Sygnia Asset Management has fallen foul of the Advertising Regulatory Board (ARB) for making misleading claims to sway people with expensive retirement investment portfolios to switch over to Sygnia as a significantly better option.
The advertising in question features a short video of Iain Anderson, reported to be the Sygnia’s co-head of investments, saying: “Invest better with a Sygnia retirement annuity. Are you aware that you could be losing as much as 60% of your retirement savings to fees? There's a better way. Make the switch to a Sygnia retirement annuity and maximise your retirement savings. Secure your financial future with Sygnia.”
The advert, posted on Sygnia’s Facebook page in February, caught the eye of Braam Hattingh, who lodged a formal complaint against the claims, arguing that they were misleading.
Hattingh said he did not believe that the costs of retirement annuities could ever possibly be high enough to eat up as much as 60% of the investor’s savings. This, Hattingh said, was a blatant lie, told to convince investors to move their retirement portfolios to Sygnia. Hattingh said the claims were not only misleading, but they created confusion as well as doubt and mistrust in the industry.
Sygnia, which is not a member of the ARB and therefore not bound by any of its decisions, opted to respond to the complaint.
Sygnia pointed out that, over a long period, recurring administration fees have the compound effect of reducing the investment’s value over time.
“If you were to compare the investment performance of two identical funds (with the exception of fees charged), the fund with the lower recurring management fees will yield a greater net return than the more expensive fund,” Sygnia told the ARB, including a copy of the National Treasury’s discussion paper titled “Charges in South African retirement funds”, published in July 2013.
The paper stated: “If the recurring charges deducted from the fund account of a regular saver are reduced from 2.5% to 0.5% of assets each year, he or she would receive a benefit 60% greater at retirement after 40 years, all else being equal. Alternatively, the saver could get the same retirement benefit by making contributions over his or her lifetime that are around 40% lower.”
Sygnia said that the results referred to assumed regular contributions increasing at 6% per year for 40 years. Though investment returns were assumed to be 10% each year, the results were relatively insensitive to the level of asset returns in the fund.
Sygnia invited clients to visit their Facebook page and website where more information is available, and where an element of its marketing is to alert and educate financial consumers to the fact that fees payable on investments can have a significant impact on the value of investments over time.
Sygnia said offering low-cost investment products was a key part of its product offering, and it stood to reason that illustrating the effects of lower fees over time was integral to its marketing.
The ARB investigated the matter in line with provisions of the Code of Advertising Practice that related to misleading claims.
The directorate of the ARB said that while Sygnia was not bound by its jurisdiction, it would pursue the matter and make a ruling for the guidance of its members and, in cases where complaints were upheld, issue instructions to members on the withdrawal and future handling of offending advertising.
To come to a decision, the ARB looked at the contested claim that customers “ ... could be losing as much as 60% of your retirement savings to fees ... ” and whether Sygnia could explain and justify it — along with objective verification of an independent and credible expert in the field to which the claims relate.
The ARB also required that the evidence put forward be “up to date and current, and must have market relevance”.
“The claim, in the context of retirement annuities, creates an impression that there are customers who forfeit as much as 60% of their savings to fees over time when investing in retirement annuities and, by contrast, these customers would or could have saved as much as 60% in fees had they invested with the advertiser,” the ARB said.
The ARB directorate acknowledged that the claim needed to be viewed in context as a “possibility” rather than an allegation of actual 60% losses.
“However, this still creates a definite expectation that this may well be true for some investors, and it therefore still must be substantiated that this is an actual possibility; in other words, that there are investment products where this occurs,” the ARB said, adding: “The question, therefore, is whether the advertiser provided any evidence of this, such as historical comparative data, current comparisons, or any other independently verified substantiation ... No such evidence was placed before the directorate.”
The ARB said Sygnia had relied on a government paper published more than a decade ago, and that the discussion concerned had been based on “a speculative model, rather than actual fund comparisons”.
The example given was a comparison of hypothetical situations over 40 years, with the recurring charges for one remaining high while fees for the other reduced over time.
“Unsurprisingly, it shows that when the recurring charges of an investment are reduced over the full term, the investor receives more money because a larger percentage of the total value is left to grow with interest, and is not consumed by charges.”
The directorate said that the fees charged were not claimed to be representative of charges that now apply to the South African retirement annuity landscape.
“To be blunt, there is nothing before the directorate to show that [Sygnia’s] charges and/or fees are comparatively lower than all its competitors, or that the lower fees directly translate into an increase in yield (or at least a saving in fees) of 60%, or nearly 60% for some of its members as implied by the advertising.”
The directorate found that some consumers — especially less financially literate and educated consumers — may understand that they stand to lose 60% of their capital investment to fees.
“This is not the case, even if [Sygnia’s] submissions were found to be acceptable.
“As such, the claim or implication that one should ‘invest better with a Sygnia retirement annuity ... ’ or risk ‘ ... losing as much as 60% of your retirement savings to fees ... ’ is now unsubstantiated and in contravention of the code.”
Advertising bodies have been instructed not to accept the advert in its current format because the wording makes it possible that clients could believe the claims to mean that they could lose up to 60% of their entire investment rather than lose 60% in the interest growth on retirement savings to fees.
