Profit CEO analyzes: Competition in provident funds is leveling up

The Path to Financial Growth

A filmed and written series of meetings on financial management and savings topics in partnership with Profit.

Four years after exiting the provident fund sector, the insurance company Ayalon is returning to the field. Alongside the growing competition there, more and more Israelis are opening independent trading accounts and trying to manage their savings themselves. Daniel Cohen, CEO of the Profit Group, which manages over 100 billion shekels, was a guest on 'The Path to Financial Growth', a series of filmed meetings in partnership with Profit, for a conversation with Bar Lavi, head of the news desk at Globes. Cohen analyzes hot trends, warns of risks, and explains why AI will only help financial experts, but probably won't replace them.

Let's talk about the entry of the insurance company Ayalon. Is there room for more players in the market?

"Certainly. First of all, I welcome Ayalon to the fold and welcome the regulation that allows this and opens the door for more companies and more entities to join the provident fund market. This is a developing industry with several trillion shekels in it, and it is important that more significant entities enter that have capital, understand investments, and can continue to compete for all of our clients and for the funds in provident funds and study funds (keren hishtalmut)."

Ayalon wants to be the next 'Mor'? That is, to enter with a storm, generate decent returns, and aggressively raise billions of shekels. To achieve this goal, the company initiated a plan that includes generous compensation for agents and financial planners who transfer clients to them.

"At the end of the day, Ayalon is a company of insurance agents. It chose the distribution arm of agents and agencies. I personally think they are doing the right thing. In the end, you can invest a lot in television, newspapers, and advertisements, and you can simply invest directly. They need this to launch a product and launch operations."

The new addition to the market is expected to increase competitiveness. But Cohen argues that there is not much room for lowering management fees. "Management fees for high amounts range between 0.6% and 0.8%, and there is not much room to lower them. In the past, they were around 2%. But along with regulation and the development of money and capital in Israel, and along with the insurance agents who came and influenced the competition in the provident fund market and the transition, these rates have decreased.

"Today, management fees in the provident fund market are balanced and are at a correct equilibrium point between distributors, manufacturers, and clients." Cohen also does not see significant differences between insurance companies and investment houses, and says the difference is "0.1% here or there. Overall, competition has leveled everyone out," he adds.

---

The advantages and disadvantages of independent trading

The numbers speak for themselves: in recent years, one out of every two independent trading accounts has been opened outside of banks, alongside a sharp increase in the volume of assets managed in IRA — direct independent management of pension savings and study funds, instead of through the regular channels of institutional bodies.

Many people have started opening independent trading accounts or are thinking about how to manage their money themselves. Do you also feel this trend?

"Yes, moving from the older, more traditional and dormant world of banks, to a world of places where it is more correct to manage the account, both in terms of commissions and in terms of technology and dynamism in your investment capabilities."

Cohen also notes the current situation in the market, which attracts private investors: "For 3-4 years the market has been rising, and is at a very high level. The stock market, which supports all other markets — along with falling interest rates, and despite the wars — creates high markets."

But Cohen warns that the new trend is not for everyone. "You have to be careful about being dazzled. People see that everything is rising and think they are succeeding because they understand investments, and it is not certain that this is true. Everyone has their own specialization in life. In investments, let those who manage investments specialize."

This past weekend, a story starred that highlights Cohen's words, according to which profit generated from the general rise in the market does not necessarily indicate talent in investments. This is after the hedge fund of 25-year-old Leopold Aschenbrenner lost 35 billion dollars in an attempt to chase the AI trend, and parts of his fund were acquired by Citadel.

Regarding personal pension management, IRA, Cohen says that "it reminds me of the trend on the S&P. So now there is a trend of IRA, mainly among young high-tech people who earn high salaries. But I think that if their specialization is in software and chip planning and development, they should leave investments to professionals who understand the opportunities, the developments, and the market better.

"If you want to get excited with a certain amount, manage it yourself, but the big money of the pension, the provident fund, the savings for the children and for yourself and for the house — it is better to put it in the hands of the experts."

---

What happened to the S&P 500 trend

The data supports Cohen's words. While a few years ago investing in the American flagship index was the hot trend for investors, with a huge flow of funds into the S&P 500, the trend began to change. The excess performance in the local market alongside fluctuations in the dollar exchange rate that eroded returns, led many to make the way back to managed channels and the Israeli market.

Let's talk about mistakes that investors make. Two or three years ago, when I spoke with investors, they told me 'I am in the S&P 500 until the last day'. We see that this did not exactly happen, and people are leaving the S&P 500, and losing a lot of money because of the dollar.

"And they missed the rise of the dollar," adds Cohen. "You have to understand that routes like the S&P 500 are 500 stocks, and only in the USA. This is still an investment focus in one place. We always say — diversify. Maybe for younger clients, with more wealth and certain salary development, we will offer another component of stocks within the portfolio, to increase the risk component.

