Partly that’s for pragmatic reasons. The industry’s regulations hinder mobility. Change introduces risks and challenges that add to the caretakers’ burden, with no guarantee of a better outcome elsewhere. As Hamlet, the prince of indecision, would argue, let’s “rather bear those ills we have than fly to others we know not of”.
And then there are the many distractions. Fund processes are detail-orientated, so it’s easy to lose sight of the bigger picture. There’s the constant background noise of the markets, the economy, regulatory changes and industry messaging. Long-standing industry relationships also have a habit of getting in the way of critical analysis and objective evaluation.
These factors engender a tendency to forgo ‘excellent’ for ‘passable’, enough so to undermine competition in the industry and, in consequence, service levels, innovation and customer expectations. At 10X, we see evidence of this all the time. We are regularly complimented for our stand-out service and response times, even when these merely accord to our in-house norms. It is simply that investors have come to expect so much less from this industry.
Fund stewards – those in caretaker roles such as the employer, the Board of Trustees, the Principal Officer and the management committee – become complicit in the industry’s failings if they tolerate poor performance and unsuitable products.
As a fund steward, what needs to move are your thoughts on where your first obligation lies. It is with the fund member. For most, this is their single largest financial asset. Of course they get anxious and restless if they must contend with poor communication, clerical errors, uncompetitive returns and unresponsive staff. This destroys trust in our savings system, which contributes to South Africa’s growing pension gap.
It’s on you to give your fund members peace of mind, the incentive to persevere and the best value for money. If they aren’t getting that you need to take action; the industry won’t change voluntarily.
Administration essentials
First and foremost, demand administrative excellence: accurate records, timely processing of contributions and exits, and timely reporting of fund values. This goes hand-in-hand with transparency, on contributions received and invested, on deductions made, on returns earned (before and after fees!), on investments and on each member’s retirement funding ratio.
Members will become more relaxed about saving if they can readily and clearly see all relevant fund information, on any device, at any time. They will become more confident if they can access reliable financial planning tools and calculators, and relevant member communication. (Short-term economic and market commentary may interest you, but it does not support investors in their long-term savings endeavour.) They will become more trusting if they perceive professional, independent oversight of their money by fund trustees who prioritise their interests above anyone else’s.
The price of such a service must be affordable. It is entirely disheartening for savers to see their contributions immediately diluted by punitive admin charges.
Caretakers should reject an administration service that does not deliver on all these essentials.
Investment focus
The other big issue relates to the subject of investing. Does the fund provide a retirement solution that is purposefully designed to help fund members achieve their savings goal? Or merely a string of products that serve others, such as the provider’s shareholders and staff, or advisors and consultants?
As fund steward, you must take responsibility for how savings are invested. That is rare nowadays. The industry has sold everyone on the idea that members want to choose from a range of funds and asset managers as though they have strong individual brand and risk preferences and the insight to make informed decisions.
The evidence overwhelmingly suggests otherwise. The great majority end up in the default fund because they are unable or unwilling to choose, disempowered by the complexity of it all. For them, investment choice is a cost that, at best, manifests in a higher administration charge, and at worst, unnecessary advice fees and goal-defeating mistakes.
You should reject or replace this model because it does not serve your members. The appropriate alternative will focus not on finding the “best” fund but on the member’s capacity for market risk (which depends on their time horizon) and their capacity for fees (minimal, even more so in the prospective low return environment). Ultimately, it is these two variables alone that will determine what their savings will be worth come retirement, so it these two variables that your fund should optimise.
Investment style
In your de facto fiduciary role, overseeing other people’s money, you are also expected to take greater care than with your own affairs. This must shape your choice of investment style – active management or indexing?
The industry generally promotes active management on the premise that this can deliver an above-average return. Yet, historically, only one in five fund managers has done so after fees. This exposes your members to manager selection risk with the odds stacked heavily against them. Most likely, active management will give your members a below-average return and a sub-optimal savings outcome. This cannot be the prudent, risk-appropriate way to go. If your administrator favours such speculation then only because it is more lucrative for them, not because they believe it is in the best interest of investors. In that case you should consider a move to one who advocates index investing.
Force the change
As a fund steward, changing service providers – administrator and/or fund manager – is one of the biggest decisions you face. Usually it is a reactive measure, after a period of exceptionally poor performance; rarely is it a proactive step towards a more effective model.
But settling for ‘passable’ is not good enough for your members. Yes, Section 14 transfers do have a reputation for delays and complications, but the potential long-term benefits – more savers retiring with more money – can far outweigh the risks. Choosing a fund that offers reliable and efficient administration, that saves on administration and advice fees, and that provides low cost, risk-appropriate portfolios promises such a reward. As a fund steward, you can be the change to make that happen.
