Majority of South African financial advisers are unprepared for RDR, CoreData

08 May 2013 | | Fiona Zerbst

With the amount of medical aid schemes, hospital plans and retirement packages on the market, the role of financial advisors has traditionally been an important one in the South African context where the majority of the population belongs to the middle to

It is therefore frightening to see that research conducted by CoreData Research South Africa shows that less than half of South African financial advisers are seriously planning for possible regulatory changes that may come about as part of a South African retail distribution review (RDR).

This general lack of planning is likely to leave many businesses caught short when new regulations regarding the remuneration of financial advisers and the classification of advice comes into effect, according to the Adviser 2013: Looming Regulation & Business Change report.

Global Context

The financial advisory industries in the UK, US and Australia have all undergone RDR recently. According to analysis of Financial Conduct Authority (formerly Financial Services Authority) numbers by CoreData UK, the number of financial advisers in the UK has dwindled down from 35 000 in 2010 to around 20 000 following RDR. The South African industry could face a similar fate.

Fees vs Commissions under review

The fee vs. commission debate within the South African financial advice industry has been going strong for some time. However, the Financial Services Board has recently come to the conclusion that a review of current remuneration models will not be enough and a full blown RDR is underway in South Africa.

Considering over two thirds of businesses still earn the majority of their income through upfront or trail commissions, RDR poses a significant threat to the survival of financial advisory firms.

Some of the other challenges faced by the impending RDR are:

* Despite the lack of future preparations, financial advisers in South Africa say the greatest challenge they are currently facing is changes in remuneration legislation with 57.9% ranking it the biggest hurdle over the next two years.

* The classification of advice between independent and restricted is the next biggest challenge they face between now and 2015.

* Only 12.8% of SA advisers currently work on a fee-based model that would require no adjustment post-RDR.

* Of those advisers that have begun to make changes to their business models, 40.4% are modifying their fee structure in preparation.

* Almost 60% of advisers currently class themselves as providing full independent advice, while 15.4% of advisers state they are restricted financial advisers. This spread could shift significantly in light of RDR.

* The main bulk of South African advisers have successfully made it through the first round of the FAIS assessments, however a quarter feel the second round of FAIS assessments is their greatest challenge over the next two years.

* The size of the advice market in South Africa, in terms of numbers of advisers, is not expecting any major contraction in the short-term as the majority of advisers (83.6%) plan to continue in their current role by the end of 2013.

* At the end of 2015 there will be more advisers that perform advice in-house but outsource all investments to a DFM (35.8%).

Necessary Protection

Traditionally, government believe the South African consumer was largely taken advantage of and the government believe the implementation of RDR will force transparency in the industry and will be a further step towards consumer protection.

The RDR will see a significant drop in numbers of financial advisers. The government believes the consumer needs to be confident that the advise that they are getting will be truthful, honest and given without maximum gain in mind.

People are generally reluctant to change, but where change benefits consumers it must be embraced. South African consumers, including financial advisors should be offered truly world class products and services.

Editors thoughts:
This is a clear indication that government wants to adhere to global best practice principles in order to protect the consumer. At the end of the day it will come down to implementation and regulation and one has to ask, does government have the capacity to effectively implement and oversee this programme? Comment below or e-mail fiona@fanews.co.za.

Comments

Added by Bruce, 10 Oct 2014

Obviously the persons sitting behind the proposed legislation have not spent day in the life of a short term broker. Those that are committed work damm hard for their 12% commision. I know I am married to one. Weekends are there to catch up the work that could not be done during the week. Could result in her having to retrench her two staff members and probably see her exit the industry due to lack of incentives. Commison is already being disclosed to clients upon taking up insurance. Call centres?....
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Added by Dedicated advisor, 26 Jul 2014

Furthermore to my earlier comment....like so many times before....regulation is copied and pasted from developed economies, just to be trialed in court and found inappropriate to our status quo....regulator, catch a wake-up . If you are here to serve your people, then analize the local situation before copying foreign laws....tip for the day! (Unbiased opinion....and this is my personal opinion)

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Added by Dedicated adviser, 26 Jul 2014

What a pity...overegulation will see some fantastic advisers forced out of an extremely important role in the society and paramount to the financial well-being of millions of customers....remember, insurance is sold and not bought....
Maybe a good time to consider a job with the regulator....as in the UK, we will soon have more employees in the regukator policing the advisers, than actual number of advisers serving the community....some food for thought to the policy makers (no pun intended)
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Added by bemused, 16 May 2013

