A highly regulated financial services environment will drive professionalism
The Financial Advisory and Intermediary Services (FAIS) Act has increased tenfold the administration burden on financial advisory businesses. In order to offer financial advice in 21st Century South Africa you must have a comprehensive compliance and risk
Against this backdrop FAnews partnered with the Institute of Practice Management (IPM) and the Financial Planners Institute (FPI) to conduct an extensive survey of financial advisory businesses and intermediaries. The survey aims to better understand the impact of compliance costs on domestic financial services providers. After months of number crunching the 2012 Cost of Financial Advisory Business Compliance SA survey results are finally in!
Thanks for your valuable contribution
Before we continue with the first of our newsletter instalments on the survey findings there are some administrative matters to take care of. I would like to extend a word of thanks to the survey sponsors as well as the 562 brokers who took the time to complete the extensive 27-question set. Our thanks also go out to the IPM for compiling the questions and collating the results – to FAnews and the FPI for distributing the survey – and to Hugo Snyman of Third Circle Asset Management for providing prizes as incentives to brokers to complete the survey. Congratulations also to the following brokers, who won prizes in the lucky draw:
· Rashida Bawa won a Tom Tom navigation device, sponsored by FAnews;
· Brett Nel won a CleverEdge smart pen, sponsored by Third Circle; and
· Ronel Roeloffze won a CleverEdge smart pen, again sponsored by Third Circle
The makings of a compliance survey
The 2012 Cost of Financial Advisory Business Compliance SA was conducted in February 2012 to determine the compliance cost associated with providing financial advisory services in South Africa. In his introduction to the survey findings, Johan Maree of the IPM writes: “The study was prompted by growing concerns that the legislative framework is placing an excessive cost burden on financial advisory practices”. As such the survey is among the first attempt to determine exactly how much compliance is costing financial advisers.
For the purposes of this study the “compliance costs” are defined as the direct cost to financial advisory businesses associated with performing tasks to comply with government legislation. Survey responses were limited to those in the industry who were business owners, representatives and key individuals in the South African financial services industry or any person with a Category 1, II, IIA, or IV licence. Of the 560-odd respondents 230 (41%) indicated that they were business owners, 140 (25%) were representatives and 180 (32%) key individuals. Based on the survey outcomes there is more than enough evidence to support that compliance costs are becoming too much of a burden, particularly for smaller advisory businesses.
Based on the survey results the Regulatory Examinations (RE) alone are estimated to cost the industry in the region of R1.28 billion! And a conservative calculation suggests that each independent financial advisory business incurs compliance costs totalling R188658 per year! “A typical one year Continuous Professional Development (CPD) cycle for all Representatives and Key Individuals could cost the financial services industry more than R120m per year,” says Maree. He concludes that the rising cost of compliance is threatening the livelihood of small, independent financial adviser businesses.
Meeting increased compliance with professionalism
In this, the first in a series of newsletter on the survey’s key findings the link between compliance and professionalism (or education if you prefer) is placed under the spotlight. Both RE and the pending CPD requirement have already had a major impact on the financial advisory space. The study found that while financial advisers have a wealth of industry experience they seldom have financial planning qualifications to back this up.
A staggering 92% of respondents had not furthered their education in their chosen careers. This is of significant concern due to the link between professionalism and the requirement for on-going education. “Passing RE is not considered a professional qualification and will definitely not make financial advisers professional overnight,” notes the survey. It adds that advisers who wish to transition to a fee-based model will struggle without a professional qualification.
Going back to May 2007 – when the late FAIS Ombud, Charles Pillai, addressed the FPI convention – a concise list of requirements for professionalism in the financial advice space emerged. Pillai said that in order for an adviser to regard him / herself as a professional, the following had to be in place:
· A specialised and well-defined body of knowledge;
· Membership of a professional association;
· Members must be devoted to public service;
· Members must embrace a Code of Ethics;
· The status of the association must be recognised by the community it serves; and
· The association must be the spokesperson of the profession.
Making professional development a life-long challenge
The bottom line is that qualifications, standards and continuous professional development delivers tangible pay offs to financial advisers, their employers and individual investors. For financial professionals, it is about positioning strategically for success. And for financial institutions and their clients, the return on investment is the integrity of the financial markets, improved industry reputation and consumer trust.
With regards professionalism, the survey concludes: “Those who do not make inroads to professionalising their total value proposition to their clients will begin feeling the pinch in a fee-for-service environment where knowledge and professionalism will dictate the quantum of fee charged for the work that is done”.
Editor’s thoughts: The 2012 Cost of Financial Advisory Business Compliance SA survey suggests that financial advisers with professional financial planning qualifications earn more than unqualified advisers. And international studies back up this fact! Do you agree that rising compliance costs and the shift to a fee-for-service model will drive professionalism in the financial advisory environment? Please add your comment below, or send it to gareth@fanews.co.za
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