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A LISP (with capital letters) doesn't refer to a speech impediment, but is South African financial jargon for an investment platform which aims to be a 1-stop shop (cater for all an investor's needs), and where you can:

• select from a range of investment portfolios from different asset managers,

• select from a range of legal wrappers (which crucially impacts on tax and term of investment),

• switch between the portfolios at low costs.

Having said that, with the same breath it must immediately be added that a LISP does add another layer of fees relative to investing directly, and if you're willing to do the extra admin yourself, it's usually cheaper that way.

Technically speaking, LISP stands for Linked Investment Service Provider, but it's an unfortunate name as it's long-winded & does not tell you much. Rather just think of a LISP as an investment platform.

Beware of Biased Advisors

It's a good idea to get a competent financial advisor to assist you. Beware of advisors who are:

• Solely advising on one LISP (or only LISP platforms with the same group), rather than comparing LISP platforms. Ask the advisor what LISP platforms they have their clients on.

• Channels you into an investment portfolio which benefits them or their group in excess of what they would earn if they advised on a different investment portfolio.

LISP v Direct Investment with an Asset Manager

Legally speaking, a LISP does not manage the underlying investments; but often they are biased towards an asset manager in their wider group.

Investing directly with asset managers is much more admin intensive. If you wanted to switch from investing directly with one asset manager to investing directly with another, you'd need to (1) provide an instruction to disinvest into your bank account, (2) once the money has landed in your bank account, complete the paperwork, and forward it onto the next asset manager.

However, some direct asset managers offer LISP platforms with their funds on it (e.g. Allan Gray), making it possible to switch between managers on their LISP platform.

The decision as to whether to go with a LISP or investing directly; hangs crucially upon: (1) whether the LISP platform offers the underlying portfolios which you want to invest in, (2) whether the LISP offers the portfolios you may in the future want to invest in, (3) whether the LISP offers the legal wrapper you want to use, in particular considering tax (e.g. living annuities), (4) any disinvestment penalties vs other LISP platforms and vs investing directly, (5) the extent to which you're going to want to switch, (6) your willingness to put in the paperwork when you do switch, (7) the fees the LISP charges versus other LISP platforms, and versus investing directly, (8) your willingness to remember seperate passwords, (9) your willingness to have double the work annually when you submit tax information on your investments, and (10) whether you are employing a financial advisor to do some of the work above (which you should be doing) (11) the capability of the LISP platform to carry out its administration accurately (12) the quality and time taken by the LISP to answer queries (13) the time lags in switching between funds (14) interest earned from the point of doing an EFT to the point of investing; from disinvesting to withdrawal, and whilst switching between funds.

The work involved may be dramatically reduced if the LISP you choose is one run by your favourite asset manager (e.g. Allan Gray, Old Mutual, Sanlam, etc...), and the cost impact is often reduced as asset managers usually offer reduced fees for investing in funds which they manage. The route I have chosen is a middle ground, to invest directly and seperately with my 2 favourite managers on each of their LISP platforms. I must with the same breath admit that even with only 2 LISP platforms, it is a pain to remember all the logins and have to extract seperate tax information annually.

LISP v LISP

Assessing which is the better of 2 LISP pretty much involves comparing the same factors as in the above, in the LISP v Direct Investment exercise.

Many Legal Wrappers

LISPS may be accessed directly, but may also allow investment via:

• retirement annuities

• preservation funds

• ILLAS (Investment Linked Life Annuities) aka "Living Annuities"

• tax free savings accounts;

• endowment policies

When signing up with a LISP you'll usually be giving them authorisation to act as your agent and conclude agreements with the relevant parties on your behalf; e.g.:

• an insurer if investing in an endowment policy wrapper.

• Buying and selling unit trusts (including switches)

This saves one the time taken to do the administration of the above yourself.

The LISP itself is regulated by the FAIS Act, and all LISPS must be licensed as Administrative Financial Service Providers with the FSB.

