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Direct selling drives a wedge into local financial services
Brokers are unhappy at what they claim is insufficient advice to clients buying investment products over the phone, writes LUCIENNE FILD
Direct delivery has been practised overseas for 30 years, spurred by investors who see no point in paying commission to financial intermediaries. Pierre Houzet, a direct delivery expert from SA who now works in New Zealand, says most big financial institutions overseas have a direct arm to cater for investors who want to choose and buy their products themselves. Some financial products are so straightforward, says Houzet, there's absolutely no reason why informed investors should not buy them directly. But while direct operations are starting to take off in SA, independent brokers strongly disagree that the customer derives any great benefit by buying direct. They argue that the lack of financial advice provided to clients by the direct selling operations doesn't warrant the "minimal" saving made. "We are against the adverse effects of direct marketing, because we believe the consumer must be able to obtain the best advice. We believe you cannot obtain that via the telephone," says Stanley Weintrop, president of the Insurance Brokers' Council of SA (IBC).
But, says Christo Davel, head of Old Mutual Direct, direct selling is aimed at investors who are informed and capable of making their own investment decisions. This week, Old Mutual Direct - which opened in August and caused a storm with claims of lower costs - expanded its operation to a 24-hour, seven-days-a-week business. It also added retirement annuities, all 13 SA-based Old Mutual unit trust funds, and short-term insurance to the products it sells. Until now, you could buy only education and simple endowment policies.
If you buy unit trusts from Old Mutual Direct, instead of paying the normal 5% initial fee, you pay only 4%. When you buy unit trust funds through intermediaries, the commission makes up 3% of the 5% initial fee. If you buy retirement annuities direct, your end-value will be higher in the short term. Davel says the company's direct products "will not always be the cheapest, but the prices will be competitive". Kenny Silke, IBC regional chairman of the Cape Peninsula Region, says brokers are against direct operations' advertising "misleading" information, such as lower costs. He objects to claims by Old Mutual Direct that the surrender value on their endowment policies is higher than for a policy bought through a broker. He says surrender values should not be promoted because investors lose by cashing in their policies before their maturity dates. Old Mutual is one of several companies selling direct in SA. But financial services companies that are progressive enough to operate a direct arm have to tread a fine line: the bulk of their business still comes from their agents and from independent brokers. Because of this, many financial services companies are furtively selling their wares directly. If you buy unit trusts from Syfrets Direct you won't get a discount - unless you specifically ask for one. And if you do, you'll get a 40% discount on the 5% initial charge - that means you pay 3% instead of the usual 5%.
The fact that Syfrets Direct is not advertising cheaper rates has saved it from the wrath of independent brokers. Ben Solomon, managing director of Cortal Direct, says while buying financial products direct is cheaper than buying them through an intermediary, the saving at the moment is not substantial. The emphasis is more on the convenience of allowing investors to buy products direct. The cost of products bought directly, however, should drop as direct operations become established in SA and as technology improves, he says.
Cortal Direct sells all SA unit trusts 40% cheaper on the initial fee than a unit trust company and 60% cheaper than linked product companies. So are the days of the independent broker numbered? Solomon believes there will always be people who prefer dealing with brokers. Overseas statistics show that only about 30% to 40% of investors use direct operations. He estimates figures would be similar for SA.
Eugene Quass, head of Syfrets Direct, says brokers are still necessary, just as direct selling operations are needed. If you are the type of investor who does not want to drive to town to buy your financial products and you have an idea of what your needs are, you are a candidate for buying direct. Davel points out that to date 60% of Old Mutual Direct's sales have been to investors who are first-time buyers of financial products from Old Mutual. He says this indicates that their direct operation is reaching a hitherto untapped market. Informed buyers of financial products are entitled to freely buy their investments without having to go through an agent or broker. Investors who doubt their financial knowledge, however, will be better off buying through a competent broker who is qualified to give you advice.
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