RDR: creating an advantage for low-income earners

The Financial Services Board (FSB) released the Retail Distribution Review (RDR) with the intent to protect retail financial services customers, particularly those in the lower-end of the market, by ensuring that they are treated fairly by their financial advisors.

Critical to the success of the RDR is an understanding of how the lower-end of the market will be affected by certain new initiatives. By taking steps to ensure that the initiatives take the lower-income bracket into account, the RDR will offer better protection for customers during the distribution process.

Customers will now be able to understand the relationship between the advisor selling an investment or insurance policy, and the service provider. This is essential since an advisor who is closely linked to a provider often presents a conflict of interest for the consumer. This may result in the advisor’s advice being skewed, or not in customer’s best interests.

Released in November 2014, the RDR proposes that financial advisors disclose the nature of their relationship with product providers; either tied (to one provider), multi-tied (to many providers), or independent. This aims to assist consumers in assessing whether an advisor could potentially be influenced by product providers, or whether they offer truly independent financial advice.

The RDR will also create more transparency around costing structures, which are sometimes hidden.

In 2013, when advisors in the UK found their commissions from the sale of investment and long-term insurance products stripped away, an inadvertent “advice gap” emerged within their lower-income consumer market. Advisors had started migrating their business towards higher-income earners who did not mind paying for their investment advice. This is a scenario that the FSB does not want repeated in South Africa.

The RDR therefore recommends that commission still be charged on investment products aimed at the lower-end of the South African market as well. This supports the financial inclusion imperative of the National Treasury that gives everyone access to financial services, and encourages South Africans to save.

Another development alongside the RDR is the introduction of tax-free investment products for which intermediaries can charge commission, similar to Individual Savings Accounts (ISAs) in the UK. Since the RDR allows for commission to be earned on sales of these products, brokers and advisors will be incentivised to sell them, and they should grow in popularity.

Although customers may now be more aware of the cost of receiving financial advice, by including these measures the cost structures of products will be far more transparent and equitable - hopefully resulting in a market that is viewed by consumers as being fair, thereby contributing to the sustainability of advisor practises and improving savings rates in South Africa.