South Africa has a well-known savings problem. As a population, we are over-indebted and under-invested.
We should, therefore, be making it as easy and as cost-effective for people to invest. It should be a priority for government and regulators to reduce the barriers to saving.
The conundrum, however, is that this is often in conflict with another priority, which is making sure that those who do invest are protected and that their money is safe. Financial services companies have to comply with a huge number of laws and regulations to ensure stability in the system and that investors are looked after.
Unfortunately, this compliance comes at a cost. It is increasingly expensive to maintain the staff and infrastructure required to offer a financial service, which means that as South Africa has been trying to make investing more inclusive, it has concurrently been making it more expensive.
It’s a problem in desperate need of a solution as evidenced by the recent announcement that Boutique Collective Investments (BCI) is introducing an additional fee for clients with a balance of less than R100 000. From October 1, the management company (manco) will charge these investors an extra admin fee of R10 a month (R11.50 including Vat). This will not however affect anyone who invests in BCI funds via a linked-investment service provider (Lisp) platform, or those who use BCI’s online service BCI Transact.
Most of BCI’s funds are co-branded and managed by smaller South African asset managers. Its partners include 36One, Anchor Capital, Efficient Select and Imara.
Unprofitable
Robert Walton, BCI’s CEO, says that the charge has become necessary for BCI to continue to deliver a quality service.
“On a R1 000 per month investment the retail service charges on most of our funds range between 0.25% and 1.0% per annum, of which a portion accrues to BCI for rendering the administration and compliance services,” he explains. “So the service charge ranges between R2.50 and R10 a year, which is between R0.20 and R0.83 per month. Of this only a small portion accrues to BCI – on average less than R1 per month on R1 000, or R10 per month on R100 000. As you can see from these numbers, it is impossible to render any reasonable decent service for this kind of money.”
Even by including this charge, Walton says they will still be serving these clients at a loss.
“Our variable cost break even is only at around R1.2 million,” he points out.
The problem is what this means for clients. For someone who starts with zero and wants to invest R500 per month, this R10 charge would mean they are paying an extra 2% in fees.
Even at a balance of R10 000, an extra R10 per month is an additional 1.2% per annum. On R50 000 it’s an extra 0.24%.
These are not insignificant numbers when comparing costs across providers. No rational investor is going to pay an extra 2% when they can invest the same amount somewhere else without incurring this charge.
Disruption is coming
BCI does at least offer its online service as a solution to anyone who has less than the R100 000 threshold, as the R10 charge will not apply on BCI Transact.
“These are mostly people who do not want to make use of a financial advisor and we automatically register them on-line,” Walton says. “They can even access the service via their mobile phones. Bear in mind that most other mancos have minimum investment amounts and thus automatically exclude these clients. From October we won’t have minimum investment amounts – we will accept anyone.”
However, in a country like South Africa not everyone can transact online and not everyone has R100 000 to put away. There is therefore still a huge part of the population potentially excluded by this decision.
The concern for regulators and law-makers should be what happens if the rest of the industry follows suit. In reality, it is not profitable for anyone to provide a service for entry-level clients who want to invest directly. Asset managers do it because enough small clients eventually become larger, profitable clients.
If, however, BCI’s decision becomes an industry benchmark, smaller clients are going to find themselves squeezed out. Investing will become even more inaccessible than it already is.
Regulators and law-makers need to take this threat seriously. They need to consider ways of lightening the cost of compliance for serving entry-level investors so that it is more profitable for asset managers to service them.
At the same time, asset managers also need to find innovative ways of addressing their own shortcomings. Providers like EasyEquities and OUTvest are challenging the old models and offering low cost solutions that are only going to become more attractive if traditional businesses are unable to keep their fees down.
In the circumstances, disruption of some sort seems inevitable. The only question is who is going to drive it.
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