Find­ing op­por­tu­ni­ties in the changes

Seems we can learn about more than rugby from the Aus­tralians

Finweek English Edition - - Creating wealth - DEUR SHAUN HAR­RIS shaunh@fin­week.co.za

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

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