1

CHOICE: GOOD OR BAD?

Compiled by 10X InvestmentsBatseta Seminar, 9 and 10 April 2014

10X INVESTMENTS

2

AGENDA

What is the purpose of Choice?

Human behaviour in response to choice

Direct cost of choice

Indirect cost of choice

When does choice add value?

How does professional advice fit in with choice?

Is choice an abdication of trustee responsibility?

A feedback loop on member choice

22

3

INTRODUCTION

TOO MUCH CHOICE

Research shows that when faced with too many options people freeze

Information overload Anticipated regret

Sheena Iyengar

4

5

INSERT TEXT HERE

People are unique and they know what they need better than anyone else

Provides members with greater control

Reality?

Most people do not know what they need or want

85% members opt for default option

Why?

Lack of investment knowledge

Apathy

Overwhelmed by number of choices

WHAT IS THE PURPOSE OF CHOICE?

5

6

HAVE WE TAKEN CHOICE TOO FAR?

7

INSERT TEXT HERE

Competition amongst service providers

Over 900 registered unit trusts (more products than companies on the JSE)

Increased profitability

All products can broadly be divided into 3 categories:

− High equity

− Moderate equity

− Low equity

National Treasury:

“Its introduction may be motivated more by those with a financial interest in expanding the services they offer to the funds than by those with the members’ interest at heart”

INDUSTRY MOTIVATION FOR CHOICE

7

COMPLEXITY

8

INDUSTRY HAS COME A FULL CIRCLE

Realisation:

Choice destroys value

Facts:

People can not retire comfortably

Increasing retirement ages world wide

Working whilst retired to supplement pension income

9

HUMAN BEHAVIOUR IN RESPONSE TO CHOICE

9

Few people exercise choice

People switch at the wrong times: emotion vs facts

Overly cautious, low risk options: detrimental to long term outcomes

Focus on returns instead of asset allocation and fees

National Treasury:

“Limited ability of individuals to access and process all relevant information, complexity coupled with confusing range of choice.”

Bounded rationality

FEAR AND GREED

10

DIRECT COST OF CHOICE

Higher administration fee, yet very few make use of the choices offered

Higher audit fees

Higher record keeping costs

11

INSERT TEXT HEREINDIRECT COST OF CHOICE

11

Switching: 4% per annum (Allan Gray)

Inappropriate asset allocation

Increased operational risk

Reduced negotiating power on asset management fees (e.g. rebates on platforms)

Greater need for investment advice, within the funds and for individuals

National Treasury:

“Investors pay for investment choice in at least 3 different ways”

12

WHEN DOES CHOICE ADD VALUE?

Default is inappropriate:

- too conservative

- expensive

- does not match your time horizon

For example, time drives investment risk so your choice of retirement product is relevant

13

INSERT TEXT HEREHOW DOES PROFESSIONAL ADVICE FIT IN WITH CHOICE?

13

Are your fund advisers incentivised to sell high margin products?

Do they advise on all strategies or only their own?

Default is critical

Education & communication of choice to members

Tools current and meaningful

14

IS CHOICE AN ABDICATION OF TRUSTEE RESPONSIBILITY?

Shifts responsibility from trustee to member

Majority of members lack education to exercise choice

Greater cost to member

Regulation 28:

“A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets…

Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets”

CCHHOOIICCEE

15

A FEEDBACK LOOP ON MEMBER CHOICE

15

Monitor investment choice and outcomes: is choice adding or subtracting value?

Educate and communicate with members regarding available choices

Technology to monitor outcomes

Limited number of choices

Simple and easy to understand

16

OTHER MAJOR ECONOMIES OF THE WORLD

Australia

“The emphasis on disclosure and member choice has not led to efficient outcomes for a substantial portion of the member population”

The main recommendation was to introduce a new class of no-choice retirement funds.

Under the new regime trustees are not being permitted to delegate investment choices to

members.

AmericaMove to simpler menu of investment options

17

SUMMARY

17

More choice = more people elect default and fear of regret

Limited choice, simple & easy to understand

Exercised by few

Increases everyone's costs

On average destroys value

Choice adds value if the default is too conservative, expensive or does not match a

member’s time horizon

Monitor choice and ensure in members’ best interests

1818

QUESTIONS & ANSWERS

19

THANK YOU

19