Secondary

Advisor Prejudice & Vested Interests

By KEN SILKE (B.A. LLB. (UCT) AA Arb, Advocate of the High Court of South Africa

One of the prime examples of advisor prejudice is where an Independent Advisor advises a client to transfer a Retirement Annuity [via a Section 14 transfer] from a Life Office to a LISP or another Life Office. Essentially two things happen:

  • Penalties for the un-recouped expenses are more often than not levied by the Life Office in question; and
  • In terms of Section 14 (7) (b) (ii) (bb) (A) and (B) of the Pension Funds Act, the IFA cannot earn initial fees to cover the aspects of consultation time spent with the client, obtaining of quotations, advice, and the overall processing and follow-ups, phone calls etc of the Section 14 transfer.
  • Apart from this iniquitous rule, and the Registrar being exempt from receiving fees which do not have to be negotiated between client and the Registrar being exempt, Financial Institutions conveniently construe that IFAs have to renew their advice and review fee with a client signature on an annual basis with the client, despite that this Section in the Pension Funds Act does not refer to the word “signature.” Often clients do not renew their agreed fees and 3 to 4 months may pass without remuneration before signature. This can have a major impact on the solvency of an Advisory Practice. Further, the Pension Funds Act does not confer any right on a Financial Institution to withhold Advisor Fees.

The question which needs to be asked is: why if a so-called “conventional Retirement Annuity” is transferred from the same Life Office to a more efficient Platform of the same Life Office with more fund choices, the IFA can earn annual fees but this does not have to be reviewed annually by the client? This is clearly a case of vested interests as the particular Life Office can hang onto its asset base.

See Annexure below which shows examples of how the rest of the financial services industry operate and how, in turn, IFAs are prejudiced, based on the information contained in this document.

My view is that in terms of fairness to the consumer and the advisor is that it should be for these parties to agree how the advice and administrative process should be paid for by the consumer?

The confirmation of annual fees and product benefits is amply set out in PART V1 Section 7 (4) of the FAIS General Code of Conduct and is naturally a “compliance function.”

PART V1 Section 7 (4) of the FAIS General Code of Conduct compels Advisors to review their clients and fees payable to the Advisor at least on an annual basis and, as stated above, there is no obligation placed on a Financial Institution in terms of the Pension Funds Act to insist on seeing a client signature every year and agreeing again to the fee, where it was agreed to on the Application Form. I quote from the relevant PART V1 of the FAIS General Code of Conduct, Section 7 (4) of the FAIS General Code of Conduct for your convenience:

“(4) A provider who had provided advice to a client or is rendering ongoing financial services to the client in respect of one or more financial products, must on a regular basis (but not less frequently than annually] provide the client with a written statement identifying such products where they are still in existence, and providing current details (where applicable, of –

(a) Any ongoing monetary obligations of the client in respect of such products;
(b) The main benefits provided by the products;
(c) Where any product was marketed or positioned as an investment or as having an investment component, the value of the investment and the amount of such value which is access ible to the client; and
(d) Any ongoing incentives, commission, fee or brokerage payable to the provider in respect of such products.

Therefore, there is no need for a Financial Institution to insist on an annual client “signature” [which is not defined in either the Pension Funds Act PART V1 Section 7 (4) or the FAIS General Code of Conduct].

As stated above, the Pension Funds Act does not provide for a signature. Further, where a client does not sign annually, the financial institution ceases paying annual fees while asset management fees and administrative fees are still payable by the client. This is a clear case of Advisor discrimination/prejudice while Advisors are still fully accountable in terms of the FAIS Act and the FAIS General Code of Conduct.

Often this annual Retirement Annuity review fee renewal does not coincide with the actual annual review date of Section 7 (4) of the FAIS General Code of Conduct and hence the problem is exacerbated.

As stated previously, no Institution has the power in terms of the Pension Funds Act to remove fees if there was client agreement to pay annual fees on the initial Application Form. Fees can only be removed on a client’s instruction to do so. What is grossly unfair is that the asset management fees and LISP fees are still earned by the fund management companies and LISPS where a Financial Institution’s practise is to remove Advisor Fees if a RA that was transferred via a Section 14 Transfer.

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