Fee for action
After attending the recent 2015 Financial Planning Institute (FPI) conference, it is clear that the distinction between those who give good financial advice and those who give bad financial advice is widening. Both National Treasury and the FPI identified that there are people in the industry who are taking a chance when it comes to financial advice and that regulation will hopefully put a stop to this.
We know what constitutes blatantly bad advice, but there are times where the line between bad advice and acceptable advice is very thin.
To focus on the question of the anatomy of bad advice, Marc Alves, Senior Case Manager at the Office of the Financial Advisory and Intermediary Services Ombudsman, and Louis van Vuren CFP, Director of Finlac and a member of the FPI Disciplinary Committee, held a special session at the conference to unpack this topical issue.
Point of departure
There have been some concerns raised in the industry about the Ombud and the determinations handed down. It is arguable that in some of the recent cases, the Ombud has leaned heavily on the adviser and that the consumer is king.
However, Alves was quick to dispel this feeling saying that the Ombud does operate within a mandate and that while it won’t fall short of exposing reckless behaviour in the industry, it also does not want to encourage similar reckless behaviour by complainants.
Van Vuren agreed with this sentiment pointing out that while some cases are cases where bad advice was the cause of the dispute, there are some cases where there are clear indications of buyer’s remorse.
Record keeping
In August last year, we focused on the fact that poor record keeping was a major contributor to the number of determinations that the Ombud hands down in favour of complainants. This is still a problem at the Ombud, and is a problem that Alves pointed out that the Ombud has to deal with on a daily basis.
Van Vuren agreed with this saying that there are still many cases in the industry where pre-populated documents are part of the complaint. He went on to ask how we could still be living in a world where pre-populated documents are rife in the industry.
But there may be some cases where the adviser did provide suitable advice, yet the complainant still approaches the Ombud because they are not satisfied with the outcome following the advice. If there is no proper record keeping, the adviser has often got no leg to stand on. A question was raised in the audience with regard to the types of evidence – or records of advice – the Ombud will accept. Many advisers are now using voice recorders to record the proceedings of the meeting with a client, and Alves said that the Ombud is accepting this type of evidence on a daily basis.
Van Vuren pointed out that the major problem with pre-populated documents deals with fee structures. He said that the FPI Disciplinary Committee often gets records of advice where the page concerning fees merely states I, the undersigned, acknowledge that all fees have been disclosed to me. There is then an initial and a signature on the page. There is no breakdown on what the fees referred to in the financial plan are.
Shadow games
If we are to believe the Financial Services Board, the ambiguity surrounding fees has been a problem in the industry for a number of years and is the major departure point for the Retail Distribution Review. In a world where clients are becoming more demanding and more educated on issues surrounding financial advice, it does seem strange that a financial plan would not have an explicit breakdown on the fee structure that the client potentially faces.
What would this entail? How should advisers be providing financial advice? Alves pointed out that all fees, as well as the monetary impact of these fees, need to be discussed with clients. Perhaps this may spell the end of speaking to your clients in percentages.
There is also a move towards fee for action, the days of ongoing commissions are fading off into the sunset. Alves said that of all the complaints the Ombud has to deal with, ongoing commission is the biggest complaint. Often clients tell the Ombud that they haven’t seen their financial adviser in six years, yet they are getting paid an ongoing commission on a policy.
It may also be a case that the adviser did sit down and explain these fees to their clients, but their eyes just glazed over because they have no understanding of the financial implications of the fees. This then is where the true value of advice comes in. There is a perception that clients are opposed to paying fees for advice; but if an adviser takes the time to work past the glazed lookPhil Billingham, a Certified Financial Planner from the UK, said that clients will cheerfully pay fees. This needs to be built off the back of a good value proposition, working with integrity, building relationships with clients, and gaining their trust.
Editor’s Thoughts:
The days of bad advice in the industry are numbered. While regulation compliance is a burden to those in the industry who are doing right by their clients, perhaps it is a means to an end to spell out the difference between good and bad advice? That way, the adviser is never in the dark as to the value of the advice they are providing. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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