The implementation of the Retail Distribution Review is fast approaching; and yet, the intermediary market is far from the position of clarity that it hoped the Financial Services Board (FSB) would have provided them.
We have heard rumours coming from the desk of the regulator about what RDR could look like. However, building a business model based on assumptions is a dangerous business. And it is your greatest asset that is at stake, the ability to earn an income.
Michelle DuBois, Senior Manager: Financial Risk Management at KPMG, says that we will see a vastly changed industry. “Far from a tick box exercise, the RDR will have a profound impact on product development, innovation and systems. This will provide business with an opportunity to reassess their distribution models, product design, IT systems and general business capability.”
The future of the intermediary
In an article within the 2016 KPMG Insurance Survey, DuBois spoke candidly about the future of the intermediary. It can be summed up in one sentiment: high risk will bring high reward.
“It’s a whole new world out there for the intermediary who is willing to evolve his/her practice. Many intermediaries will tell how they have spent years perfecting their sales skills. However, no longer content with a compelling sales technique, the intermediary of the future needs to create and, more importantly, constantly validate a value proposition that is beyond fault,” says DuBois.
She adds that rumour has it that the far reaching changes proposed by the RDR will see intermediary numbers drop significantly, that clients will be reluctant to embrace the concept of advice fees and will thus go direct for their insurance needs, contributing to the increasing advice gap.
“With every risk, however, is an opportunity and for the intermediary who is willing to evolve his/her business, the future has never been brighter. Perhaps the words of Socrates ring true: The secret to change is to focus all of your energy not on fighting the old, but on building the new,” says DuBois.
A troubled relationship
DuBois points out that the advisory relationship is complex and demanding. Based heavily on trust and reputation, the decision to engage the adviser’s services are reliant on emotive factors as well as historical performance, recommendations from other professionals and qualifications.
“Clients will question whether a financial adviser really understands their needs, as well as demanding a differentiated service that cannot simply be obtained online or via a call centre,” says DuBois.
She goes on to say that added to this subjective assessment is the fact that intermediaries are unwittingly competing against the newest player in the market – the robo-adviser.
“Sounding slick and sophisticated with a compelling futuristic title, the robo-adviser is a sales process driven by an automated web of decision trees,” she says.
The intermediary needs to fight against these two opposing forces to build a unique product/service offering that clients will gravitate towards.
Money’s to tight to mention
DuBois quotes Brian Foster, founder of Brian Foster Coaching & Consulting who said: The problem for advisers is that this isn’t really a regulation problem, it’s a business model problem. RDR raises a key two-part question: how do wepersuade clients to pay for advice, and how do we make itprofitable?
“The opportunity to critically assess the currentoperating model provides the ideal occasion to determinethe success factors for a sustainable practice. This iswhere the value proposition becomes critical: what are weselling, who are we selling it to and at what price?” asks DuBois.
Moving from a commission-based model to a fee-based model comes with its own set of complications and cash flow is only one of them. Having that initial conversation with a client can be awkward and requires a solid belief in skill, professionalism and value proposition. A fee based model can have the upside of mitigating the risk of commission claw backs and reducing the possibility of clients not taking up the product recommended after the time has been spent researching and completing the financial needs analysis. Advisers who choose to embrace this model sooner rather than later will be more likely to transition successfully.
“It is estimated that cash flow challenges accounted for as much as 11% of the reduction in financial adviser numbers in the UK post implementation of RDR changes,” says DuBois.
Editor’s Thoughts:
Finding a place in this world is not an easy task. You have worked hard your whole life to come to this point only to be told that you need to reinvent yourself. But for those who are prepared to take the risk, the rewards are high as there will always be a demand for intermediaries in the market. Human interaction will never become extinct. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Comments
Added by Paul, 24 Aug 2016Product suppliers need to be part of this fee channel to enable advisers to charge their fees in a clear and transparent manner through the provider, that enables the client to understand what they are actually paying a fee for,its composition, as well as how much a commission would have actually cost them,I would suggest a rationale be included simply reflecting the difference between paying a fee and a commission and allowing the client to make an informed decision as to which method they would prefer.
At the moment it appears that the only way is the FSB's way or the highway.
This is not fair to either the intermediary or the client.Particularly when taking into account the spectacular(and admitted) failure's of FSA;s in other countries
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I have done a few test cases charging fees of approximately R12000 in total. I have received detailed replies as to why the clients should not pay and not one cent!! Report Abuse
I for one have put brakes on all big purchases, have not replaced staff,stopped furthering my studies in this industry and am considering moving abroad to the UK where this RDR Experiment is at a more advanced stage.I paid the price 21 years ago and am not going to pay the price again for the next 8 years as witnessed in the UK.FSB dont care as they are still getting their monthly salaries but what will happen as Brokers decrease....up their fees probably. Report Abuse