A NEW 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 much-anticipated, 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 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 long-term 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.
Iain Williamson is managing director of Old Mutual’s Retail Affluent division