Financial advice in SA is turning in your favour

The regulators of financial services are beefing up the laws governing financial advice and sale of financial products. The Retail Distribution Review, now under way, is aligned with the Treating Customers Fairly approach. reports

ARE YOU paying an ongoing annual advice fee on an investment that you have had for years, with the only advice you received on it being when you took out the product? Or have you recently been switched by your adviser from one product to another for no good reason you can think of ?

The Retail Distribution Review (RDR), which is being implemented in phases by National Treasury, addresses these and other concerns about how financial products are sold to you.

The intention of RDR is to ensure that financial products are sold in a way that supports the delivery of “Treating Customers Fairly” outcomes. It aims to:

• Support the delivery of suitable products and advice;

• Allow you to make informed decisions;

• Encourage professionalism in the financial services industry; • Promote fair competition; and • Promote sustainable business models for financial services providers. There are three phases: • Phase I, which mainly concerns insurance;

• Phase II, which mainly concerns investments; and

• Phase III, which deals, among other things, with the categorisation of advisers.

Phase I has mostly been finalised and is being rolled out, while Phases II and III are still largely subject to consultation and input from the financial services industry.

In a presentation to advisers from around the country at the PSG Conference 2018 at Sun City recently, Ronald King, the head of public policy and regulatory affairs at PSG, outlined how advisory practices needed to prepare for the regulatory changes coming their way.

He reminded the delegates that RDR itself is not legislation, but a policy framework within which existing legislation is being changed and new legislation being enacted.

RDR places far greater accountability on the adviser for his or her actions when dealing with you, the client. Among the ways in which advisers will have to adjust are:

• Fit and proper requirements. Someone selling you a financial product must be qualified and registered to sell you that product, having to write exams on each type of product for which they are registered.

• Solvency requirements. Advisory practices will need to hold greater reserves. This “cash on hand” could be as much as three months’ revenue, King said.

• Record keeping. Advisers will have to become more diligent at keeping records, including those of their interactions with clients, King said.

• Complaints procedure. Practices will need to ensure that advisers have proper procedures or mechanisms in place for handling complaints from you, the client.

• Level of independence. If an adviser is employed by an organisation that also supplies financial products, the adviser will not be able to call him- or herself independent, King said.

• Fees. Fees charged by the adviser, which must be negotiated with you, the client, must be commensurate with the work done, King said. This needs to be set out in a service level agreement, in accordance with upcoming changes to the code of conduct for advisers under the Financial Advisory and Intermediary Services Act, so that you, the client, know exactly what to expect. He cited a case in Australia (where RDR has already been implemented) in which the financial services industry had to repay 45 000 clients AUS$100 million in fees because they had not provided the services they had promised.

• Client-driven advice. Advisers must carry out a proper needs analysis, King said, no matter what products they are selling. Then the adviser must identify a product or strategy that matches those needs. Third, once a product or strategy is in place, the adviser must monitor how well it is working. For example, he said, if your adviser has created a share portfolio that is matched to your income needs, he or she must monitor your withdrawals from the portfolio to ensure the strategy is sustainable. Inaction is also action, King said – advisers can be held accountable for doing nothing when the situation demanded that they took action.

• Product replacement. This is one thing on which the regulator is taking a tough stand, King said. “It’s not just replacing the policy of one provider with that of another provider. It could be when you are replacing a unit trust portfolio with a share portfolio or vice versa. There will be a long list of things you will have to consider before you replace one product with another,” he told the advisers at the conference.

• Due diligence on products and suppliers. Your adviser needs to thoroughly research the products he or she is selling to you, and needs to justify why a certain company or product was selected.

• Conflicts of interest. “You might say you are not conflicted in your advice,” King told the delegates, “but the moment you get additional income from a product you are recommending, you are conflicted. Ask yourself whether you will gladly cancel the current product you have recommended and give your client another one. If your answer is no, you are probably conflicted.”

King’s underlying message to advisers was that they needed to rethink their value proposition to their clients, emphasising the human element and focusing on building long-term relationships based on trust.

martin.hesse@inl.co.za