"But at Profit, which manages over 100 billion shekels, most of the funds we offer our clients to invest in are a general route with some further reinforcement in the stock route. There is no company that has less than ten investment routes. It is a lot, there are all types. You can choose whatever is possible. In my opinion, there are even too many routes, and this can confuse clients. But S&P or routes that focus on one segment — this is a mistake."

There was a reform two years ago that tightened the definitions in the names of routes, but in practice it turns out that we can have a route with exactly the same name, but the content inside is completely different. How do you help clients understand where their money is?

"True, a company can put 100% foreign stocks and another company can put 100% Israeli stocks, and it will still be called a 'stock route'. Therefore, it is very important to use professionals who will explain what the route is. The right professional can reach the level of the individual asset to show what the product or route mix is in each company."

The confusion of investors stems not only from the variety, but also from the companies themselves. In the field, investment houses and insurance companies often change the nature of the investment within the route, and the packaging and name remain the same. For example, turning a solid and diversified route into a route that invests only in technology giants, without changing the name. This usually happens when a certain route shows weak performance, and the company prefers to change the content under the packaging to improve performance. The result? For example, savers are sure they bought apples, but in practice discover they received bananas. The ability to compare becomes especially complicated.

"Our suggestion, sometimes, is to diversify also between companies — if it is a stock route oriented towards abroad, a stock route oriented towards Israel — then come and diversify between both of them. In addition, 'abroad' is a very broad word, and you need to see the geography of the investments. And what are the types of investments in stocks? This is also not the same in terms of liquidity. The client needs to know all these things. Our role is to diversify his money correctly," says Cohen.

---

'Family Office is a pension agent with branding'

Another trend in the local investment world is the growth of 'wealth management' and investments of 'qualified investors' (usually investors with liquid capital of over 9 million shekels) in sophisticated products. Only recently was it revealed in Globes that Phoenix Brocks is acquiring 60% of Goren Family Office, with the goal of deepening the group's activity in the worlds of wealth management.

Let's talk about the world of wealth management, of people with deeper pockets. We see that insurance companies and agencies are expanding there and offering more advanced products, such as hedge funds.

"True, there are many more wealthy people in Israel. Big money. You can see exits in startups, in technology companies, and in our whole world. Our country contains many more wealthy people than before." Cohen refers to family office agencies, and tells a joke: "What is the difference between a barber and a hair stylist? The same thing as a pension insurance agent and a family office. It is a different positioning. There are very few real family offices in Israel, and the client needs to be very careful. Many of them offer their clients private investment proposals, and this is a thing that can be dangerous."

What should you look at before going to a family office? Give us rules of thumb.

"First of all, a family office is suitable for the top one percent of Israel. Not everyone needs it. At the end of the day, the market is developing and the regulated products, such as investment and savings products, cover all types of investment for people who have up to tens of millions of shekels.

"Beyond that, sometimes they look for more diversification for money, and therefore 3%-7% can be distributed in what you call hedge funds or other alternative assets. In my opinion, this is suitable only for clients who are considered qualified investors."

This status gives special privileges in the capital market, such as investment proposals without a public prospectus, and comes only from income and especially high holdings: "We won't complicate things, but let's say it is over 12 million shekels in assets, of which 9 million are liquid. You need to be a very rich person and proven in your liquidity."

But in Cohen's eyes, the regulatory definition does not matter: "What is a rich person? A rich person who has 30 houses, he is not qualified on the regulatory level, but he probably has a lot of money. They want them to be managed differently, and they can risk part of their wealth to a certain level in things like the alternative market and hedge funds. And even there, you need to look at funds that have correct economics and correct expertise behind them."

In conclusion, we see AI arriving everywhere, including bank accounts, and there are even those who promise that it will replace financial planners or insurance agents. Is there a chance that this will happen?

"I don't think there is a chance that this will happen. Although the revolution is happening, and we financial planners are also using it. It is easier to learn things and make information accessible. I don't want to say that for us it is a bit of Google plus, because it is much more than that, but at the end of the day there is the human component: the relationship, the accompaniment, the acquaintance with the family, with the client and his needs, with how he feels and how he will behave. What will he do when the market moves? When he receives a bonus? I don't think AI knows how to talk about this. Also, there is still no AI doctor. You need the human touch that looks in the eyes and says 'trust me'.

"The way to replace a financial planner with a robotic device is very long. With us, AI has become our employee. The financial planner knows how to talk to AI and tell it what he thinks, and the tool will output a more efficient and correct result for him, and will help explain it to the client in his language, and not in the language of an investment person. It can be used to simplify the story, but it cannot replace the person." A filmed and written series of meetings on financial management and savings topics in partnership with Profit.