1
CHOICE: GOOD OR BAD?
Compiled by 10X Investments
Batseta 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 ...
3
INTRODUCTION
TOO MUCH CHOICE
Research shows that when faced with too many options people freeze
Information overload Ant...
4
5
INSERT TEXT HERE
People are unique and they know what they need better than anyone else
Provides members with greater co...
6
HAVE WE TAKEN CHOICE TOO FAR?
7
INSERT TEXT HERE
 Competition amongst service providers
 Over 900 registered unit trusts (more products than companies...
8
INDUSTRY HAS COME A FULL CIRCLE
Realisation:
 Choice destroys value
Facts:
 People can not retire comfortably
 Increa...
9
HUMAN BEHAVIOUR IN RESPONSE TO CHOICE
9
 Few people exercise choice
 People switch at the wrong times: emotion vs fact...
10
DIRECT COST OF CHOICE
 Higher administration fee, yet very few make use of the choices offered
 Higher audit fees
 H...
11
INSERT TEXT HEREINDIRECT COST OF CHOICE
11
 Switching: 4% per annum (Allan Gray)
 Inappropriate asset allocation
 In...
12
WHEN DOES CHOICE ADD VALUE?
 Default is inappropriate:
- too conservative
- expensive
- does not match your time horiz...
13
INSERT TEXT HEREHOW DOES PROFESSIONAL ADVICE FIT IN WITH
CHOICE?
13
 Are your fund advisers incentivised to sell high ...
14
IS CHOICE AN ABDICATION OF TRUSTEE
RESPONSIBILITY?
 Shifts responsibility from trustee to member
 Majority of members...
15
A FEEDBACK LOOP ON MEMBER CHOICE
15
 Monitor investment choice and outcomes: is choice adding or subtracting value?
 ...
16
OTHER MAJOR ECONOMIES OF THE WORLD
Australia
 “The emphasis on disclosure and member choice has not led to efficient o...
17
SUMMARY
17
 More choice = more people elect default and fear of regret
Limited choice, simple & easy to understand
 E...
1818
QUESTIONS
& ANSWERS
19
THANK
YOU
19
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Choice: Good or Bad? by Michele Ongley and Tracy Jensen

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10X Investments' Chief Product Architect, Tracy Jensen, and Head of Institutional Business Development, Michele Ongley, presented at the Batseta Seminar (formerly known as POA) in Johannesburg (9 April) and Cape Town (10 April) on the topic of Choice: Good or Bad?

The topic covered key investment factors, including:
- what is the purpose of choice in retirement funds;
- what do we know about human behaviour in response to choice;
- and what is the direct and indirect cost of choice and when does choice add value?

Published in: Economy & Finance
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Choice: Good or Bad? by Michele Ongley and Tracy Jensen

  1. 1. 1 CHOICE: GOOD OR BAD? Compiled by 10X Investments Batseta Seminar, 9 and 10 April 2014 10X INVESTMENTS
  2. 2. 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. 3. 3 INTRODUCTION TOO MUCH CHOICE Research shows that when faced with too many options people freeze Information overload Anticipated regret Sheena Iyengar
  4. 4. 4
  5. 5. 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. 6. 6 HAVE WE TAKEN CHOICE TOO FAR?
  7. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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. 14. 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” CHOICE
  15. 15. 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. 16. 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. America Move to simpler menu of investment options
  17. 17. 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
  18. 18. 1818 QUESTIONS & ANSWERS
  19. 19. 19 THANK YOU 19

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