The decision as to which legal wrapper to use depends inter alia upon:

• When you want to invest until and the possibilities of requiring the proceeds earlier (e.g. an endowment policy has a minimum term of 5 years, or to death if earlier).

• The source of the money and whether you have used up contribution limits

• Your personal taxation position, and what it is likely to be going into the future

• The tax implications on yourself, of the legal wrapper chosen

Taxation

The taxation of your investment will depend on the legal wrapper you have chosen. If you are investing directly via the LISP platform into unit trusts, without any wrapper then you will pay the same tax as if you invested directly into the unit trust:

• Dividend withholding tax is withheld for individuals by the unit trust, at the rate of 20%; the exception being REIT dividends which are distributed in full, but also subject to personal income tax as your marginal rate (assuming you, the investor are a natural person). There is no withholding tax applied to REIT dividends.

• Interest income is distributed and taxed as income at your marginal rate; with natural persons enjoying an annual interest exemption. At the time of writing, the annual interest exemption was R23,800 for those younger than 65, and R34,500 for those equal to or older than 65.

• Capital gains as a result of asset manager transactions in a unit trust are not subject to capital gainst tax. However, when a unit holder sells units in the unit trust, any gain is counted as a capital gain and subject to capital gains tax (CGT) in the hands of the investor. At the time of writing natural persons were paying tax on 40% of their capital gains, with an annual exemption of R40,000. If capital losses are made, they can be used to offset future capital gains.

This contrasts with LISP investments which are wrapped in an endowment police:

• These fall into the IPF (Individual Policyholder Fund) of the life office issuing the policy wrapper, and as such income and capital gains are taxed in the hands of the life office.

• Income is taxed at a rate of 30%, and capital gains are subject to an inclusion rate of 40%, translating to an effective CGT rate of 12% (40% * 30%).

• The proceeds of the endowment are not taxable in the hands of the investor, as the life office has already paid tax on the gains and income. This confuses some investors into thinking endowments are tax-free.

So, should one choose to invest directly into a unit trust or into an endowment policy? This would depend inter alia on:

• Whether one is ok with the minimum term of an endowment policy of 5 years (or death, if earlier), or whether liquidity may be required earlier.

• The individual's marginal tax rate, available interest exemption, available CGT allowance and available capital losses to offset gains (if any); versus the life office's tax rate. For individuals with a marginal tax rate above 30%, the IPF tax rate of 30% may be attractive.

• Any additional fees or costs within the endowment wrapper.

• Any other restrictions.

In addition to considering direct investments and endowment wrappers, individuals should also consider whether it's more efficient to invest via a tax free savings account; at least up to the annual allowance, taking the maximum overall allowance into account as well.

Bulk Accounts

The units which the LISP purchases on behalf of investors is held in bulk accounts on their behalf; with the legal entity owning the assets in the bulk account depending on the legal wrapper chosen, e.g.:

• A retirement fund in the case of compulsory money.

• An independent custodian in the case of direct investors.

• An insurer in the case of policies.

Note that the LISP itself is never the owner of the assets in the bulk accounts. Key responsibilities of the LISP are to keep its own capital seperate from that of investors, and to keep track of which clients own which units in the bulk accounts.

Selecting a LISP Investment Platform

Pay attention to:

• Fees, including:

  • LISP fees (initial & annual)

  • Financial Advice fees

  • Any additional fees for using a life policy

  • Cost of switching

  • Fund of fund /multi-manager fees, if this is the way investments are accessed

  • Underlying asset manager fees (contrast with investing directly with asset manager)

  • Pay extra attention to the frequency of fees (charged daily/monthly/...) and performance fees

  • Asset managers sometimes pay LISPS to be on their platform - keep an eye out for the extent to which rebates from asset managers are passed onto investors (e.g. in the form of reduced fees).

• LISPS which insist that you use a financial adviser, rather than allowing you to invest directly onto their platform.

• If operating under a life license, the financial soundness of the life company.

• LISPS associated with a specific manager, as they may favour that manager's investment portfolios.

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