Ensuring security in the independent financial advice space
Independent financial advisers plying their trade in South Africa have a number of challenges to overcome. To create a secure and stable financial services environment, brokers must first identify these challenges and then meet them head on. Ian Middleton, managing director of the country’s largest broker network, Masthead, presented his take on the “challenge and solution” debate at the Masthead professional development day held in Johannesburg recently. With more than 2, 600 independent brokers in the Masthead stable there are few better-positioned to comment!
Middleton’s first observation was that advisers and clients face similar environmental obstacles even though their objectives differ. The impact on local consumers through the recent recession is a case in point – consumers are pressed for cash and unable to fund new policies, while advisers struggle to write new business.
On time, money and regulation
One of the top challenges faced by advisers is to balance the “time and money” equation with the impact of regulation. “Advisers are making less money today and spending more time making it,” said Middleton. He quoted recent UK-based research to support of his observation: Over a 15-year period financial advisers in that country experienced an about turn in customer facing versus administrative tasks. In the past these advisers spent four days with clients and one day on admin, today it’s the other way around. It is unlikely this balance will change in coming years as advisers adapt their practices to accommodate additional regulatory and compliance requirements.
Post-recession South Africa will move to a so-called “twin peaks” model for the regulation of the financial services industry. The South African Reserve Bank will be in charge of prudential regulation (how large financial institutions behave) while the Financial Services Board (FSB) will take care of market conduct and consumer protection. “It will take a few years to implement, but the first steps are already in place,” said Middleton. Future changes to market conduct regulation will undoubtedly reflect the current consumer protection focus. “The intention and objective of regulation is to align South Africa with international standards – this alignment is not bad – if we align at macroeconomic, regulatory and policy level we are going to attract foreign investment,” he said. Where will the regulators begin?
The first salvo has already been fired with the proposed Treating Customers Fairly (TCF) regulation. Next steps could include a review of the advisory model. But Middleton – although conceding that the UK and Australian ban on investment product commission had set a precedent – dismissed threats to commission-based remuneration models as premature. The bottom line is that consumers are prepared to pay for good financial advice. And despite the perceptions raised around broker remuneration by the media and regulators, the client is quite happy for product providers to remunerate their adviser by way of commission, whether up front or ongoing. Going forward, industry stakeholders should focus on the value of financial advice rather than obsessing over costs and commissions. Financial advisers play a critical role in protecting their clients’ lifestyles by addressing their insurance and savings needs.
Unlocking the value of advice
A consumer can address their savings and investment requirements in one of three ways. They can adopt a do-it-yourself approach, go direct, or seek face to face advice. Seeking face to face advice is the only solution that guides the consumer through the investment minefield. “Our task is to help customers become aware of their needs and to deliver appropriate solutions in a face to face environment,” said Middleton. And there are dozens of surveys confirming that people with independent financial advisers are more likely to save (earlier and in more appropriate financial instruments) than those who go it alone.
It is high time for consumers, financial advisers and regulators to appreciate the value of the financial advice, given or received. “There is value in the advice we give,” said Middleton. “This value must be paid for – and customers have indicated their willingness to do so!” Is the current remuneration fair? A study conducted by the Actuarial Institute SA (approximately three years ago) concluded that adviser remuneration was not excessive for the service provided. The remuneration models haven’t changed much since, but the administrative and compliance load has definitely increased.
A “win / win” strategy is to engage rather than confront
As new issues come to the fore brokers will have to engage with regulators. “Masthead is about the survival of the independent broker and about assisting brokers to run successful businesses,” said Middleton. The group strives to meet with both National Treasury and the FSB each quarter and will continue to constructively engage the regulators rather than taking aggressive or confrontational positions.
Editor’s thoughts: Regulators often forget they wield a two-edge sword… They forget that with each complexity they introduced by way of regulation they chase more dedicated financial advisers from the industry. Have you thought about leaving the financial advice profession due to the mounting burden of compliance? Please add your comment below, or send it to [email protected]
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