Melane was part of a panel convened to “smoke out some of the retirement industry’s elephants in the room” at the event: The Real Money Fight #2: The Elephant In The Room. The discussion by the panel that included two of the continent’s leading experts in indexing covered three issues that are decimating the savings of South African savers: high fees charged by the industry, the reliance on (expensive and risky) active investment management, and unnecessary complexity.
The tone of the evening took a turn when another panellist, Siv Ngesi, comedian and no-nonsense man of the people, expressed outrage at data presented showing poor outcomes for most savers. Ngesi, who was on the panel on behalf of the ordinary saver, asked why children were not learning from their parents about saving and investing. Or, for that matter, “Why isn’t this part if the school syllabus”?
The event follows on from an event in September last year in Cape Town, The Real Money Fight #1, where Steven Nathan, 10X’s chief executive officer, debated Neville Chester, a senior fund manager at Coronation, on the topic: Is passive or active investment management more appropriate for South African retirement savers?
The Daily Maverick, which hosted both events on behalf of 10X, had expected the two events to follow the same format, but had failed to persuade an active manager to take part in the second one. 10X, the disruptive asset manager with more than R9 billion in assets under management, points to the reticence in the industry to state their case publicly as proof of the many “elephants in the room”, jumbo topics that insiders would prefer did not get to see the light of day.
In the absence of an active manager, Maverick asked Zack Bezuidenhoudt, head of S&P Dow Jones Indices for sub-Saharan Africa, to join the discussion with Nathan and Ngesi.
Melane, the Capetonian radio host and interviewer, moderated the panel, which sought to “advance the conversation about these various topics that legacy players are trying to keep under wraps”.
Nathan told the audience at Bowman’s auditorium in Sandton that according to Treasury figures only 6% of South Africans can afford to retire. He said this figure had not improved in 25 years, to which a member of the audience responded that he thought it had actually worsened slightly during his 30-odd years in the industry.
Nathan explained how just 1 or 2 percent extra in fees per annum, combined with the active management industry’s consistent under-performance, was devastating the pensions of many ordinary South Africans.
High fees are often an unwelcome side-effect of having to pay too many middle-men, which includes brokers, administrators, product providers and fund managers.
“At 10X we believe fees should be kept at 1% or lower,” said Nathan. “It just doesn’t make sense to pay fees higher than this in the long run.
“We have seen some investors charge as much as 4% … for what?” he asked. “At 4%, clients are losing up to 70% of their accumulated income. This is simply unacceptable!”
There is this common misconception in the industry that paying high fees results in higher investment growth. Nathan said this was not the case. “In fact, the opposite is true: high fees often result in lower investment growth. And that is before you start paying for advice and administration fees,” Nathan said.
Ngesi stepped in here, mentioning the old “truth” that paying more for goods meant they were better quality. “My mother knew that when she wanted our school shoes to last longer she would have to pay a little extra,” he said. “Isn’t it the same when it comes to people looking to get higher returns?”
This was one of those moments where simply airing a thought leads quickly to its rejection. It is this examination of “truths” and debunking of myths that 10X seeks to encourage by having the conversation publicly.
Nathan said that unfortunately for most South Africans they started asking questions about their retirement savings when it was too late.
“It’s a low-interest category. We are looking to change that, we want people to start investigating, and as soon as they do they start to open this can of worms,” he said.
Bezuidenhoudt used his presentation to round on the active management industry, which manages R1 trillion of South African retirement savers’ money. He showed various tables and graphs illustrating how more than 80% of active managers underperform the industry benchmarks every year. And this while they charge a premium for “selecting winners”.
This was not an exclusively South African problem, Bezuidenhoudt added. S&P analyses markets across the world, from Canada to Australia, and Europe to Japan: “Simply put, it is extremely difficult to beat a benchmark,” he said.
Ngesi expressed incredulity: “How is this possible?” He wanted to know how these enormous life companies managed to appear to be so successful when the evidence showed repeated failure. “I travel a lot and I am forever seeing billboards lining airport walkways advertising their ‘success’ story,” he said.
Nathan told the audience: “As humans, we are driven by fear and greed. These very same emotions drive the financial market. No one has a crystal ball … there is no easy way to get rich.
“Markets fluctuate on a daily basis, it is essential not to care what happens to the markets every day, but rather the performance in the long run,” he added.
The chief executive of the fast-growing asset manager wrapped up his argument showing various slides of complicated and convoluted investment statements, arguing that they seemed designed to confuse. Nathan, who is the former managing director of Deutsche Bank in Johannesburg and London, said he had been in the industry for 25 years and he struggled to make sense of the monthly statements people brought to him, particularly with respect of how much they were paying in fees.
He sees this as a tactic used by the industry. “Layers and layers of complexity, smoke and mirrors, hidden fees, hundreds of options disappearing, reappearing and morphing into something else. We have seen some of the statements that investors send to clients, some range from seven to nine pages, all trying to hide fees and confuse clients.”
The sense of shock and awakening among the audience was palpable as the penny dropped for many of them and long-held ideas and blind trust came under scrutiny.
Melane’s point that the government should take action to outlaw what looks distinctly like predatory behaviour and protect retirement savers struck a chord with the audience, many of whom went away promising to start asking tough questions about who was benefiting most from their hard-earned savings.
