RDR puts client needs to the fore
CLARITY: NEW CLIENT-FINANCIAL ADVISOR RELATIONSHIP Retail Distribution Review will create a separation of services and products, with more transparency in what clients would like to buy and will be paying.
South Africans should take a moment to understand Retail Distribution Review (RDR) – a significant development that will change the client-financial advisor relationship.
Financial advisors are regarded as expensive; some consumers don’t feel they’re treated fairly and often don’t understand what they’re buying or paying for, says Lizl Budhram, head of advice at Old Mutual Personal Finance.
RDR’s purpose is to create better clarity; allow consumers to be better informed; and remove conflicts of interest inherent in the way advice is given. The systemic use of commissions has meant advisors were essentially paid by product providers – insurers and asset managers. However, advisors should be serving clients, not the companies whose products they’re selling. As Financial Services Board (FSB) market conduct strategy advisor Leanne Jackson explains, reviewing this model is necessary to foreground clients’ needs.
RDR must also change the way people think about their advisors. Many professionals market their advice as “free”, since it’s included in the cost of the product. But that diminishes what advisors do.
“One of the concerns of the current framework is that it disguises the value of really good advice,” says Jackson. “Good advisors should be in a position to demonstrate value and sell that value.”
“Because the industry has trained advisors and incentivised them through the commission model, the conversations clients tend to have with advisors are about products,” says Brian Foster, financial planner and co-founder of consulting firm Beyond RDR, adding that products aren’t always necessary all of the time.
As such, conversations between advisors and clients have been mostly transactional, so clients only see value in the product and not in the planning relationship.
“The problem is that financial advisors are currently only being paid for the least valuable part of the process. They are giving away all of their value in terms of the planning conversations that they should be having with people, and which the public generally wants to have, because financial advisors have never had to be paid for that before.
“Clients need to recognise that this is where the value really is, and be prepared to pay for it, and advisors need to get better at showing people the difference that good financial planning makes to their lives.”
These are discussions about what clients want from life and how to plan for it.
Also, RDR will create a separation of services and products, with more transparency in what clients would like to buy and will be paying, says Budhram. “Generally advisors need to have much more transparent conversations to explain what is the initial service they are offering, what is the ongoing service, and what is the cost. That in turn puts the consumer in a position where they can choose what they want to buy.”
This transparency must lead to better outcomes.
“Customers must also … [understand] what the impact of those fees will be on their investment,” says Jackson. “And they must be comfortable that what they are getting from their advisor is worth the cost.”