60% of advisors see themselves as independent? Dream on. ASISA stats show >50% of "advisors" are tied agents and of the rest there are many in aligned (conflicted) structures paying more than statutory commission. Remuneration drives behaviour in most cases, not client interests. Honest, independent financial advisors are at a massive disadvantage. When will the regulator act to close down these dishonest product providers and intermediaries?????
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Added by Paul Kristiansen, 11 May 2013

Great Plan - less Advisors - more call centres - Im sure it will be a "great advantage " to consumers Its amazing - the Insurance Companies control the market - pricing etc - but somehow Advisor Commissions are the soft target With the complexity of product today who is going to analyse / interpret for the Consumer - so effectively he will often buy an inferior option ! What a joke - imagine trying to negotiate a fee every year with every client Please provide some stats of how many Clients will call every day to book an appointment at MY Office to buy Insurance so "I can gear up my staffing " etc ! - time to plan an exit strategy !
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Added by Not Amused, 08 May 2013

Surprise, Surprise! More legislation, just for a change! I mean we have almost gone 12 months since the last changes to this or that. Maybe financial advisers, brokers etc should form a "Not for Profit Group'; that's exactly where we are going. We can form our own charitible group and all move into homeless shelters and operate via telegraph as there is no income to cover home, car, cell etc. I could always yank my children out of school, since I can't pay school fees and have them home schooled by parrot (that's if we can afford the parrot and feed that is). Why did I not think of this sooner? As I am already under financial constraints with commission cuts with recurring premiums for investments as well; lets just just do away with this remuneration for services rendered rubbish and have all brokers and FA's operate without any remuneration whatsoever. COme to think of it, the same can be applied to doctors, lawyers, or anyone else who delivers on that most putrid service known as advice.
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Added by Savannah, 08 May 2013

I agree with Fiona. Our aim should be to become the worlds best advisors. We should constantly embrace learning and find enjoyment and pleasure in educating ourselves. This is what makes life so interesting. I think that if the insurance industry forms partneships with government by availing systems and expertise it will assist with effective iimplementation.
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Added by AJ, 08 May 2013

AMEN, NOT AMUSED! The truth of the matter is that, over the past 15 years, there was an ever-increasing focus on the remuneration (whatever form it takes) of the intermediary providing the advice to the advantage of the investor/client. Again and again our income was cut down and redesigned with the end result that we still render and honest service, that is both indispensable and beneficial for the client, but we are gradually remunerated less and less. But the real profits on the client's money are not made here, by the intermediary. It is made further upstream, by the insurance companies, investment houses, banks and funds themselves. But not nearly as much focus (and consistent focus) was given to these entities and their fees/profits. The players and issues are mixed together so that it is difficult to rise above the inane chatter and see what is really going on. In my opinion the problem is not... The client, nor the FSP, nor the intermediary that provides the good advice. The problems ARE... Clients that change their mind (for any number of reasons, good or bad) and wants ANYONE else to pay the price for their change of heart, FSP's that design the intermediary's contract in such a way that the risk (compliance / fees / expenses) is largely placed on the individual's shoulders and do not revert back to the FSP, The intermediary that provides bad advice, or even commits fraud or some other crime, The intermediary that provides good advice, but is NOT remunerated in accordance. These problems are separate issues and needs to be dealt with separately. I do not have the time or space to type out my opinions for possible solutions, but I know this for sure: IT IS NOT A SOLUTION TO JUST TAKE (in whatever ingenious way) MONEY AWAY FROM THE INTERMEDIARY. Final thought: The people that are designing the laws and regulations that influence countless others directly and indirectly, remind me of a couple of friends that are playing the board game, RISK. It is a game of world domination, played by people who cannot even run their own lives.
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Added by Sue, 08 May 2013

Whilst I agree with the principle, too many people in SA are financially stretched already and they are the ones who most need advice but simply cannot afford it! This results in panicked cancellations of existing policies instead of consultation with a broker/advisor who can assist with savings in a way that won't deplete retirement and risk goals. It seems like a catch22 for the client and the advisor.
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Added by Zarrick, 08 May 2013

