The introduction of tax-free savings accounts on 1 March this year was a positive step from National Treasury. Effectively the government has put its money where its mouth is with regards to encouraging savings.
By offering the carrot of an investment that attracts no tax, it has shown it is willing to take meaningful steps to promote saving. The regulations also made asset managers and other financial services firms tailor their offerings to suit the requirements of these accounts. Disallowing performance fees and putting restrictions on holdings has required issuers to consider how they structure their products.
Where the regulations made no determination, however, was on how financial advisers may be compensated around these accounts. Advisers can play a critical role in promoting their uptake, but some reflection is needed on how best they play that role, and what fees they should charge for doing so.
With the implementation of the Retail Distribution Review (RDR) on the horizon, it’s also important to ask whether this isn’t an opportunity for advisers to be proactive and start implementing RDR principles in the way they engage with these products. Can they too play a role in promoting savings by making their fee structures more appealing when it comes to tax-free savings?
A discussion on this point inevitably starts with the question: ‘is it worth it?’ The limit on investing R30 000 a year or R500 000 over a lifetime into a tax-free savings account means that any commissions are inevitably going to be thin.
As Brian Foster of Steve Billingham Consulting points out, advice requires a personal client assessment and that’s difficult to do properly or profitably for the commission one gets from selling a R2 500 a month investment.
“It isn’t until advice firms have a suitably high level of recurring revenue that they can afford to offer such advice as part of their ongoing advice relationship services,” says Foster. “And that takes time. Those firms that already have high levels of recurring revenue could easily treat this as part of their services whilst those that don’t, have a challenge.”
The most effective approach is clearly to offer tax-free investments as part of a broader plan where the profitability of the individual transaction is less important than the overall client relationship. However, does that place these accounts in the ‘advice gap’, where less wealthy clients without other assets are not going to be able to get advice because they can’t afford to pay for it and advisers can’t afford to offer it?
There are discussions in the industry around this very point, and there are specific debates taking place around how asset managers and advisers deal with lower end clientele investing small monthly debit orders. That needs to be part of RDR, and indications are that tax-free accounts will be an important part of any solution.
What advisers face for the moment, however, is making themselves relevant and their services attractive at a time when there is an opportunity to draw in new clients. The interest in tax-free savings accounts is also a chance to promote their services, and advisers need to be proactive and innovative in taking advantage of this.
Foster acknowledges that it is a challenge, but also an opportunity:
“Is this business as usual? Yes, probably for most, and the results of advice will be mixed. Is it an opportunity to be pro-active around RDR? Definitely, but getting many advisers to think about it in a non-transactional way will be the challenge.”
