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Pension Funds
Sunday, April 1, 2007
Mixed trends

Someone in the pensions industry suggested recently that paying 3% initial fee and 1,25% a year for an investment into a unit trust seemed like a lot of money. It brought home the fact that even those involved in the financial services industry have little idea of how much they should reasonably expect to pay for the service of buying a fully diversified portfolio of shares, managed by an expert on their behalf.
To put these fees into perspective, the client would be paying R45 over a year, on a R100 a month investment, which grew at an average of 10% that year. Or, on a larger single investment of R10 000, they would have forked out R427 for the privilege of professional asset management, a separate trust structure, with trustees in attendance to protect their money, professional advice from a registered adviser and of course administration of their investment, along with regular communication from the collective investment scheme manager.
But it is difficult for the professional adviser to ask clients to pay them to do their job these days. Unfortunately, the few that overcharge their clients taint the rest of the profession.
Australia, which has led the way in seeking alternative ways to remunerate advisers, can provide some insight into how clients view paying their adviser for their services. The Australian Association responsible for looking after investment fund interests, conducted research, called the Taverner research, in December 2005. They wished to establish how critical Australians considered advice to be, as well as how they wished to pay for that advice.
It was clear from the research that the more face to face contact the client had with the adviser the happier he was; while 45% of respondents who saw their adviser twice a year were happy, while this figure dropped off rapidly to 28% for those who only saw their adviser once a year, and 22% for those who saw them less often.
All round the world it has been proved that people don’t just decide to buy a retirement product, for example – they have to be encouraged. For example, a 2002 report from the Association of British Insurers shows that 46% of low to middle income earners said that they would not have commenced retirement savings without receiving advice from a planner to do so.
Australia has paved the way in terms of introducing the so-called flat fee advice model. This means that clients treat their adviser like any other professional with which they deal, and pay a flat rate for the time spent on their affairs. When asked this question in the research, 63% of respondents said they would prefer to pay this way rather than an ongoing fee out of the investment itself.
However, in practice clients appear to find it difficult to pay a flat fee before they have received anything, as many do not equate their adviser with providing them the same kind of value as their attorney or doctor. The research results showed that only 6% were paying separate fees for advice or additional advice while only 3% had paid initial consultation fees.
On the other hand, 36% had paid trail commissions to the adviser, and 29% were paying a percentage fee based on the assets under management; 9% had organised individually negotiated fees and 11% had paid entry fees.

Copyright © Insurance Times and Investments® Vol:20.3 1st April, 2007
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