RDR: the road to sustainability

Ian Middleton, managing director of Masthead.

While the financial reforms proposed by the Financial Services Board (FSB) in its RDR discussion paper aim to achieve better outcomes for the consumer, the changes will also direct financial advice businesses onto the road to sustainability.

The FSB’s reforms will help build consumer confidence and trust in the financial services industry through greater disclosure and transparency. Furthermore, the FSB’s proposals are consistent with National Treasury’s policy objectives of a stable financial services sector and the promotion of affordable access for South Africans to financial advice and products. This is a positive environment for advisors.

In an RDR environment, customers will be able to better understand and compare the nature, value and cost of advice and other services that financial advisors provide. They will know exactly with whom they are dealing, as they will know the status of an advisor. They will know what they are paying and for what. They will be in charge of the advice fees and have the power to redirect these.

The reforms will therefore serve as a catalyst for advisors to put the right processes in place and modify their value proposition to achieve and maintain business sustainability in an environment where commission is not the main source of remuneration. This is by far a more desirable situation for financial advice businesses.

Advisors who currently rely on commission-based income will need to think about how their businesses are set up, the product providers they support, their fees and on what basis they charge fees. They will need to revisit their offering and ensure consumers are easily able to identify the value they add, as this makes it easier to justify charging a fee for their services.

In an RDR environment, advice businesses will not be the only businesses to effect changes. Product providers will need to review their own business models and way to market. In the context of fair outcomes to customers, a greater responsibility will be expected of product providers regarding the advice and/or product sales of advisors who are seen as independent.

The FSB’s discussion paper has been a long time coming, but it is in line with expectations. We support the objectives of RDR and the rationale for the changes. Furthermore, we are happy to have a clearer view of the future, as this gives more certainty and the ability to plan.

Masthead will be providing feedback on the paper to the FSB by early March. At this stage we see some anomalies and, in some cases, a one-size-fits-all approach is assumed. Details, especially pertaining to some adverse and/or unintended consequences, need to be debated, both in relation to some of the proposals and the mechanisms that will be put in place to ensure adherence to the final proposals.

We believe part of the success of RDR will depend on the balance between a rules driven and a principle driven approach to implementing the proposals. If the proposals are properly policed and contraventions swiftly and appropriately sanctioned, we think the chances of achieving the goals outlined in the paper will be significantly improved.

Masthead is encouraged by and has faith in the consultation process, and trusts there will be a sufficient phase-in period to enable advisors to implement changes in ways that will help to build sustainable businesses.

Meanwhile, Masthead is assisting advisors to make the transition to a post-RDR environment. We are helping them to establish a value proposition and sustainable business model that is based on alternatives to commission. Reducing dependence on commission now will make it easier when the reforms are legislated.

As an industry, and in the build-up to a fee-based world, we should all be publicly promoting financial advice and its benefits. We look forward to working with our customers and the FSB in a way that maximises the chance of achieving the objectives of RDR and ensuring solid advice to customers.