Linked products make up one of the least-known components of the retail investment market. Yet statistics released for the first time by the Linked Investment Service Providers' Association (Lispa) show it is a R191bn industry.
In the September quarter it was responsible for R12,5bn of the R19,8bn flows into unit trusts.
Linked products are known as "platforms" in Australia and "fund supermarkets" in the UK. They allow financial advisers to build up a client portfolio of unit trusts from different providers into a single product, and to switch between the funds at low cost, usually about 0,25% of asset value.
Assets under management through linked products have grown by 21,7%/year since 2000, compared with 8,3% annualised growth in the life insurance industry over the same period.
Linked products account for 30% of unit trust assets, or 50% of money market funds - which linked products do not usually offer - are excluded.
WHAT IT MEANS
 Linked products are a good way in to unit trusts
The ability to switch managers is popular
|
About half the assets in the linked product industry are in discretionary products, in which there are no restrictions on taking money out and putting it back. There is a further 8% in endowments and annuities sold through a life licence, but which offer the same flexibility as discretionary products in switching between unit trusts at low cost.
A further 43% are in retirement products - either retirement annuities, when people are building capital before retirement; or preservation funds, when people leave jobs and want to preserve a lump sum or living annuities. It is almost entirely a lump-sum industry focused on the affluent market, as the minimum account size is usually R50 000. Just 1,5% of inflows are in the form on recurring premiums.
The first linked-product house in SA was started in 1993 by merchant bank UAL (now absorbed into Nedbank), which exploited the lack of transparency and flexibility in the life products of the day. The flagship product, developed by Alister Colquhoun and Peter Anschutz at UAL, was the living annuity.
Instead of being tied in to a fixed pension offered by a life company, living annuities allowed clients to invest in a broad range of unit trusts, and to benefit from capital growth and draw down between 5% and 20%/year. Any remaining capital can be passed on to beneficiaries after death, while life annuities usually end when the annuitant dies.
Linked products also aided distribution for independent unit trust companies such as Investec, Coronation and Allan Gray, which did not have large, captive distribution through agency forces or bank branches.
Linked investment service providers (Lisps) are low-margin businesses, particularly since Allan Gray started its own Lisp 18 months ago and set the benchmark for administration fees at 0,5%. Lispa chairman Riaan Van Dyk says a Lisp needs at least R15bn under management to be profitable.
There have been casualties since the industry was formed, including the first two Lisps in the country, UAL (which merged into the mother company's Lisp, Old Mutual Investment Services) and TMA (which merged with Investec's Lisp). Lisps such as Absa's Cortal Direct and RMB Financial Services were closed down as they were too small to be profitable.
But it remains a fragmented industry. Individual market shares have not been provided, but the larger Lisps are Investec IMS, Momentum, Sanlam Personal Portfolios, Galaxy, Stanlib Linked and, more recently, Absa Investment Management Services. These companies have market shares of between 11,2% and 17,2%.
The fastest-growing Lisp, with an estimated 23% of the inflows in the September quarter, has been Allan Gray, as many advisers are attracted by its lower fees and the simplicity of its limited menu, which is confined to its own funds and selected funds from six other managers.
Van Dyk says the life offices have recognised that Lisps are often a more appropriate vehicle for single-premium investors than on-balance-sheet life policies, and have actively promoted their own Lisps. The only large life office without a wholly owned Lisp has been Liberty, and taking control of Stanlib's Lisp will be one of the main benefits of the Stanlib takeover (Money & Investing December 15).
Says Van Dyk: "The ability to switch from one manager to another should be the bedrock of consumer protection. And Lisps have never charged penalties when people decide to withdraw their money."
Van Dyk says he expects the linked-product industry to follow the example of Australia, where platforms (Lisps) account for 85% of net retail flows.
John Kinsley, MD of Prudential Unit Trusts, who has also worked in the Lisp industry, says SA was getting close to that level in the late 1990s, but a number of trends have reversed this.
"There has been high growth in money market funds and in their close cousin, dividend income funds (which provide lower yields but are tax-free)," says Van Dyk. "These products are primarily sold directly to the public and are not available on Lisp wrappers, as clients do not want to see their yields diluted by Lisp fees. And some financial advisers have set up their own broker funds of funds, and assets that used to be held under a Lisp have been moved to these."
Unit trust businesses such as Coronation have also encouraged brokers who want to invest for the long term, and do not see much value in the ability to switch, to invest directly with them and cut out the extra layer of fees that a Lisp charges.
But Van Dyk says Lisps provide good value for money, and administration charges have gone as low as they can at 0,5% - they are between 0,6% and 1,0% in Australia. He believes there will be further pressure on unit trusts fees as SA fees are still higher than in Australia.
The fees Lisps receive are well above 0,5% if the rebates that unit trust companies pay to Lisps are taken into account. Lisps built up a reputation as a much more transparent vehicle for retail investments than life companies. But the reputation was tarnished in 2001 when it was reported that unit trust companies paid undisclosed kickbacks to Lisps to ensure that they would get "shelf space" for their products. These kickbacks were not disclosed to clients.
Allan Gray, in 2005, was the first Lisp to disclose the level of rebates and to pass them on to the client, so that he never paid more than 0,5% on top of the disclosed unit trust fee.
Van Dyk says it will be easier for clients to work out what they are paying in aggregate at all levels of the value chain when total expense ratios (TERs) are introduced. These will incorporate all fees the client pays, whether for asset management, trading costs, the adviser's trail commission or administration fees. They will be required from all direct unit trusts from April 1 2007 and Lisps also plan to disclose TERs to clients.
22December2006
Ranking the Analysts 2009
