Commission conversion
In October 2015, the South African government released the draft of the Financial Sector Regulation Bill – legislation looking at replacing the current commission system with a Retail Distribution Review (RDR) fee-based model similar to the UK.
“I personally do not agree with a fee-based model,” says Featherby.
The country’s regulator, the Financial Services Board, has said it expects to introduce the regulation later this year, but Featherby thinks the timeline is unrealistic.
“First of all, there are questions around how they would implement the new RDR structure. Would they phase it in, would it apply to the whole market, or will RDR and commission work side by side?”
Foreseeing a postponement until November 2017, he predicts it will be implemented in a way that means advisers have to offer the client both models and let them choose. Something Carrick has been doing since day one, he says.
Despite the choice between fee and commission, of its 579 clients, only one has opted to be charged a fee. “If you present a client with the option of either paying 1% on their investments over the next eight years or 1% on all investments for life, it’s a no brainer which one they will choose.”
Like many critics of the UK’s RDR system, Featherby argues it will create an ‘advice gap’ for those on moderate incomes looking to invest. However, he does concede the reforms increase retail offerings and simplify the retirement savings environment.
Getting rid of commission will shrink South Africa’s IFA market and reduce competition for consumers, he warns, predicting that Carrick and other “big players” will buy out smaller firms struggling to adjust to the new model – a trend seen in the UK after the RDR was introduced in 2012.
“Many smaller firms just don’t have a large enough client base to able to move over to the RDR model. I don’t think this is good as the bigger companies will end up dictating the terms of the market.”
African expansion
With additional offices in South Africa located in Johannesburg and Durban, Carrick expanded its business into Zimbabwe in January last year, a venture Featherby describes as having “gone very well”.
With plans to expand into Nigeria and Kenya, Featherby sees the future of his business as providing “sound, researched advice” to clients across East Africa.
Currently waiting for the go-ahead from Kenya’s Capital Markets Authority, the main challenge in Nigeria, he says, is the “high level of corruption” that makes it difficult for Carrick to find a firm there to partner with.
“Nigeria is set to overtake South Africa as Africa’s largest economy over the next few years, so it definitely makes sense to set up an office there,” says Featherby.
The firm has also opened a satellite office in Mauritius to provide what it calls ‘virtual global pension advice’.
“We have set up an office with a studio of local advisers offering expats advice using video-calling. You’d be surprised how many people are happy to take financial advice over Skype without actually ever meeting their financial adviser.”
According to Featherby, Carrick is well-placed to help clients face the fallout from South Africa’s worsening political and economic situation.
“South Africa has seen huge growth in the last decade, but due to the devaluation of the rand, the state of the economy and the general desire for clients to shift a portion of their investable assets offshore into a hard currency, we are seeing more and more business in offshore investment structures.”
Latest figures from KPMG show that the rand has depreciated more than 50%, from an average of 8.20 to the dollar in 2012, to 12.74 in 2015, while Egypt has now overtaken South African as the second largest economy in Africa.
Both the National Treasury and South African Reserve Bank forecast the economy will expand less than 1% this year, the slowest pace since 2009. Meanwhile, the country has just barely escaped a downgrade of its credit rating to ‘junk’ albeit Moody’s has warned that the outlook for South Africa looks “negative”.
Adding to the economic turmoil is the dire political situation. Scandal-ridden president Jacob Zuma is regularly facing calls for impeachment for failing to pay back the $16m of state money he used to renovate his home.
Featherby has already seen the effects this has had on the industry, involving a massive shift away from Qrops and into offshore trusts, a trend he expects to continue.
“When we started out 18 months ago, we dealt predominantly with expats and 80% of our business was Qrops and pensions transfers, while 20% was offshore trusts. Now we are seeing a shift to 50% Qrops business and 50% offshore trusts. Eventually, we expect the majority of our business to come from offshore products.”
