New fi­nan­cial ad­vi­sory frame­work raises bar

The Star Early Edition - - OPINION & ANALYSIS - Iain Wil­liamson Iain Wil­liamson is man­ag­ing di­rec­tor of Old Mu­tual’s Re­tail Af­flu­ent di­vi­sion

ANEW frame­work for fi­nan­cial ad­vis­ers pro­vides for im­proved cus­tomer ser­vice and en­hanced com­pe­ti­tion that will un­doubt­edly boost the per­for­mance and sus­tain­abil­ity of the fi­nan­cial ser­vices sec­tor.

South Africa has a good, well-reg­u­lated fi­nan­cial ser­vices sec­tor, and the muchan­tic­i­pated, much-dis­cussed Re­tail Dis­tri­bu­tion Re­view (RDR) dis­cus­sion pa­per re­cently re­leased by the Fi­nan­cial Ser­vices Board (FSB) has out­lined some im­por­tant changes and op­por­tu­ni­ties for us. The RDR is sub­stan­tially based on that of the UK, but adapted for our mar­ket.

Chiefly, the RDR aims to deal with in­her­ent con­flicts of in­ter­est in the re­la­tion­ship be­tween prod­uct providers and fi­nan­cial ad­vis­ers (or in­ter­me­di­aries). It seeks to clar­ify the ser­vices that in­ter­me­di­aries pro­vide us­ing an ac­tiv­ity-based ap­proach. Ac­tiv­i­ties are to be sep­a­rated into three cat­e­gories – ser­vices pro­vided to cus­tomers (ad­vice), ser­vices pro­vided to prod­uct sup­pli­ers (out­sourced ser­vices) and ser­vices pro­vided to con­nect prod­uct sup­pli­ers and cus­tomers (in­ter­me­di­a­tion). It then pro­poses a fur­ther re­view of fi­nan­cial ad­vis­ers’ charg­ing and re­mu­ner­a­tion mod­els and their trans­parency.

A pri­mary out­come of the frame­work will be to ob­vi­ate the in­cen­tives of­fered to fi­nan­cial ad­vis­ers that in­tro­duce a con­flict of in­ter­est to their re­la­tion­ship with cus­tomers. In some cases this has, in the past, led ad­vis­ers to of­fer the prod­ucts most lu­cra­tive to them­selves (with com­mis­sion earn­ings) rather than those most ben­e­fi­cial to cus­tomers.

At the heart of the move from com­mis­sion-based to­wards fee-based re­mu­ner­a­tion lies a de­sire to pro­mote ap­pro­pri­ate, af­ford­able and fair ad­vice and ser­vices. It also aims to support a sus­tain­able business model for fi­nan­cial ad­vis­ers as a business with con­tin­u­ing fees is more sus­tain­able than one that re­lies mostly on up­front com­mis­sion.

This is very en­cour­ag­ing: the in­ter­na­tional ex­pe­ri­ence, es­pe­cially in the UK and Aus­tralia, is that such reg­u­la­tory shifts ben­e­fit all. It pro­motes the im­por­tant role of sound fi­nan­cial ad­vice by qual­i­fied ad­vis­ers which, in turn, means that cus­tomers stand to ben­e­fit from en­hanced

At heart of the move from com­mis­sion-based to­wards fee-based re­mu­ner­a­tion lies a de­sire to pro­mote ap­pro­pri­ate, af­ford­able and fair ad­vice and ser­vices.

pro­fes­sion­al­ism in the in­dus­try.

In South Africa, we face a huge task to en­cour­age in­di­vid­u­als to be­come more fi­nan­cially savvy and im­prove the coun­try’s sav­ings cul­ture.

The re­cently up­dated Old Mu­tual Sav­ings and In­vest­ment Mon­i­tor (Om­sim) found that most South Africans were aware of the im­por­tance of plan­ning for their fu­ture (80 per­cent of work­ing met­ro­pol­i­tan re­spon­dents want to learn how to save), but many haven’t trans­lated their aware­ness into ac­tion yet: about 30 per­cent haven’t seen a fi­nan­cial ad­viser and as many as 33 per­cent have made no for­mal pro­vi­sion for re­tire­ment.

It’s painfully clear that many Baby Boomers (born be­tween 1946 and 1964) face hard times and that their fam­i­lies will bear the brunt of that. Almost half (46 per­cent) of Baby Boomers be­lieve their chil­dren should care for them, and 63 per­cent of re­spon­dents (70 per­cent in black house­holds) ex­pect to support fam­ily mem­bers in the fu­ture. Th­ese statis­tics alone should in­di­cate just how im­por­tant pro­vid­ing ad­vice is. It is equally im­por­tant that con­sumer con­fi­dence in the ad­vice process is high.

The in­ter­na­tional ex­pe­ri­ence, both in the UK and Aus­tralia, is of an up­ward curve of stan­dards and ex­pec­ta­tions and we an­tic­i­pate that the pro­posed re­view by the FSB will help to drive that trend here.

There is no doubt that some step-changes are re­quired: in the short term, ad­viser firms that don’t have a healthy pro­por­tion of an­nu­ity in­come from cus­tomers may face cash flow chal­lenges as less up­front com­mis­sion will be payable un­der the new frame­work.

But there is prob­a­bly suf­fi­cient time to pre­pare and ad­just for this. Ad­vis­ers will need to ex­am­ine their business mix and ra­tio of up­front-ver­sus-trail in­come, and to man­age the tran­si­tion to earn­ing more an­nu­ity in­come in the form of ad­vice fees.

Ad­vis­ers will also need to as­sess very care­fully their value of­fer­ing to cus­tomers, and an­a­lyse their com­pet­i­tive ad­van­tages in a fee-based en­vi­ron­ment.

Ad­viser firms will need to es­tab­lish whether they want to of­fer tiered ser­vice-lev­els at dif­fer­ent price points. Those that opt to do so will need to of­fer cus­tomers at­trac­tive choices and ar­tic­u­late those choices clearly.

From ex­pe­ri­ence in the UK, we have learnt that one out­come of the re­view is that con­sumers will be more aware of fi­nan­cial ad­vice as a ser­vice in its own right, rather than as some­thing that ap­pears free be­cause it is at­tached to a prod­uct pur­chase. There­fore, fi­nan­cial ad­vis­ers need to of­fer longterm ben­e­fits and adapt the way they pro­mote ser­vices to en­sure the value they de­liver to cus­tomers is clear. All in all, this means that fi­nan­cial ad­vice is now recog­nised as a valu­able ser­vice worth pay­ing for.

Ad­just­ing to the new en­vi­ron­ment will pro­vide a com­pet­i­tive ad­van­tage for pro­fes­sion­als and an in­crease in de­mand for their ser­vices. Again, the in­ter­na­tional ex­pe­ri­ence is in­struc­tive: in Aus­tralia, fi­nan­cial ad­vis­ers are the most re­spected pro­fes­sion­als after doc­tors and den­tists (source: The As­so­ci­a­tion of Fi­nan­cial Ad­vis­ers in Aus­tralia). We could achieve the same level of cred­i­bil­ity in our coun­try.

What­ever the fi­nal for­mat of RDR, the ma­jor changes ahead for the fi­nan­cial ser­vices in­dus­try will have long-term ben­e­fits for the sec­tor and all its stake­hold­ers. For in­di­vid­ual ad­vis­ers the chal­lenge is to embrace the change and turn it into an ad­van­tage.

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