A recent finding by the FAIS Ombud will probably cause product providers to rethink how they disclose costs, including commission, in quotation packages.
The General Code of conduct stipulates that a provider “…must, as regards all amounts, sums, values, charges, fees, remuneration or monetary obligations mentioned or referred to therein and payable to the product supplier or the provider, be reflected in specific monetary terms: Provided that where any such amount, sum, value, charge, fee, remuneration or monetary obligation is not reasonably pre-determinable, its basis of calculation must be adequately described”. (My underlining).
There is also a specific question in the annual compliance which requires the FSP to confirm that the “Extent of monetary obligations assumed by the client…” was disclosed to the client in writing.
A client invested R2 million on 25 April 2008 in an off shore investment. When she received her first statement dated 25 October 2008, her investment had declined substantially in value, mainly as a result of the financial crisis. Against the advice of her advisor, she terminated her investment a year after inception. Her initial investment of €161 135.68 had shrunk to €99 002.86.
Amongst other complaints, the client alleged that the ‘exorbitant costs’ involved in making and maintaining the investment were never disclosed to her; in particular the commission was not agreed upon.
While a number of very interesting issues are discussed in the determination, I only want to focus on one aspect in this article – the disclosure of costs and commission.
In response to queries relating to the non-disclosure of the actual monetary value of the commission charged, Respondent contends that this fee need only be adequately described where it is not reasonably pre-determinable. According to Respondent he charged an initial commission of 2.5% and an annual commission of 0.5% per year. Whilst he was paid up front by Old Mutual, this was to be recovered from the Complainant over three years at 0.83% per year, and given the fluctuating value of the investment, it was impossible to determine in advance the rand value of the fee that Old Mutual would recover from the Complainant.
The Ombud is of the opinion that:
…there is no way in which any investment, never mind a medium to long term investment, should be recommended without first reaching agreement on the term and cost implications thereof.
Section 3. (1) (vii) of the Code does not just refer to the adviser’s commission but all costs. These are to be reflected in specific monetary terms in order that the client understands exactly what it is that they are committing themselves to at point of sale.
Merely setting out a percentage cannot and will not suffice. Even in the very rare instances where the costs are not reasonably pre-determinable, the basis of calculation must still be adequately described.
Respondent admits to having had his commission paid out up front, which amount had to be disclosed in term of the section 3.(1) (vii). In addition, Old Mutual clearly had no difficulty in calculating costs when they sent the October 2008 statement.
What needs to be disclosed? The actual rand value that the advisor receives, or the quarterly deductions over three years, which includes interest payable by the client to the product house for the “loan” to pay the advisor? Certainly, in this instance, my money is on the Ombud’s interpretation being correct.
Concerning the other costs: In my view, one’s point of departure should be to assist the client in making an informed decision. For most individuals, 0.5% sounds trivial, but if you say it amounts to R10 000 per annum, they are likely to ask what they get in return for this sum. Also bear in mind that there are still provider costs to be added, which appears not to have played a part in this disclosure.
This reminds me of a great Joan Baez song called Diamonds and Rust:
Now you’re telling me you’re not nostalgic
Then give me another word for it
You who are so good with words
And at keeping things vague
Because I need some of that vagueness now
Its all come back too clearly
If you’re offering me diamonds and rust, I’ve already paid.
If the song brings back wonderful memories, click here for the Youtube version.