Page 81 - Profiles's Unit Trusts & Collective Investments - September 2024

The CIS Industry

Tied Brokers, IFAs and RDR
Independent Financial Advisors (IFAs) are brokers who are licensed to place investments
with more than one product supplier. A tied broker, on the other hand, is a financial advisor
who sells products for a single supplier. But IFAs, although nominally independent, are
often incentivised by product suppliers in various ways, and these incentives can introduce bias. The
FSCA has made changes to the General Code of Conduct under the FAIS Act that oblige advisers to
declare any conflicts, to declare if they earn more than 30% of their remuneration from a single source
and to ban the acceptance of any establishment fees and incentives from product providers.
The Conduct of Financial Institutions Bill is likely to also include new labels for financial advisers
that will oblige them to disclose to investors the level of their independence from product providers.
The proposals so far suggest PSA (Product Supplier Agent) for tied broker and RFA (Registered
Financial Advisor) in place of IFA.

also resulted in growth in the number of
retirement fund members who are offered a
choice of underlying unit trust investments for
their retirement savings.
The introduction from September 2024 of
the two-pot retirement system is expected to
result over time in greater preservation of
retirement savings as two-thirds of all
contributions made by members of most funds
after this date will have to be preserved until
retirement. Currently, members are allowed
and typically do, withdraw all their savings
when they resign.
The new system may see some large
withdrawals initially but is likely to result in an
increase in retirement savings invested in
collective investments over time.

Financial Advisors (Brokers)
Brokers, or financial intermediaries, have always played an important part in the collective
investment schemes industry. Before 1998, initial costs, which included 3% commission payable
to brokers, were regulated by the industry. Since fee structures were deregulated, however,
financial advisors may be remunerated in a variety of ways, including trailer fees in the form of
ongoing advice fees.
The Financial Advisory and Intermediary Services (FAIS) Act and its General Code of Conduct
emphasise the need for financial advisers to determine the suitability of financial products in the
context of an investor’s needs. Financial advisors need to be able demonstrate that they
recommended appropriate solutions; it is no longer feasible to fall back on legacy justifications like
brand reputation or historical performance data that ignores risk factors.
The RDR proposals seek to make the distinction between tied brokers and independent
brokers more clear-cut, especially as understood by consumers.
It appears that most South Africans need the services of brokers to help them with their
financial planning and investment decisions. As a retail investor, the differences between funds,
platforms, multi-managers and DFMs are bewildering – and that’s before facing passive vs active,
retirement wrappers, tax free saving accounts (TFSAs), and other options.
Many management companies – either directly or via platforms – work through both “tied” and
“untied” (independent) financial advisors, where the former exclusively offer the products of a
single channel and the latter (in theory at least) offer a broader choice.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 79