Pension Plain: The true cost of (not having) sound financial advice

We are often exposed to articles in the press where comparisons are made between the investment returns of clients who invested without the benefit of financial advisors and those who made use of financial advisors to guide them in the right investment direction.

The inference is sometimes made that those investors who choose to employ financial advisors are worse off over time due to the reduction of their investment return by fees paid to financial advisors than those investors who decide to make investment decisions based on their own knowledge of financial markets and products.

The ill-informed among us might incorrectly draw the conclusion that “high” financial advisor fees automatically lead to low investment returns and that the best possible financial outcomes will be attained by avoiding the payment of financial advisory fees or commissions at all costs.

The cost of not having access to sound financial advice before making life changing financial decisions is not such an interesting topic of discussion. One reason for this is that it is easy to calculate the financial advice fee/commission costs upfront and to extrapolate the effect of those costs over the term of an investment. On the other hand, the costs of the inappropriate financial decision made by a retirement fund member can only be calculated when those costs are incurred in the future.

The recent case of Mohlala v Distell Provident Fund (Case number PFA4/2024) before the Financial Services Tribunal highlighted the risk that fund members are exposed to when making decisions regarding fund exit choices without the assistance of capable financial advisors.

Mr M, a member of the Distell Provident Fund, was involved in an accident that led to blindness in his one eye. As a result, he could no longer work as a forklift operator. His employer terminated his contract of employment because of his incapacity to perform his duties. Mr M submitted a withdrawal claim form to the fund and the fund paid a withdrawal benefit to him, as per his request, even though he also qualified for a disability benefit in terms of the rules of the fund. After receipt of the withdrawal benefit, Mr M laid a complaint at the office of the Pension Funds Adjudicator claiming that the fund should have paid him a (higher) disability benefit and not a withdrawal benefit. His complaint was dismissed by both the PFA and the Financial Services Tribunal on the following grounds:

• • The rules of the fund are its constitution and if the rules of the fund do not afford the fund the legal power or capacity to do something (changing an application for a withdrawal benefit to an application for a disability benefit), then such purported act by the fund is ultra vires and accordingly null and void.
• • Mr M admitted to completing and signing the withdrawal claim form.
• • If Mr M wanted to claim a disability benefit in terms of the rules of the fund, there was an obligation on him to submit a claim with the insurer of the fund who then had the right to accept or to reject the claim. There is no evidence that Mr M submitted a disability claim to the insurer of the fund.
• • The fund admitted that the exit of Mr M from the fund was not due to ill health.
• • There was no evidence that Mr M signed the withdrawal application form under duress. Mr M only claimed that he was unsure which type of exit to select since a disability benefit option was not provided on the exit form.
• • Mr M is presumed to have understood the consequences of completing and signing the withdrawal form.
• • The fund was reasonably entitled to assume that by completing and signing the withdrawal form, he was bound by its terms and conditions.

In terms of section 7C of the Pension Funds Act, the object of the board of trustees of a fund is to direct, control and oversee the operations of the fund in accordance with the applicable laws and the rules of the fund. The board of trustees of the fund must, in pursuit of its objectives, take all reasonable steps to ensure that the interests of members are protected, act with due care and good faith, avoid conflicts of interest, act independently and with impartiality in respect of all members and maintain a fiduciary duty towards members and beneficiaries in regard to accrued benefits. It is not the duty of the board of trustees to ensure that members apply for the best possible benefits in terms of the rules of the fund when they exit the fund. The fund only has an obligation to pay the benefits applied for by the member with due care and in good faith.

The Financial Services Tribunal therefore in the Mohlala case confirmed that there is no responsibility in terms of the Pension Funds Act or the rules of the fund on the fund trustees or the employer to ensure that a member receives the best possible benefit upon exit that is provided in terms of the fund rules given the personal circumstance of the member.

If neither the fund nor the employer has a responsibility to ensure that the member upon exit from the fund applies for the best possible benefit that is offered in terms of the fund rules, that responsibility can only fall on the member. If a member in Mr M’s position had access to a financial advisor who was fit and proper to provide financial advice regarding the fund rules, the financial advisors would have:

• • Studied the rules of the fund to determine the exit benefit options available to his or her client.
• • Made an analysis of the financial and tax implications of each exit option given the wishes, personal circumstances, and risk tolerance of the member.
• Recommended the most suitable exit benefit option, for example, applying for a disability benefit, to his or her client.
• • Engaged with the fund and its administrators to ensure that the application for a disability benefit is processed and assessed correctly.

The retirement fund arena is a complicated minefield to the average fund member. Few fund members have the skills to analyse fund rules and to make informed decisions regarding the diverse options provided in terms of the rules of the fund without any assistance from experts. The assistance and guidance of a competent and trustworthy financial advisor can add value to the lives of the average fund member in the long run.

You therefore have the option to do it “My Way” and save money in the short term on financial advice fees or to face the long-term, negative financial consequences of making decisions regarding fund benefits without knowing what the best options regarding those benefits are.

If hindsight is 20-20 vision, Mr M would in all probability have been in a much better position if he had the benefit of looking at his fund options through the spectacles of a competent financial advisor before submitting his fund exit form.