The Steinhoff saga, which cost South African savers around R200 billion collectively, shows that we should be wary of relying entirely on regulation and governance structures to safeguard our interests. And that is even more true when it comes to the investment industry, where around R6 trillion rand of private sector savings are at stake.
On the face of it, this industry is subject to stricter governance rules, and regulation that compels companies to treat their customers fairly. But there are too many examples where these are ignored or contravened.
The Steinhoff debacle showed that rules alone do not always ensure that the people we expect to act in our best interests do so. Too often, they act out of self-interest. We still don’t know how so many insiders could have been deceived, but one early lesson from this disaster is already obvious: investors need to be more vigilant, and empower themselves with information, so that they at least act in their own best interest.
With Steinhoff – and with all publicly listed investments for that matter - we base our trust on the governance structures in place, in the main an independent board of directors, independent auditors and internal controls. That is a reasonable and necessary expectation for the system to work.
We thought we could trust what we were told because these structures had given Steinhoff the stamp of approval. The responsible people and entities are privy to non-public information, they have a bird eye’s view of how management conducts its business and all its financial affairs. Investors’ opinions are based only on publicly available information, and on the seal of approval from insiders and these governance structures.
These start with the executive team. That encompasses many people, not just Markus Jooste in the case of Steinhoff. It requires a lot of smart managers to run a large business like this. They are subject to layers of independent oversight provided by the board of directors, as well as external and internal auditors, and rating agencies. Sars, too, was an insider into the affairs of Steinhoff, as were the lawyers and advisers who secured funding for the group, such as the 1.5 billion euro bond raised globally.
A large company like Steinhoff will deliberately associate with reputable advisers for the very reason that it helps builds trust. In the same vein, we expect these reputable advisers to do the due diligence work before they lend their reputation to a client.
The point is, there are multiple aspects to governance, and many informed insiders, who provided comfort that investors could trust Steinhoff’s numbers and credit rating.
We have learnt that this trust was misplaced, because they failed to spot that things were amiss. This failure has come at a great cost, because investors, and that includes pension funds and the people who invested directly in Steinhoff, have lost something like R200 billion collectively. It’s also come at a great cost to our country’s corporate reputation, and the trust we place in the system.
Many people also misplace their trust in the retirement fund industry. They believe that regulations and governance structures safeguard their life savings and prioritise their financial interests. They continue to do so, despite the mounting evidence to the contrary.
While the industry is subject to a higher standard of governance and regulation, there are many examples where the law is ignored. In the end, it is the investors who pay the price. They are typically only presented with the bill upon retirement, when they discover they have much less money than they expected, or need.
The Financial Sector Conduct Authority (FSCA) regulates financial services companies. The standards are high because financial institutions are entrusted with trillions of rand of private sector savings.
People rightly expect that when a company claims to be an approved financial service provider, it means that the FSCA has put its stamp of approval on the way such a company conducts its business, and that it acts both within the letter and the spirit of rules and regulations. This should give them comfort that their retirement savings will be invested appropriately, they will be given a fair deal and that they will be protected from self-serving practices.
Yet the truth is that often this is not the case.
The regulations intend to support the customer. The Financial Advisory and Intermediary Services Act (FAIS) legislates that advice given to the consumer must be in their best interests. We also have the Treat Customers Fairly (TCF) regulation that demands certain fairness outcomes, that requires companies to put their clients’ interest first.
It demands a culture of properly explaining products, of having products suitable for clients’ needs, that are likely to perform in line with expectations and the promotional material. It requires that customers can transfer these products without big frictional costs.
So we have a large body of regulatory safeguards that suggests you can trust this industry.
But the reality is that you can’t.
Some of these products to this day include termination penalties, in particular many of the retirement annuities sold by life companies. Some are disguised, for example, with products that charge very high fees upfront, but discount these after you have invested for a certain number of years. So your initial fee of 4% pa eventually gets reduced to, say, 2%, which boosts your investment by say 30% or 40%.
This sounds like a windfall for you, but it’s not. In truth, you have received no more than if you had simply paid 2% all along; but in this way, you are effectively prevented from moving your money. That is not treating customers fairly.
Even a 2% fee is already outrageous. At 10X Investments we charge less than 1% pa plus VAT. It is by now well documented that paying just 1% pa less in fees over a working life can add up to 30% more money at retirement.
It used to be the case, maybe a decade or so ago, that these companies only had expensive actively managed products. Today, many also offer low-cost index funds (not by choice mind you, but due to market pressure and increased customer awareness of the fee impact). These index funds perform at least as well as actively managed funds and in the great majority of cases, they produce a better after-fee return.
If these providers were truly intent on treating customers fairly, as the legislation requires, they would not push their expensive and often under-performing actively managed funds; rather they would promote their low-cost index funds.
10X Investments offers only low-cost index-tracking products and only one long-term portfolio. As far as we are concerned, all 10X customers deserve our best investment view, from the tea lady to the chief executive.
The public should be wary of relying too heavily on governance structures and regulations to deliver the best outcome on their savings. Trust is good, but some control is better. Keep a watchful eye over your investments, your retirement savings and unit trusts, and over the people looking after these. Do not outsource your entire oversight to an industry that is more intent on looking after its own interests than yours, an industry that, frankly, cannot be trusted.
The evidence of that is piling up, despite regulations that compels it to treat customers fairly, and to put customers ahead of its profits. Investors should heed the big lesson from the Steinhoff saga: the danger of blind faith.
