Platforms may have to do extra checks on funds they offer
Watchdog is reviewing the responsibility of service providers to investors, particularly where they draw up buy lists
Though SA investment platforms claim they do extensive due diligences on the unit trust and other funds they list, the financial services regulator is considering setting clear requirements for the due diligences.
Even if thorough due diligences are conducted in line with regulations, it doesn’t mean investments can’t fail, but the millions of SA investors who use these platforms may enjoy a greater level of accountability from financial institutions that provide easy access to funds.
Through the investment platforms of one financial institution you can invest in an array of underlying unit trust funds — and often exchange-traded funds — from asset managers from a variety of financial institutions and are able to switch easily between them.
You are likely to be one of 3.6-million investors using an investment platform, also known as a linked investment services provider (Lisp) if you have a retirement annuity, living annuity, umbrella pension fund or tax-free savings account that offers choice of a range of underlying funds — and possibly even listed shares.
Some platforms aim to list as many funds as possible while others like to offer fewer carefully selected funds. The Collaborative Exchange’s recently released SA Platform Survey 2018 shows that Momentum Wealth has 1,700 funds listed on its platform, while Allan Gray has just 121, for example.
The six platforms that participated in the survey and host about 71% of the R1.2-trillion invested in funds through platforms reported that they do extensive due diligences before listing new funds on their platforms.
The scope of these due diligences, depending on the provider, includes checking licences and legal structures, taxation, finances, governance, key risks, key personnel, operational readiness, data security, information technology, pricing and the value proposition for investors and their advisers.
Not all investment platforms are created equally.Derek Smorenburg, the founder and CEO of SAIFAA.
The survey also notes that some platforms provide independent fund ratings for the funds they list on their platforms and leave the choice of funds to you, while others provide recommendations on funds through a buy list or list of core funds.
Allan Gray offers independent ratings but not a buy list. It reviews its list of local and offshore funds annually to ensure the offering remains relevant to the needs of advisers and investors, the SA Platform Survey reports.
Absa, Glacier, Momentum and Old Mutual each have buy lists that are researched by their investment professionals.
Most say this research goes beyond checking the performance of the funds to, for example, checking that the fund sticks to its chosen investment philosophy, whether any managers have resigned and what risks there are that could prevent the fund continuing to deliver good performance.
UK platforms are often referred to as fund supermarkets. One of the country’s most popular ones, Hargreaves Lansdown, is embroiled in controversy as it had on its buy list a fund in which trading has now been suspended.
Trading in Woodford Equity Income Fund, run by one of the industry’s much-loved managers, Neil Woodford, was suspended after a series of bad bets, a drop in the fund’s performance and a run on the fund. It then came to light that the fund had a relatively high exposure to illiquid investments including unlisted ones that are difficult to sell.
Hargreaves Lansdown has come under fire for not allowing investors to transfer their investments in the suspended fund to other platforms and the issue has been brought before the regulator.
The responsibility of an investment platform to investors, particularly where they draw up buy lists, is an issue with which the local regulator, the Financial Sector Conduct Authority, is also grappling as part of its review of the way in which consumers buy financial products.
In its June 2018 discussion document on investment-related matters relating to its Retail Distribution Review, the FSCA seeks input on a variety of issues relating to platforms and advisers and discretionary investment managers who use them to create what are often known as model portfolios. Discretionary investment managers put together portfolios for financial advisers’ clients.
In the document, the FSCA says due diligences should extend beyond checking that managers are licensed and should consider whether the outcomes for the targeted investors are fair.
It suggests that Lisps be required to perform a due-diligence review of any collective investment-scheme management company, investment manager or model-portfolio provider before accepting its portfolios onto the platform.
In turn, unit-trust fund managers will be obliged to do due diligence on any Lisps that distribute their products.
It also suggests that financial advisers be required to conduct a due diligence on any investment manager, model-portfolio provider or collective investment-scheme manager whose investment offerings they recommend to you.
The FSCA is considering responses to its discussion document and hopes to publish final proposals shortly, Caroline da Silva, the executive for regulatory policy, told advisers at the recent Financial Planning Institute conference in Johannesburg.
Due diligences are a major concern for financial advisers, many of whom have joined the SA Independent Financial Advisers Association (SAIFAA) to assist them in determining the extent to which they need to conduct these reviews.
The ombud for financial services providers has held a number of advisers liable for poor advice when they have recommended investments, such as property syndications that have subsequently failed. In almost all of these cases the ombud highlighted how obviously high-risk and inappropriate the investments were. By recommending these investments, the advisers concerned contravened the Financial Advisory and Intermediary Services Act.
But the cases have also made advisers think about the comprehensiveness of their due diligence on products they recommend to you and how much information they have to conduct such reviews.
Derek Smorenburg, the founder and CEO of SAIFAA, says many independent advisers are not equipped to conduct comprehensive due diligences on financial product providers such as asset managers and investment platforms. These advisers tend to stick to well-known brands and may rely on platform buy lists.
To assist advisers, SAIFAA has sent more than 80 asset management, investment platform, unit trust and offshore investment companies a set of questions aimed at extracting information advisers need to perform a due diligence on the companies’ products.
Smorenburg says he has been trying to get clarity on how exactly advisers are supposed to conduct a due diligence on an investment platform. He says “not all investment platforms are created equally”.