Legislation to create clarity
The broader financial services sector has experienced an unprecedented period of regulatory reform.
Wealth managers are also dealing with the implications following the initiation by the Financial Sector Conduct Authority (FSCA) of the Retail Distribution Review (RDR).
The RDR seeks to address various market conduct elements, such as how financial advice is provided and remunerated, and how financial products are sold to ensure the fair treatment of customers.
“We welcome a clearer demarcation of roles, services and commensurate costs in the broader wealth management industry,” says Mike Wilmot, head of advice at Nedbank Private Wealth.
“RDR legislation intends to clear up confusion around responsibilities and remuneration for performing specific tasks within the wealth management value chain. The legislation also aims to simplify the product and price discovery process by clearly defining what is offered from an advice versus an investment management perspective. This will ensure that clients understand what they are paying for and to whom, and more clearly demonstrates the comparative value they are receiving.”
In terms of fee demarcation, the RDR seeks to align remuneration with stricter service level agreements and advice fees that have been negotiated with clients, while also limiting what can be charged for when providing financial products and advice, with restrictions and capping proposed on commissions.
“This is an important development for the industry, as fees associated with managing a client’s investments is the biggest detractor from long-term performance,” says James Arnold, wealth manager at FNB Wealth and Investments.
“Accordingly, this new legislation aims to create a more consultative environment, where clients will gain a better understanding of the costs. It better highlights the options and choices available to individuals on their wealth journey.”
These legislated changes will force many financial services providers to overhaul their internal processes and address various operational inefficiencies, some of which may have unnecessarily increased pass-through costs to customers in the past.
To achieve this objective, many financial institutions are investing significantly in digital transformation initiatives to help streamline processes and create seamless operations.