The Retirement Funds Department of the FSB published Draft Information Circular 6 of 2013 to clarify its views on certain issues, including the payment of fees and commissions when a client elects to transfer funds from one product provider to another.
Section 14(7) of the Pension Funds Act provides that:
“(a) Notwithstanding anything to the contrary in the rules of a fund, a retirement annuity fund shall not prohibit the transfer of business that relates to a member’s interest or non-member spouse’s interest, at the request of such a member or non-member spouse from one retirement annuity fund to another.
(b) No fees or commissions of any nature are payable by any party or by any agent or mandatory of such party –
(i) in return for the facilitation, intermediation or recommendation of the transfer; or
(ii) for financial services rendered by a financial services provider or representative after the transfer in respect of the transferred interest of the transferring member or non-member spouse which exceeds the fees or maximum commission that would have been permissible for such services in terms of the Long Term Insurance Act, 1998 or any regulations made thereunder had the transfer not been done other than fees-
(aa) payable to the registrar;
(bb) negotiated and agreed to in writing by the transferring member or non-member spouse annually, which fees are-
(A) payable by the transferring member or non-member spouse personally; or
(B) authorised by the transferring member or non-member spouse to be paid by the fund or administrator.”
The draft circular then sets out the purpose of section 14(7)(b), which it says is to protect clients “…from the risk that advice given to him or her by a financial services provider regarding the transfer of his or her retirement savings (might be) for the principal purpose of generating fees or commissions for the financial services provider rather than in the member’s or non-member spouse’s best interests.”
The draft circular then sets out the Registrar’s view:
“If fees or commissions have already been paid to a financial advisor which were determined on the basis of contributions and/or other amounts paid to the transferor fund which have yielded the retirement savings to be transferred to the transferee fund, no new or additional fees and/or commissions may be paid to any financial services provider by or on behalf of the member or non-member spouse in respect of those retirement savings.”
If our understanding of this is correct, it means that advisors who facilitate the transfer of funds will not be eligible for remuneration for such services.
An advisor may receive fees or commission if new contributions to the transferred funds are made.
My first RA matured recently. The advisor who sold it to me received his commission all along, despite the fact that I have not seen or spoken to him in over 30 years.
Despite having been in the industry for 37 years, I elected to make use of an advisor to assist me in transferring my funds to what I regarded as a better fund. I did this for two reasons:
- I do not have the required knowledge of the markets to the extent that I can determine where to place my retirement savings, given my age and risk profile.
- Knowing just how much some product providers do to try and discourage clients from transferring their funds, I was quite happy to pay a measly 0.5% to an advisor to handle all of this on my behalf.
I fail to see why an advisor should not be remunerated for these services – it is an entirely new advice process, and the General Code of Conduct places a huge demand on the advisor to comply with all its requirements.
Then there is the intermediary services which take up an enormous amount of time, both from a legal perspective, and from attempts by some providers to delay the process which allows them to keep the funds under management for as long as possible. It appears that the Regulator is aware of this, as highlighted above:
…a retirement annuity fund shall not prohibit the transfer of business … from one retirement annuity fund to another.
No further mention is made of this in the draft circular, however.
It appears that, if these proposals are to be implemented, advisors would be expected to provide this service without remuneration, yet make their expertise and time available to the client. They would also be exposed to the risk of “not acting with due care and diligence”.
The proposals of the Retail Distribution Review (RDR) are due for publication in May. This is, in my view, the forum to address this issue.
A number of industry bodies provided input to these proposals prior to the deadline for comment. One can only pray that a practical outcome will be achieved.
If not, the biggest loser in the process will be the very client who is supposed to be protected.