At the recently held Momentum Consult “It’s a Mindshift” conference, it was clear that financial advisors and planners were worried about the implications of RDR on their businesses, but they were reassured that support would be available to them both from the FSB, as well as Momentum Consult. Addressing the advisors and planners, Brian Foster, co-founder of Beyond RDR, discussed his views on RDR, explaining how to set up one’s business post RDR. “From the industrial revolution to the digital age, we have seen the world transform, and we all need to implement necessary changes in order to satisfy the consumer’s changing needs,” said Foster.
In most countries, the financial industry is more regulated and supervised than other industries. On systemic and consumer protection grounds alone, it is almost universally accepted that this should be so, and South Africa is no exception. Currently, the South African regulatory environment is in flux, and a lot of new regulations are being put in place; many of which are directed towards treating customers fairly and ensuring fair remuneration for financial advisors and planners. The current financial environment has too many risks that impact customers, overall sustainability and effective supervision. Below are some of the issues facing the financial industry as outlined by the Financial Services Board (FSB):
1. Risks to fair customer outcomes:
• Inherent conflicts of interest in commission and / or fees from product provider
• Accountability for quality of advice and customer outcomes not always clear
2. Risks to intermediary sustainability:
• Financial advisors not always properly remunerated for advice
• Value of financial advisor’s services not properly recognised
• Up-front commission not a sustainable business model
• Inappropriate incentive structures expose intermediaries to regulatory risk
3. Risks to effective supervision:
• Imbalances in product supplier and intermediary responsibilities.
To address these issues, several legislations have been proposed by the FSB, one being the Retail Distribution Review (RDR), which was published in November 2014. The FSB published the RDR document against the background of the Treating Customers Fairly approach to regulating conduct of business in financial services, the document proposed reforms to the regulatory framework for distributing financial products to customers. As with any change in legislation, financial services providers will have to adapt to and change ways in which they do business to comply with new requirements. The RDR put forward a total of 55 specific regulatory proposals, to be implemented in phases, under three main headings: services provided by intermediaries, product supplier and intermediary relationships, and remuneration.
Discussing the evolution of financial planning, Foster touched on the different models that each evolution followed and highlighted the issues that arose from each one. For instance, brokers sell products and solutions offered by other suppliers, giving their advice away for free; leaving them with no business value. The investment advisor is still selling other firms’ investments, dealing with price pressures from the new Robo advice systems. Pass this stage, it doesn’t look too bad. Next is the financial planner who has a product (financial plan) and receives rewards in the form of recurring fees, but it is still expensive to deliver and the process takes far too long.
Evolving from the financial planner is the lifestyle financial planner who gives advice and separately acts as an intermediary. The issue here is that this requires a 180 degree thinking, re-training and acceptance of more intimate conversations. But how do we persuade clients to pay for advice? Can this new business model be profitable? Yes, says Foster. Listening attentively, the crowd of financial advisors and planners learned Foster’s six steps to creating a successful business post-RDR:
1. Profile – The first step is profiling your clients. Many firms do not realise that over 80 percent of their profit is generated by only 30 percent of their client base. It is then easy to see that servicing all clients the same way will not work.
2. Promise – 70 percent of companies don’t have a written proposition that they give to clients. If you don’t know what your clients find valuable, then how do you know that you may be doing too much or too little?
3. Pricing – 80 percent of companies don’t know how much it costs to deliver their service. Pricing is incredibly important when setting up your practice, evaluating costs of service is directly linked to the value that clients place on your service.
4. Pitch – How you pitch yourself to potential clients is imperative. A vast number of planners and advisors don’t know their position and cannot define what they do. What you need to define is who you want as clients, what sort of business or product you provide, what value this will give your clients, and what the cost for that value is.
5. Partnerships - You need to understand that your clients and their money have a long journey ahead of them, and you need to be there for them, as a partner.
6. Profitability – The first question you need to ask is, what is your product? If you don’t know your product, then what are you charging for? Again, it is important to understand the perceived value of your product or service.
“For financial advisors, RDR is a business model problem, not a regulation problem. Once you know and understand the intricacies of the new regulations, you will be able to establish a successful business post RDR, keeping in mind that the FSB will be available for advice and guidance to ensure that financial advisors and planners are able to remain successful in their businesses,” concluded Foster.