legislation standardises the disclosure of costs to clients incurred in an umbrella fund, expressed as a percentage of the investment amount. Arguably, brokers are not prepared for the shift, which calls for careful analytical ability to compare and interpret results.
Shakeel Singh, CEO at Sanlam Umbrella Solutions, says, “Previously, costs were disclosed in different ways which led to some opaqueness regarding the true cost to client. Now there’s standardised disclosure for fairer comparisons. More than ever, brokers play an integral role in looking beyond fees to analyse the value propositions of like for like products. There’s the risk of heightened fee fixation. Our recent Benchmark research shows cost and charges are assigned just 20% importance amidst a myriad other issues. We’ve also shown they don’t move the needle in terms of member outcomes.”
Singh says brokers who can interpret costs will have an immediate edge, especially if they can preemptively explain the implications of the new rules to clients. “We’ll also see some providers changing their products to be cheaper as 1 September approaches. Sanlam has always advocated for fee transparency so has no need to adjust due to the new rules. But others will be making shifts. And brokers will need to be familiar with the revised offerings.”
The fees will be disclosed across four main buckets, namely administration, advice, other (includes all other fees deducted from member contributions like contingency reserve account levies), and investment management – the biggest fee component. Singh says here is where many disclosure problems arose, as asset managers aren’t necessarily used to giving the amount of detail required for the new RSC standard. ASISA wants the total investment cost, which is total expense plus transaction costs, shown as a percentage of assets under management.
For intermediaries, the real skill lies in interpreting the data and ensuring this is the same across the board. For example, if a there is a difference in the membership data that is compared from one administrator to the another, naturally, that’ll affect the numbers that are generated. The same goes for the investment portfolio; if a passive fund is compared to a smooth bonus fund, the smooth bonus fund will end up looking more expensive. Passive funds are cheap generally as an investment strategy, so not comparable to an actively managed balanced fund. A broker needs to understand this and recognise it when doing the calculation.
Singh adds, “From what we’ve seen in the last six months, we are concerned brokers have a lack of understanding on how to interpret costs. That’s why we developed a quick, free tool that takes intermediaries through the new legislation and a comparison exercise. We urge brokers to use this tool and similar ones to familiarise themselves with how the calculations work. Additionally, we suggest interacting and building relationships with administrators. And taking advantage of any educational material, tools and training from umbrella fund providers.”
Singh also suggests brokers remain cognisant of not being overly fixated on costs. “Yes, an offering needs to be competitive, but cheapest doesn’t always mean best value-for-money. Go deeper and ask other questions that count.”
Ask things like:
How strong is the administrator? Is it good at paying claims?
How quickly can it invest members’ contributions?
Do you trust its system?
How strong is the administrator’s IT security? How good is its IT infrastructure? How is member data protected?
How good is the service? Is there support beyond the first line? Do you have access to executives to assist you?
Singh concludes that it really is about relationships, “At the end of the day, the retirement fund product is not tangible. You’re buying a relationship. You’re looking to work with someone over the long-term. So, it’s about the relationship, not just numbers. That’s an important value proposition to consider, especially as the new legislation comes into force, and we’ll all need to work together to ensure we optimise member outcomes.”