“The investment industry helps individuals, companies, and governments save and invest money for the future. Individuals save to ensure that money will be available to cover unforeseen circumstances, to buy a house, to cover their living expenses during retirement, to pay for college or university tuition, to fund such discretionary spending as travel and charitable gifts, and to pass wealth on to the next generation. The investment industry provides many services to facilitate successful saving and investing.”
Source: Larry Harris, Investment Foundations, Chapter 13 “Structure of the Investment Industry” www.cfainstitute.org
A subsection of the broader financial services industry, the investment industry is made up of a multitude of stakeholders that all play a crucial, but specific role in the effective functioning of the larger financial system.
Given the fact that retirement fund members form part of the investment industry, it is important that retirement fund members understand who the various stakeholders are and the role each plays within the investment industry. For the purposes of this article, the focus will be limited to the following stakeholders: administrators, investment custodians, stockbrokers, stock exchanges, asset consultants, investment managers and the Financial Sector Conduct Authority (FSCA).
Defining the stakeholders and their role
- Administrators: Retirement fund administrators fulfil the critical roles of receiving contributions and distributing benefits, transferring new members into and existing members out of, retirement funds as well as providing member communication in the form of benefit statements, income tax clearances and death benefits. Investment fund administrators are responsible for servicing and managing a retirement fund, doing the ‘back office’ work, which consists of processing the financial paperwork, keeping clients up-to-date with the latest information on their fund’s investment performance and ensuring that the fund complies with all necessary legislative requirements.
- Investment custodians: Very often a custodian, oftentimes referred to as a “custodian bank”, is a financial institution that holds clients’ securities for safekeeping in order to minimise the risk of their theft or loss. Investment custody services are often performed by large commercial banks.A custodian holds securities and other assets in their capacity, either in physical or electronic form, on behalf of their clients for convenience and security. Custodians are typically large and reputable firms that are responsible for the safety of assets and securities that may be worth hundreds of millions or even billions of rand.
- Stockbrokers: A broker or a stockbroker can be described as a professional who executes buy and sell orders for stocks and other securities in the context of a listed exchange.A broker or a stockbroker is the middleman between the investor and the stock exchange. If an investor wants to buy or sell shares on the JSE, they can’t go directly to the bourse. Instead, the investor has to find a broker who will act on their behalf. This broker will follow instructions as to what the investor wants to trade in, the number of shares and the price. Stockbrokers are regulated by the JSE as well as the FSCA in order to protect investors.
- Stock exchanges: Exchanges acts as a marketplace for the trade of securities, commodities, derivatives, and other financial instruments. Some notable examples of local exchanges include: The Johannesburg Stock Exchange (JSE), ZARX, A2X and 4AX, and the Equity Express Securities Exchange (EESE).Exchanges can either provide traders with a physical location or an electronic trading platform on which to trade stocks. However, today most exchanges use electronic trading.
- Asset consultants: Asset consultants can be defined as consultants that assist retirement funds with framing their investment strategy and the implementation thereof.Asset consultants form part of the investment chain and provide retirement funds with services that include strategic investment decision-making support, strategic asset allocation, and traditionally playing a key role in fund manager and strategy selection.
- Investment managers: An investment manager is an individual or company that makes investments in portfolios of securities on behalf of clients based on the investment mandate the client has provided the investment manager. Investment managers can range in size from one- or two-person offices to large multi-disciplinary firms with international offices.An investment manager will typically be involved in handling some or all of the following activities: the management of client portfolios, day-to-day buying and selling of securities, portfolio monitoring, transaction settlement, performance measurement, and reporting on legal and client matters.
- FSCA: The Financial Sector Conduct Authority (FSCA) is South Africa’s market conduct regulator of financial institutions that provide financial products and financial services; financial institutions that are licensed in terms of a financial sector law, including banks, insurers, retirement funds and administrators; and market infrastructures.The FSCA’s mandate is to improve the efficiency and integrity of the financial market; encourage fair customer treatment by financial organisations; provide financial education and promote financial literacy; and assist in maintaining financial stability.