FSB takes aim at ad­viser in­cen­tives that harm you

The fi­nan­cial ser­vices in­dus­try reg­u­la­tor is concerned that you, the con­sumer of fi­nan­cial prod­ucts, are be­ing made to switch prod­ucts for the wrong rea­sons. As a re­sult, it is clamp­ing down on prod­uct providers that place their own fi­nan­cial in­ter­ests ab

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

Fi­nan­cial ser­vices com­pa­nies that of­fer fi­nan­cial ad­vis­ers sig­nif­i­cant cash lump sums, of­ten in the mil­lions of rands, and other in­cen­tives, such as share op­tions, to switch em­ploy­ers, of­ten to the detri­ment of con­sumers, are in the fir­ing line of the reg­u­la­tor, the Fi­nan­cial Ser­vices Board (FSB).

The FSB’s re­cently pub­lished draft reg­u­la­tions aim to strictly con­trol con­flict-of-in­ter­est sit­u­a­tions where the in­ter­ests of con­sumers are placed be­low those of, for ex­am­ple, fi­nan­cial prod­uct providers and their sales forces.

The reg­u­la­tions are due to be par­tially im­ple­mented in Oc­to­ber this year, with the full force of the reg­u­la­tions in place by April next year. But Gerry An­der­son, FSB deputy ex­ec­u­tive in charge of mar­ket con­duct, warns that even now fi­nan­cial ad­vis­ers should tread wearily, be­cause the fi­nan­cial ad­vice om­bud will take the pay­ment of in­cen­tives into ac­count when mak­ing de­ter­mi­na­tions on ad­vice is­sues.

In­cen­tive pack­ages for in­de­pen­dent ad­vis­ers and rep­re­sen­ta­tives of­ten come with tough sales tar­gets that are seen as a ma­jor cause of the prod­uct-switch­ing (known in the in­dus­try as “churn”) scourge un­der­min­ing the wealth of in­di­vid­u­als.

If you switch in­vest­ment prod­ucts, you have to pay both dis­in­vest­ment and rein­vest­ment fees, while on risk life as­sur­ance prod­ucts you may be moved into prod­ucts that, over the long term, could be to your detri­ment.

The main ben­e­fi­cia­ries of the un­ac­cept­able churn­ing of prod­ucts are com­mis­sion-earn­ing ad­vis­ers and the prod­uct providers that gain from the switch.

The FSB has warned that the prac­tice of set­ting sales tar­gets with­out qual­ity ob­jec­tives will be banned from April next year with the im­ple­men­ta­tion of pro­posed con­flict-of-in­ter­est amend­ments to the code of con­duct of the Fi­nan­cial Ad­vi­sory and In­ter me­di­ary Ser­vices (FAIS) Act.

The FSB is concerned that the sign-on in­cen­tives are one of the fac­tors driv­ing the high level of prod­uct chur n in the fi­nan­cial ser­vices in­dus­try.

The FSB is also concerned that a large vol­ume of the churn­ing is now oc­cur­ring with risk as­sur­ance prod­ucts be­cause of changes to com­mis­sion struc­tures for life as­sur­ance in­vest­ment prod­ucts. From Jan­uary 1 last year, the com­mis­sion on life as­sur­ance in­vest­ment prod­ucts was re­duced from 100 per­cent paid in the first two years to 50 per­cent paid up­front and the bal­ance paid as and when premi­ums are paid.

The reg­u­la­tions, how­ever, do not af­fect risk prod­ucts. In­dus­try fig­ures now in­di­cate that most of the churn­ing has switched to risk life as­sur­ance, be­cause ad­vis­ers can make a big­ger killing.

Com­mis­sions are paid up­front within the first two years and are of­ten equiv­a­lent to more than the to­tal amount you pay in premi­ums over the first year. Af­ter two years, there are no penal­ties for the ad­viser if the pol­icy is can­celled, and the whole process can be re­peated. So com­mis­sions are paid on premi­ums for many years into the fu­ture that will never be col­lected, leav­ing life as­sur­ance com­pa­nies ex­posed to fi­nan­cial risk over time.

Jonathan Dixon, the FSB deputy chief ex­ec­u­tive in charge of in­surance, says the FSB is now re­view­ing the up­front com­mis­sion rules that ap­ply to risk life as­sur­ance be­cause of the dangers of sys­temic threats to the in­dus­try. The costs could even­tu­ally re­sult in premi­ums es­ca­lat­ing, as life as­sur­ers at­tempt to pro­tect them­selves from the losses.


The prac­tice of lur­ing agents with sig­nif­i­cant sign-on in­cen­tives was started by Dis­cov­ery Life af­ter it launched in Oc­to­ber 2000, and par­tic­u­larly af­ter it en­tered the in­vest­ment mar­ket three years ago. But Dis­cov­ery de­nies that, at any stage, it at­tached sales tar­gets to these sign-on pack­ages.

Dis­cov­ery Life did not have its own sales force when it launched, so it has been us­ing a wide range of sign-on in­cen­tives, in­clud­ing cash pay­ments, share op­tions and loans against com­mis­sions yet to be ear ned, to poach ad­vis­ers from other com­pa­nies.

How­ever, Mo­men­tum, which has re­sorted to us­ing the same tac­tics to re­cruit trained sales staff, has a di­rect link be­tween the sign-on in­cen­tives and tough sales tar­gets, with staff who do not meet their tar­gets hav­ing to re­pay the money.

The vic­tim com­pa­nies claim that the com­pa­nies us­ing these sign-on pack­ages are stim­u­lat­ing the churn­ing of prod­ucts, be­cause sales tar­gets are ag­gres­sive.

Suzanne Stevens, Dis­cov­ery’s cor­po­rate com­mu­ni­ca­tions man­ager, says Dis­cov­ery does not make any bonuses con­tin­gent on ag­gres­sive sales tar­gets. Dis­cov­ery will only em­ploy rep­re­sen­ta­tives who meet Dis­cov­ery’s min­i­mum per­for­mance re­quire­ments for pro­duc­tiv­ity, min­i­mum ed­u­ca­tion stan­dards, com­pli­ance re­quire­ments, con­tin­u­ing pro­fes­sional devel­op­ment and a re­quire­ment to sign a code of con­duct. She says the sign-on amounts are less than the amount the ad­viser would have earned in fu­ture com­mis­sions. The fu­ture share op­tions are, how­ever, linked to sales.

Stevens says that when churn­ing does take place it is in the best in­ter­ests of the pol­i­cy­holder.

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