Are South Africans ready to pay for financial advice?
• “Expect a major shake-up in the SA retail investment market.” • “Advisors will have to negotiate a fee for their advice with customers.” • “Industry’s attempt to increase disclosure have failed.”
Rachelle Best, associate director and regulatory change lead at PricewaterhouseCoopers (PWC) addressed the Momentum Investment Summit in Cape Town on 12 November, on PWC’s consumer behaviour research into South Africa’s impending Retail Distribution Review (RDR) and its influence on consumer behaviour.
Best expects a major shake-up in the SA retail investment market when RDR rules come into force in 2016. As product providers may not incentivise advisers to sell their products, advisers will have to negotiate a fee for their advice with customers.
For the research, PWC conducted 3 000 online surveys with people who had used a financial adviser, as well as 400 face-to-face interviews with people from lower-income market segments.
Best said that what customers expect from an adviser after the implementation of RDR is the same as before. They want someone who understands their financial needs, helps them make the correct financial decisions, chooses an appropriate financial solution and provides an ongoing service.
PWC’s research shows customers are unclear about whether they pay an adviser and how much they are paying, meaning industry’s attempt to increase disclosure has failed to fix the problem.
According to Best, a key challenge is determining whether customers value branding or independence and accountability. Customers must choose whether they prefer the services of a tied broker, where the brand has ultimate accountability or independent advice for which the independent financial adviser (IFA) is accountable?
RDR will result in a decline of traditional business for IFA’s, as the mid- and lower-income levels may be perceived as unable to pay for advice. There will be strong demand for advice from the high-net-worth segment of the market and many IFA’s are expected to gravitate to this sector, which will become increasingly crowded and competitive. Product providers will have to rethink their distribution models to ensure all segments of the market are adequately served.
Survey respondents were unsure whether they should pay for advice. Customers did not know IFAs needed a qualification, but were prepared to pay more if there was perceived value. Asked whether adviser fees should be in line with a plumber, doctor or specialist, most indicated remuneration somewhere between a doctor and a specialist.
Like all successful businesses, Best believes IFAs should cultivate a reputable brand, product supplier influence, a broad offering, expertise and ongoing advice as part of their customer value proposition. Post-RDR, IFAs will need to present themselves as professionals.
Best gave a snapshot of the effect of RDR in the UK. RDR appears to profit advisers, as the overall cost of advice increased by between 0.5% and 1% for ongoing professional advice compared to between 0.5% and 0.75% pre-RDR paid in trail commissions. Once-off advice charges post-RDR appear to be in line with pre-RDR initial commissions.
UK statistics show that the profit before tax of financial advice firms increased by 20%, while the average profit per adviser increased by 36% post-RDR.
However, there was a 23% decrease in the number of advisers from 2011 to 2014, as the proportion of the population who sought advice declined from 25% in 2008 to 13% in 2012. It is worrying that post-RDR, 45% of people chose not to have advice compared to only 25% in 2010.
The direct-to-client market took up some of this slack, increasing their assets under management from £94.3 billion in 2012 to £116.5 billion in September 2013 – a 24% increase in one year.
RDR puts pressure on margins for product providers. Pre-RDR, providers could earn a total of 2.25% across the end-to-end value chain. This reduces to between 1.4% and 1.8% post-RDR. On the upside, the decrease in total charges to the customer somewhat balances out increased adviser fees.
Best advised IFAs to understand customers’ current perception of advice. To develop an advice proposition that customers will value and be prepared to pay for, advisers must understand their customers, which aspects of advice they value and what they are willing to pay.
