Finding opportunities in the changes
Seems we can learn about more than rugby from the Australians
THE INVESTMENT INDUSTRY and especially financial advisers are entering what will probably go down as a period of unprecedented change. There’s increased legislation (the FAIS Act), proposed changes to commission structures and definitions of what actually constitutes a financial adviser from National Treasury, and more noise from increasingly critical consumers.
In coming years a compulsory pension plan for all employed South Africans is also likely to be introduced, promoted by Finance Minister Trevor Manuel in the Budget. This will have an effect on all retirement funds and the industry around retirement planning, including advisers.
It must be an unsettling time, even for those advisers who acknowledge and even welcome the changes. A balance needs to be struck between necessary regulation and the danger of over regulation.
So it was encouraging to meet a senior adviser who has been through it all, and note his positive and relaxed attitude to the changes taking place in South Africa.
Kevin Bailey was the opening speaker at last week’s Momentum Investment Summit, an annual gathering of investment professionals and some of the top people in financial planning. He’s executive chairman of The Money Managers in Australia but has also done extensive work on various bodies in Oz representing financial advisers in talks with the federal government on regulation.
“What took 15 years in Australia will happen in a blink of an eye here,” he says. “The Australian experience offers a snapshot of the future of the industry in South Africa.”
Regulation in Australia does seem to have followed a very similar path to the changes being introduced here. It’s probably not surprising that some of the proposals in the National Treasury document are close to what became law in Australia – it’s known that Treasury looked at examples of regulation around the world, and Australia seems to have had an influence on its thinking.
What’s fascinating is why Bailey decided to get involved in what effectively led to a clean up of the industry in Australia. “It was 1992 and there were lots of issues around financial services and financial planning. There had been scandals, there was some rubbish we had to get out of the industry. My son had just been born, and I didn’t want him to go to school one day and feel embarrassed when one of the kids asked what his father did.”
The first big change came in 1993 when the Australian government introduced its “superannuation savings scheme”, essentially a compulsory retirement scheme for all Australians.
“It was originally seen as a great threat by advisers, but it has now turned out to be a big bonanza,” Bailey says.
At first, lobby groups such as the unions muscled in, putting their members into retirement funds and keeping the financial advisers out. “Then member choice was introduced, and that gave us the opportunity to offer advice and superannuation funds. People in Australia began to realise they had a substantial nest egg and the need for advice.”
Bailey believes a compulsory retirement savings scheme in South Africa will be a boon for the industry. But he cautions that, as in Australia, legislators will increasingly look at ways to protect retirement fund members. “The opportunity is there but you have to earn the right, or government will take over. And as in Australia, governments have no idea of how to run money.”
Financial advisers in Australia moved rapidly from a sales-driven to advice-driven approach to business. Bailey says it involved new levels of disclosure, including any possible conflicts of interest (we’ve seen quite a bit of that here) and soft dollar incentives, for instance if a product provider or asset manager was supplying the adviser with a free computer or laptop.
And the big change was in how advisers were paid. Today Bailey says it’s largely a fee model, where the client pays the adviser, not the life company or product provider. “Things like trail commissions are allowed, but must be disclosed, and the advisers can’t call themselves independent because they are being paid by an institution.”
Again, this sounds very much like the definitions of advisers being proposed by Treasury.
The battle here is how truly independent financial advisers are going to switch from a commission to a fee-based structure. Some already have and are doing very well, but their clients tend to be in the top end of the market and are used to paying for specialised services.
Bailey believes it’s an essential change and will not be as difficult as some advisers seem to think. But he was largely talking to the converted, at least newly converted. The Momentum summit attracts the top advisers who will make the necessary adjustments.
The problem is how you get that message across to the rank and file in the industry – without regulation.
Been through it
all. Kevin Bailey