Publications
Partners
The majority of people who have a life or investment product are most likely paying ongoing advice fees, yet we are inundated by readers every week asking for help or information about the products they have. In most cases, the client has no idea who their adviser is or that they are paying them a regular commission from their policy or investment premium.
A reader wrote to complain about the penalties she would have to pay if she stopped her contributions to her retirement annuity and endowment policy with Sanlam. Despite contributing for the past 24 years, her fund values would fall by R7 234 and R8 832, respectively. Over the past 10 years, the adviser in this case received tens of thousands of rands in commission – all paid by the investor, who will now have to forfeit some of her returns to pay for them.
The reason she needed to stop her contributions was because the adviser had originally signed her up for premium escalations of 15% and 20% a year, respectively, which had become unaffordable. As she had an annual escalation, the adviser received additional commission each year.
Although there is legislation that states that termination/surrender fees cannot be charged on a policy after a maximum of 10 years, this only applies to polices taken out after January 1 2009.
This then led to a question about the financial adviser’s conduct. Is it considered good advice to tie someone into a 30-year endowment policy with a 20% annual escalation? Keep in mind that, with compounding interest, even a premium of R100 a month would have increased to R19 781 within 30 years.
The other question is why this adviser continued to receive commission when the last contact that the client had with the adviser was more than 10 years ago.
In this case, the adviser did not work for Sanlam as he was an independent adviser who happened to sell Sanlam products. Sanlam hence argued that it could not investigate or take action against the adviser as he is not a “tied agent”.
The reader’s only recourse would be to approach the office of the Ombud for Financial Services Providers (Fais). It would not be easy to go back and challenge an agreement signed 24 years ago in terms of the escalations, however, she could argue that the adviser did not provide a regular review of her investments and should return the commission.
Section 7(4) of the Fais general code of conduct states: “A provider who advised to a client or is rendering ongoing financial services to the client in respect of one or more financial products, must regularly (but not less frequently than annually) provide the client with a written statement identifying such products and providing current details of any ongoing monetary obligations of the client, the main benefits of the product, the value of the investment and any ongoing incentives, as well as commission, fee or brokerage payable to the provider.”
It is also important to note that the product provider has a similar obligation to provide annual benefit statements disclosing the above information required by the Fais Act. These benefit statements would form part of the review with the adviser.
Had the reader received regular reviews, a simple discussion about the unaffordability of the escalation would have resulted in the escalation being cancelled a few years ago and the policy remaining affordable.
There have been changes to the legislation around commissions and termination fees, but it all depends on when you took out your policy.
In 2005, legislation was introduced to cap the maximum termination fee on retirement annuities and other policies. It was set at 30% for retirement annuities and remained at 30% until December 31 2017. Since January last year, this percentage was decreased to 20%. Yearly decreases to the cap were introduced at the same time to reduce the maximum charge in 2% and 1% steps to 5% as of January 1 2029 and beyond. After that date, it remains level at 5%.
A new set of rules was introduced for retirement annuities or endowment policies taken out from January 1 2009. The maximum surrender charge is set at 15% and it must reduce over a maximum term of 10 years to zero (a shorter term applies to some policies).
Given how important these reviews are, whose responsibility is it to make sure you have regular discussions with the adviser you are paying?
On one hand, the Fais Act makes it clear that the adviser has a responsibility to contact the client annually and review the portfolio. But shouldn’t the client also be taking responsibility for their own financial wellbeing? If you sign up for a gym contract and pay gym fees for the next two years, but don’t go, you can’t blame the gym for the fact that you are not getting fit.
We have the greatest responsibility to ourselves to look after our hard-earned money. You should receive and review your benefit statements from the product provider each year. It is important to ensure you update your details with the product provider so that you can receive regular communication about your investments and policies.
The statements will have the contact details of your adviser. If you have taken out a policy and not heard from the adviser again, contact the product provider and either get another adviser or cancel the commission that is paid to the adviser.
In some cases, mostly regarding life insurance products, commission is structured into the fees, but that doesn’t mean the original adviser should keep receiving it if they are not performing their duty.
Find another adviser who is prepared to work for the commission they are earning – don’t just sit back and then wake up when you realise you have forked out tens of thousands of rands in commission.
Take action today – find those policies and call the adviser.
