Secondary

More on Tax Free savings

Fees in respect of tax free investment

The list of definitions states:

A “fee” includes a management fee, administration fee or any similar charge;

The regulations stipulate that “any fee charged in respect of a tax free investment must be reasonable.” It also does not allow product providers to charge any penalties should there be missed payments, or reduced payments.

What about Advisors?

No mention is made of advisor fees or commission. It is difficult to relate “…or any similar charge…” contained in the definition above, as implying an advice or “placement” fee.

It is to be hoped that government is not under the impression that these products will sell themselves.

It will be interesting to see how product providers address this, as advisors are unlikely to recommend these products if there is no compensation for intermediation. While commission is often cited as the main culprit when a conflict of interest arises, it is also a bit naïve to expect an advisor to provide advice and assistance for free.

The exclusion of advisor remuneration on tax-free products will cause a new conflict of interest.

During an extensive review of a client’s portfolio, and where an advice fee applies, these products will naturally be considered, but most advisors still operate on a commission and fee basis. The advice fee, proposed in the retail distribution review, is still a long way off.

What will happen in the interim, when this product is the right one for the client? Do you refer your client to the product provider? Surely this is contrary to the culture of treating clients fairly?

Endowments

The media release from Treasury indicated its concern that some existing products, like endowments, might not be suitable for certain investors who are taxed at a higher rate (30%) than their individual marginal personal income tax rates. It is investigating the possibility of allowing such individuals to convert their savings or investment in current products into tax free investments.

No mention is made of whether this will be regarded as replacements, with the ensuing claw back of commission where applicable. In theory, an advisor may be in a position where he not only loses commission, but will also be obliged to assist the client in terms of TCF. Under FAIS, he will be required to conduct a thorough analysis of the two products, but will not be able to be recompensed for it. RDR proposes that no commission be paid on replacements.

The industry will need to address these issues with Treasury before financial advisors become voluntary workers.

 

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