Advisers lack incentive to promote tax-free accounts

Story Highlights

• TFSA
• tax-free savings
• Advisers
• intermediaries
• low commissions
• incentives
• PSG
• Sanlam
• Element
• Citadel
• Momentum
• Old Mutual, Sanlam
• Stanlib

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 Colin Anthony

The issue of whether financial advisers put clients’ interests first is being highlighted by tax-free savings accounts (TFSAs), which earn little in the way of commissions for financial intermediaries. While take up has been strong among some fund managers, those who rely on financial advisers as distribution mechanism have found it harder going than managers who sell direct to end clients. This was confirmed by a representative of the Financial Intermediaries Association, who said bluntly: “They just don’t make enough on commissions.”

Element Investment Managers – which is offering TFSAs – agrees that this is problematic. “Independent advisers are not making much out of it so they are not pushing it,” says Jaleze Hattingh, a portfolio manager at Element. “But those who do what’s right for their clients will promote it. We believe our industry should do what is best for the end investor and by so doing, that investor will remain a loyal client, probably for life.”

Hattingh says Element is encouraging investors to ask their advisers why they are not recommending it. “We actually put that in our official communications – we encourage them to empower the end investor with the information so that they can make the right decision. The role of advisers is to do what’s best for clients in an environment they often don’t understand.”

“We’ve received a lot of interest from clients – many didn’t know it was available,” Hattingh says. “But the uptake thus far has slightly disappointed. Many people don’t really understand the benefits and we’re trying to clarify that in our latest newsletter.”

However, she believes there will be a “big drive” over the next few months once the investor market is more educated about it and investors and advisers learn how to structure the TFSA in relation to existing investments. “Essentially we’re trying to induce the long-term nature of it, and we don’t want to people to cash in other investments such as retirement annuities.”

She says the TFSA is ideal for first-time savers and low-income earners but also works as an ideal vehicle to supplement existing investments.

In contrast, PSG Wealth is finding the response from clients – who can open a TFSA directly through its Wealth Trading & Investment division – to be excellent. PSG’s Wealth Tax Free Investment Plan offers a range of in-house and other investment products. It offers four PSG unit trusts to match different risk levels: balanced, diversified, stable and income. However, through the platform clients also have access to all their investments so can also invest in a range of unit trusts from other investment houses, including Satrix products.

The take-up by clients has been exceptional, says Magnus de Wet, head of direct clients at PSG Wealth. “In the first 12 days of March, 36% of all account applications were for the PSG Wealth Tax Free Investment Plan. The interest in this product has certainly exceeded our expectations.”

Various other managers have launched products but are yet to see significant take-up.

Citadel has launched its Tax-Free Investment Plan, a discretionary product that will allow investors access to a wide spectrum of underlying investments. John Kennedy, director of wealth planning, advises investors to use TFSAs to supplement retirement savings such as retirement annuities and pension and provident funds. “They should not be viewed as a replacement,” he says.

Momentum has launched a series of TFSA themes for targeted savings alongside its “flexible tax-free option”. There is one each for education, retirement, and a “dream savings” option, each with a minimum investment amount of R250/month. The flexible option has a minimum lump-sum investment of R15 000 or R1 000 a month. Underlying investments include a range of tailored and packages discretionary options.

The Old Mutual Invest Tax Free Plan, with a minimum of R350/month, offers a wide range of Old Mutual funds in which to invest for a minimum of R350/month as well as external funds from other investment houses including Nedgroup Investments, Coronation, Prudential and Investec. The minimum for the external funds is R1 000 a month or a lump sum of R5 000.

There are 17 Old Mutual funds on offer, including tracker funds, low-risk money market and income funds and strategic funds such as balanced and flexible funds but also its higher-risk Maximum Return Fund of Funds.

Sanlam has tailored investment options for its TFSAs, a core, non-discretionary lifetime investment option with a minimum payment of R300/month or a comprehensive option in which clients have a wide range of choice.

Sanlam has also introduced a novel “social savings group” structure in which a number of people with individual TFSAs can form a group and benefit from lower rates (Savetaxfree.co.za reported on this previously).

The Stanlib Tax-Free Savings Solution also offers a wide range of funds through its unit trust platform. Investors pay the same costs as if they were investing in the funds without a TFSA. However, while Stanlib does not charge initial fees to open a TFSA, it says advisers “will be able to charge an initial adviser fee agreed with the client.