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Friday, June 1, 2007
Read my Lisps

Providing choice at reasonable cost is the primary aim of Linked Investment Service Providers (LISPs). Unfortunately, complex and opaque products and pricing structures make some of them less investor-friendly than others.

LISPs act like intermediaries between investors and investment fund providers, offering a simple, cost-effective way to manage one’s investments. They offer clients access to a range of funds (such as unit trusts) in which to invest directly as well as the “wrappers”, such as retirement annuities, endowments, preservation funds and living annuities. These wrappers essentially offer certain tax advantages to qualifying investors.
“Investors can choose both their wrapper and their underlying fund and, if they want, can switch between underlying funds cost effectively,” says Johan de Lange, Director of Allan Gray Investor Services.
There are now 14 members of the Linked Investment Service Providers’ Association (LISPA) who jointly administer more than R227 billion in assets, involving over 400 000 investment accounts.
Many LISPs are associated with either life assurance or asset management companies, which offer that company’s own investment funds alongside those of other providers. This is similar to a supermarket offering its own-name products.
Choice, flexibility and transparent access to a range of underlying funds on one administrative platform, consolidated reporting and the ability to switch between funds, to construct portfolios and rebalance easily and cost-effectively are compelling reasons for investors and their advisers to invest through a LISP.
An issue that continues to plague the industry is the discount given (or fee paid) by fund providers to LISPs that offer their products as investment options on their platforms. Historically these discounts were for the most part not disclosed to investors and the benefits thereof were retained by the LISP. Fortunately this is now changing and some LISPs, such as Allan Gray’s, not only disclose but also pass on any savings enjoyed or payment received directly to the investor.
As an investment vehicle LISPs offer distinct safeguards to investors. For example, they never own the clients’ money or investment. They aggregate all the money that is invested with them and invest it in units in the selected funds in the name of a custodian (trust structure) on behalf of the individual investors. “Clients are protected because beneficial ownership of the units always remains with the individual investor, not with the LISP or the custodian,” says Mr de Lange.
LISPs are required to register with the Financial Services Board (FSB) in terms of the Financial Advisory and Intermediary Services (FAIS) Act. To retain their license they have to meet a number of regulatory obligations, including submitting annual audited statements to the FSB showing that they are solvent.
Mr de Lange says one thing to keep in mind when using a LISP is that products and funds available on the platform may change. “But then one can always switch, providing the cost of this does not undermine the benefit.”
A risk of LISPs is that the ease of switching could encourage investors to chop and change frequently, which might have a negative impact on investment performance.
So when selecting a LISP, Mr de Lange says investors should look for transparency and disclosure of all the costs involved. They should also make sure they are comfortable with the range of funds and wrappers available on the platform.
 

Copyright © Insurance Times and Investments® Vol:20.5 1st June, 2007
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