Facing up to the realities of retirement
Some good advice
On 17 June 2008 FAnews Online attended the Masthead Professional Development Day held at the CSIR Conference Centre in Pretoria. During the course of the morning a number of product suppliers presented topics which would benefit the financial intermediary audience in attendance.
In today’s newsletter we’ll focus on the opening address by Masthead which took a look at how to address industry challenges and adapt a practice to accommodate major broker concerns. Masthead identifies the most important areas for the financial intermediary as money, risk and business models. They said these tie in with the areas identified during a survey of their broker clients. Brokers identified administration (which ties in with business models), commission (money) and compliance (risk) as their major concerns.
A closer look at risk!
There are a number of areas a financial intermediary should look at when considering business risks. Compliance remains one of the dominant concerns and all indications are that the regulatory onslaught witnessed in the last three to five years is only the beginning. There will be further interventions, particularly in the area of long-term industry commissions, before government eventually gets round to regulating the short-term insurance industry too. But regulation is not the only business risk. Brokers need to take account of a range of other risk-based challenges to their businesses.
Top among these is succession. It is imperative (and a regulatory requirement) that a financial service provider has some form of succession plan in place. The regulators want to know that your clients are taken care of in the event of your demise. There is also a risk in providing ‘fit and proper’ advice. To this end, ongoing professional education and development is an imperative for all stakeholders in the industry. Masthead noted that there were more ‘exams’ in the offing for the industry, probably two before the end of 2009.
Another risk lies in the realm of financial advice. Despite the rigorous regulatory environment already mentioned there are still product providers out there that provide toxic products. These toxic products are often tempting due to the high commissions awarded to brokers who ‘sell’ them. Masthead noted that the best principle to adopt in this regard was: “If it sounds too good to be true, then it is too good to be true!” As an example Masthead sited a product they encountered on their countrywide road show. It offered ‘guaranteed’ annual returns of 27.5% per annum and could achieve such returns after giving away a 10% slice for broker commissions.
Show me the money
It’s going to be up to brokers to change their strategies and find new products and outlets to make up for the loss in commissions due to various regulatory changes. The first step in dealing with these changes is to analyse the impact they have on your practice’s income. Having completed this, you can embark on a strategy to replace the ‘lost’ income by tweaking your business model. One possibility is to charge a monthly administration fee to each of your clients. The technology makes this possible and the challenge to the broker is to introduce a valuable service when the fee is introduced. Research shows that most clients will be more open to such a charge if its introduction coincides with a useful ‘add-on’.
Another option is to increase your product offering. Masthead mentioned that some of their member companies had enjoyed great success by expanding into the mortgage bond and debt consolidation areas. As an example they showed how a practice with approximately 600 customers could earn R40 000 per month in additional commissions by offering a mortgage origination services. This size practice would yield approximately 10 bond origination opportunities per month. And if only 50% of these opportunities were closed –and each was for an ‘average’ R800 000 mortgage bond – the potential would be for R8 000 in commissions per event!
Editor’s thoughts:
The presentations at Masthead’s Professional Development Day outlined a number of the challenges facing the modern day financial intermediary. Brokers can meet these challenges by striking the correct balance between business model, money and risk. Is your practice ready for the income challenges posed by changing commission regulations? Add your comments below, or send them to [email protected]
