Fixing financial outcomes begins with rethinking adviser remuneration

Finance and risk advice professionals have to up the ante in education to meaningfully address South Africa’s twin challenges of financial inclusion and poor financial outcomes. A recent panel discussion hosted by EBnet.co.za singled out financial education, or the lack thereof, as one of the factors contributing to the poor uptake of financial products and services in South Africa.

The key to improved financial outcomes

“South Africa has a well-developed financial system and a highly regulated retirement and investment industry, yet our savings culture and savings outcomes are dire,” said Nathalie Burrows, EBnet editor and panel moderator. She introduced and steered an hour-long discussion on modern-day approaches to advice, communication, and education with the aim of improving retirement and savings outcomes. 

There was broad consensus that the financial planning industry has a role to play in raising awareness and educating the public on all matters financial. This might explain why the Financial Sector Conduct Authority (FSCA) recently published a general conduct standard on requirements for financial institutions providing financial education initiatives. The regulator seems intent on standardising consumer financial education, with one of its primary aims being to distinguish between financial education and product marketing. 

“This is similar to what we are advocating for as the Financial Planning Institute of South Africa (FPI); our members should offer pure consumer awareness and education as part of being a professional planner and as part of their duty to the greater community,” said Nici Macdonald, CFP® and HOD: Certification and Standards at the FPI. Asked to comment on the regulator’s latest focus, Macdonald said there were concerns over both financial awareness and financial sector participation among domestic consumers. 

Case in point, the dwindling subset of the domestic consumer market that currently benefits from financial advice, and a basic education sector that is doing too little to promote financial literacy. The panel agreed that more could be done to incorporate financial literacy into primary and secondary school curricula before turning to the bigger question of whether financial advisers or planners have enough time to take care of foundational financial education in addition to navigating clients through their financial plans. 

Education a core component of financial planning

“Education is part of the core work we do,” explained Terence Tobin, CFP® at Rich Ideas Group. “We must make sure that the consumer knows and understands, in a language they can understand, what they are about to transact in,” he said. The Treating Customers Fairly (TCF) principles require this educational information to be in plain and simple language and be provider-agnostic. 

Another panel talking point centred on how advisers or planners could both deliver the financial education message and ensure that their clients understood it. “Sharing the information, which is what a lot of financial literacy initiatives have done to date, gets you only so far,” said Jacques Coetzer, GM Strategy at Sanlam Retail Distribution. He said advice professionals had to consider how each client might interpret and understand the advice given: “A financial plan reflects an individual’s current reality alongside their hopes for the future.” 

Burrows brought remuneration models into the discussion, asking whether financial advisers and planners were adequately compensated to take on the role of financial educator. “A financial advice practice is not a charity organisation; advisers need to earn a decent living,” exclaimed Bertie Nel, Head: Financial Planning and Advice at Momentum. He commented on some legacy issues that still define South Africa’s financial advice landscape, most notably that of remuneration coming from the product side. 

Unfit advice remuneration models

There is broad consensus that the existing remuneration models are problematic, but solutions are less evident. “Unfortunately, the advice component of the [planning process] is not as profitable as what the product solution is,” Nel said. Under the status quo, advisers proceed on the basis that they give advice, but only make money when they execute this advice through product. This uncomfortable truth is partly to blame for the difficulty in attracting young advisers into the discipline and addressing the equally important transformation issue. 

In the absence of in-person advice, many South African consumers are turning to social media for the basics, leaving it to YouTube finfluencers to guide their investment decision-making. Tobin applauded consumers for conducting research and due diligence through online channels, but warned of the difficulty in trusting and verifying the information that the so-called financial influencers produce. He advocated for paid-for advice from an experienced Certified Financial Planner® as the best option for consumers’ financial planning needs. 

The panel briefly discussed how the retirement fund industry might collaborate with financial advisers to improve financial advice outcomes. After all, it seems patently clear that the formal retirement savings journey creates countless opportunities to link the client to an advice professional. 

Matla Titi, Head of Member Engagement at Alexforbes, said their client interactions spanned group employee benefits and individual consulting. “We also have financial wellbeing consultants whose role is a lot broader and straddles that of educator and somebody who is able to provide financial advice,” she said. Member interactions go beyond making the most of retirement benefits to improving members’ financial capability. 

Benefits counselling makes a real difference

“Based on our experience of having implemented our enhanced retirement benefit counselling solution, we can say that counselling makes a difference; there are early signs that those clients that use our enhanced benefits consulting services are seeing higher rates of preservation,” Titi said. 

The challenge for today’s advice professionals is how to scale access to financial advice. Many financial institutions are stepping up with WhatsApp and other online self-service channels; but wider access does not guarantee uptake or understanding. “What do you expect your members to do to encourage action over apathy among their clients?” asked Burrows, directing the question to the FPI representative. 

Macdonald deflected to a more serious issue blighting the country’s advice landscape, namely the shortage of skilled financial planners. South Africa has just over 5000 CFPs to service the millions of formally employed, let alone expanding access beyond that. “We should change the advice model to get more salaried advisers in to speak to people without clients having to purchase a product to ‘pay’ for the advice,” she said. “There is enough money in this industry to change the model.” 

Coetzer said the current regulatory landscape leant towards adviser remuneration being linked to the sale of a product. “If you zoom out and start asking about all the services that an adviser renders that are not directly linked to a product, then the problem sits in the definition of services as a financial intermediary,” he said. “It becomes difficult, if you read through the legislation, to extract anything that a financial intermediary does.” 

Your writer found this comment particularly insightful. He recalls that the basic description and definition of financial and risk intermediaries kept on getting delayed through the Retail Distribution Review (RDR), and to this day remains unclear. The industry is now waiting for the Conduct of Financial Institutions (COFI) Bill to resolve the uncertainty. 

Rethinking how advisers, planners get paid

“Rethinking how financial advisers get remunerated does not start with the industry, but with the regulator acknowledging that the current regulations are driving behaviours that have unintended consequences,” Coetzer said. The legacy issue of adviser remuneration being linked to product raises its ugly head again, dear reader. 

Nel countered that consumers were partly to blame due to many being unhappy with any fee for advice, be it product-linked commission or service-based. “We need to make money, and we need to vest models in order to make financial advising profitable,” he said, offering some support to Coetzer’s view. And the solution? 

“We must put more focus on the sale of advice and planning, emphasising that the product is just the potential solution,” Tobin said. He offered the analogy of a doctor (the adviser) getting paid for identifying an ailment and prescribing a treatment plan versus the procedure or tablets that are provided and paid for elsewhere. His conclusion: the focus must shift from selling 10 policies to helping 10 families avoid poor financial decisions, and, of course, figuring out how to price this value fairly and convince consumers to pay for it. 

Writer’s thoughts:

There is broad consensus that education is part of your core work as financial adviser or planner; equally, clients are not keen to pay for advice. How do you balance your growing list of responsibilities with the commercials of running a successful practice? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].

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