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?

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CHOICE: GOOD OR BAD?
Compiled by 10X Investments
Batseta Seminar, 9 and 10 April 2014
10X INVESTMENTS

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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
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INTRODUCTION
TOO MUCH CHOICE
Research shows that when faced with too many options people freeze
Information overload Anticipated regret
Sheena Iyengar

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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?
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HAVE WE TAKEN CHOICE TOO FAR?

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 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
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COMPLEXITY

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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

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HUMAN BEHAVIOUR IN RESPONSE TO CHOICE
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 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

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DIRECT COST OF CHOICE
 Higher administration fee, yet very few make use of the choices offered
 Higher audit fees
 Higher record keeping costs

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INSERT TEXT HEREINDIRECT COST OF CHOICE
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 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”

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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

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INSERT TEXT HEREHOW DOES PROFESSIONAL ADVICE FIT IN WITH
CHOICE?
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 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

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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

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A FEEDBACK LOOP ON MEMBER CHOICE
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 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

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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

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SUMMARY
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 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

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QUESTIONS
& ANSWERS

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THANK
YOU
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