Sygnia advert’s claims about RA fees based on ‘virtually meaningless’ model

The Advertising Regulatory Board (ARB) has told its members not to accept an advertisement by Sygnia containing the claim that investors could be losing up to 60% of their retirement savings to fees.

The ARB is a self-regulatory entity funded by donations from marketers and advertisers. It administers the Code of Advertising Practice.

The ruling follows a complaint about an advert posted on Sygnia’s Facebook page in February. The advert consists of a video accompanied by text stating:

“Invest better with a Sygnia Retirement Annuity

Are you aware that you could be losing as much as 60% of your retirement savings to fees? There’s a better way. Make the switch to a Sygnia Retirement Annuity and maximize your retirement savings. Secure your financial future with Sygnia.”

The complainant, Braam Hattingh, disputed the claim that RAs are so expensive that they can consume as much as 60% of one’s savings. Hattingh asserted this was “a blatant lie” designed to convince consumers to move their RAs to Sygnia. It created confusion and was misleading.

Fees have an impact over time

Sygnia elected to respond to the complaint, although it does not consider itself bound by the ARB.

It submitted that recurring fees reduce investment returns over time. If the investment performance of two identical funds is compared, the fund with the lower recurring management fees will yield a greater net return than the more expensive fund.

Sygnia referred to a July 2013 discussion paper titled “Charges in South African retirement funds”, published by National Treasury. On page 19, the discussion paper states:

“For instance, if the recurring charges deducted from the fund account of a regular saver are reduced from 2.5% to 0.5% of assets each year, he or she would receive a benefit 60% greater at retirement after 40 years, all else being equal. Alternatively, the saver could get the same retirement benefit by making contributions over his or her lifetime that are around 40%.”

The phrase “all else being equal” was followed by a footnote, which reads: “These results assume regular contributions increasing at 6% per year for 40 years. Although investment returns were assumed to be 10% each year, the results are relatively insensitive to the level of asset returns in the fund.”

Sygnia said its marketing consistently alerts consumers to the fact that fees can have a significant impact on the value of an investment over time.

Claim must be substantiated

In its ruling on 23 April, the ARB’s Directorate said the question was whether the advert created a false or misleading expectation.

Clause 4.1 of section II of the Code of Advertising Practice requires advertisers to have in their possession objective verification for all direct and implied claims in advertising. It also requires such objective verification to emanate from, or at least be evaluated by, an independent and credible expert in the field to which the claims relate. Finally, it stipulates that such evidence must be “up to date and current and must have market relevance”.

Clause 4.2.1 of section II states that an advertisement should not contain any statement or visual presentation that, directly or by implication, omission, ambiguity, inaccuracy, exaggerated claim or otherwise, is likely to mislead the consumer.

The Directorate said Sygnia’s claim creates an impression that there are consumers who forfeit as much as 60% of their savings to fees over time when investing in RAs. These consumers would or could have saved as much as 60% in fees if they had invested with Sygnia.

The Directorate accepted that the claim is contextualised as a possibility, not stated as a definite fact. However, it still creates a definite expectation that this may be true for some investors. Therefore, the claim must be substantiated as an actual possibility – in other words, there are investment products where this occurs.

It said Sygnia had not provided any evidence to this effect.

The Directorate said Sygnia’s claim appears to be based on a technical discussion paper published more than a decade ago. More specifically, it appears to be based on a speculative model, rather than actual fund comparisons.

The section on which Sygnia relied appears to outline a hypothetical situation where the yield is compared at the end of a 40-year investment. In this hypothetical comparison, the only change is an incremental reduction in recurring charges from 2.5% to 0.5% of the total value of the investment.

It was “a mathematical reality” that when the recurring charges are reduced over the full term, the investor receives more money, because a larger percentage of the total value is left to grow with interest.

However, it was not clear whether these charges reflected market reality at the time National Treasury published the document.

The Directorate also noted that reducing the fees from 2.5% to 0.5% constitutes an 80% reduction in charges.

Decade-old model is ‘not relevant’

More importantly, according to the Directorate, there was nothing to show that these charges are representative of the charges that currently apply to South African RAs.

The hypothetical comparison was, at least conceptually, similar to claiming that one could buy a house worth R1 million for a repayment of only R51 451 a month, assuming an interest rate of 2.2%. The comparison is effectively “meaningless” because home-buyers are more likely to pay an interest rate of at least 11%, at which point the same house would cost R10 322 a month.

It said the nearly 11-year-old hypothetical model was “virtually meaningless” relative to the claims made in the advert. No evidence had been placed before the Directorate to show that:

• Sygnia’s charges and/or fees are comparatively lower than those of all its competitors, or
• Sygnia’s lower fees directly translate into an increase in yield (or at least a saving in fees) of 60%, or nearly 60%, for some of its members.

The Directorate said was not convinced that, even if it were accepted that Sygnia’s financial modelling is relevant, the wording of the advertisement correctly conveys this to the consumer.

The advertisement states “you could be losing as much as 60% of your retirement savings to fees”. Sygnia means this to be understood as you could be losing as much as 60% in the interest growth of your retirement savings to fees.

But the Directorate believed some consumers – particularly less financially literate and educated consumers – may understand this to mean they stand to lose 60% of their capital investment to fees.

As such, the claim or implication that one should “Invest better with a Sygnia Retirement Annuity” or risk “losing as much as 60% of your retirement savings to fees” was unsubstantiated and in contravention of clauses 4.1 and 4.2.1 of section II of the Code.

The ARB requested its members not to accept the advertisement for publication in its current format.

ARB members include the Association for Communication & Advertising, the Marketing Association of South Africa, the Association of Independent Publishers, the National Association of Broadcasters, and the South African Insurance Association.