In the light of another round of commission reductions, this time with regard to RA and endowment products, we wish to voice our concern regarding some potential but possiblyunforeseen results of this well-meaning legislation.
We have already witnessed the fairly common phenomenon of independent intermediaries joining practices and consolidating administrative and other functions such as compliance and financial software in order to make ends meet. The situation has been compounded by other commission reductions in recent years making an already challenging situation impossible for many independent intermediaries.
Another consequence of an increasingly negative cost to income ratio has been the “tying” of some groups of brokers to a single product provider, in return for assistance with the above-mentioned costs. While this is an advance on leaving brokers to carry the cost of legislation by themselves, a clear consequence of these arrangements is a possible loss of independence and “churning”. This is clearly because it is only possible to have these arrangements with a single product provider and they usually require a percentage loyalty to this provider. These are outcomes which FAIS specifically seeks to avoid.
As such, a brokerage is often faced with the stark choice: Lose a degree of independence or go under. There are very few alternatives. Critics may argue that a fee-based practice will offer such an alternative, but in reality it is well understood that relatively few clients are prepared, or indeed, in a position to pay a professional consulting fee for financial advice.
We suggest that a potential solution to the problem of ever increasing costs arising from factors such as legislation is to allow groups of intermediaries to pursue the kind of arrangement mentioned above, but with more than one supplier as is currently done in the United Kingdom. This would encourage the objective and independent advice as envisaged by FAIS & avoid the possibility of “churning” while allowing intermediaries to maintain a compliant and professional practice, an essential but costly exercise. It is vital that we continue to provide the consumer with independent, unbiased as financial products become increasingly more complex.
The alternative is to see the demise of yet more independent intermediaries and the domination of the market place by product providers’ agents all peddling their particular product.
As mentioned by us in a previously published article with regards to the changing commission structures for medical aid intermediaries, this leaves the consumer with no recourse to an independent evaluation of the available products. It obviously also means that those product providers with huge marketing budgets and large sales forces will dominate the market, regardless of whether their product is necessarily the most cost effective and suitable solution for a consumer.
It is critical that every effort is made to encourage independent advice and forcing intermediaries to tie themselves to one product provider in order to survive is not the way to do it.
We look forward to your response.
TA Jones
Mainsail Financial Services
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