I suppose that you have to stand back and try to be objective when things start to be overwhelming and try and check yourself should you just be pessimistic.. When looking at the big picture you have to ask, what exactly are they trying to achieve and who is pulling the strings? This is all a move to get everyone working for big corporations, why...well then you can control more people of course. If you can control everyone and get everyone to earn an average income by working for the big corporates and then control the big corporations you can then fleese the people with hidden costs and minimise their options by having a controlled monopoly. This is cleverly orchestrated to minimise the freedom of a democracy and to control it. Carl Marx said "we will control the bourgeoisie by taxes and inflation. This government has done the same and taken it far further with their plans of total control. In an age of information and IT connectivity between nearly all entities this can now be done. This is just clever socialism disguised as democracy within this k*kistocracy. We will all be under one ruling class with its greedy fingers in the pie of big business and everything will be corruptly controlled. No matter what you do there will be a regulatory body or some big brother to steal from you legally. There will be a huge middle and lower income class with no real rights or say, as the system will be too powerful and there will be seemingly no one that you can turn to for help. Our rights are slowly being stripped away with all the new legislation that is now being promulgated and costs imposed on us. Just think for a second. - The info bill, your privacy is gone - The new expropriation Bill where the gov can confiscate your property - The toll gates, just give it time and we will be paying another R500 plus pm - Car license reg fees, went up by ridiculous amounts - Home valuations, property prices are down, but gov puts up our rates - Eskom, huge increases over a five year period and I can go on. It’s just one big money grab to feed the greedy, corrupt politicians who will not stop till they have drained this country dry and corruption in gov is rife. We will all realise this when it is too late when we will be slave to the system. The whites can't stick together and have the sort of unspoken philosophy that…..well as long as I'm ok they can nail my neighbour , because I don’t really care anyway. The blacks all stick together with their ubuntu with a sense of belonging and also in fear of being ousted in case they go against the stream, and they think that things are going to get better. Also if they play along maybe they will be more accepted and possibly even get a free ride on the gravy train. Mean while the small ruling class capitalise on this and are plotting behind the scenes going for total control. Nobody can police them or control them. There is no real body that stands up against the government. I think that we should support a body that fights for our rights. We can live in denial or actually start to do something! President Zuma has proudly announced that his party is national and socialist. This was Hitler’s ideological stance and party motto. Time to wake up and smell the coffee. You can learn a lot if you study history and just do it better than those before you. History is the result of of what happens when people carry out their nature. It will therefore repeat itself.
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Added by World Traveller, 08 May 2013

Fiona, I love your comment. "This is a clear indication that government wants to adhere to global best practice principles in order to protect the consumer. At the end of the day it will come down to implementation and regulation and one has to ask, does government have the capacity to effectively implement and oversee this programme" The SA FSB seem to be like sheep following the latest "FAD" in international regulation. I truly hope that they look at the consequences of the legislation that was applied by the UK and Australia. All that has happened is that advisors have moved up the food chain now charging fees leaving a much larger gap in the un-advised who also happen to be the type that largely bury there heads in the sands and most need advice. Commissions are fully disclosed - what is the problem? Just because the other regimes have implemented RDR does not make it a "global best practice". The FSB should rather focus on implementing the current legislation and spending more time on monitoring the Fidentia's and Sharemax's of this world. Let current rules be implemented and managed before we start with another whole raft of rules and as AJ comments the advisor (that is around today!) is "generally" not the problem. There is more than enough legislation to manage rogue advisors surely the FSB's valiant efforts should start to focus on the product providers (beyond TCF). It seems that Governments around the world and especially here keep implementing new legislation to fix the problems of the original legislation that was not done properly. Like people investing in an economy the market needs surety and stability.
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Added by Skylimit, 08 May 2013

Let's face it.....this is a dying industry.The only way to justify a fee based approach is if it is a statutory requirement....very similar to accountants and auditors whereby a client has to produce a needs analysis every year prepared and signed off by a financial planner. Doctor's and Lawyer's have a captive market already.If a client is sick, that person will pay a Doctor to get well whereas the same client may not even be aware that he is financially sick until it is too late to remedy the situation. All I can say is that the consumer will be worse off as the few Financial Planners left will be able to charge outrageous fees and won't have the capacity to properly service the average Joe on the street.
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Added by Ben Holtzhausen, 08 May 2013

The reality is upfront commission on financial products IS a perverse sales incentive. I think the assurers feel even more threatened by RDR as their cash cows are going to dry up. Here is some real history that has a good probability to repeat itself: About 10 years ago health care was our primary line of business and I was one of those who were severely affected by the change of medical schemes commissions in January 2003. We were forced to retrench staff, sell cars, cancel DSTV, holiday plans, magazine subscriptions and also our own savings plans. It was not nice to suffer the same ridiculous penalties as our clients when cancelling RA's and endowments, albeit on top of reversed commissions. As a result the income from our life division also disappeared for a while. Those were some real tough times, but we pressed on and continued building the health care book. We also ceased all insured savings products (RA's and Endowments) and only supported unit trust platforms. (some assurers were furious) today our clients enjoy real good value as the costs are much more transparent and NO penalties are applied when they change their plans. We've subsequently engaged into a program to zero rate all commissions and charge an affordable retainer fee. Our clients' loyalty and willingness to pay the fees, surprised us way above our greatest expectations. I cannot wait for an As & When (ala short term business) life assurance commission structure. Financial advice will be even more affordable to the poor and middle class while we will build another strong growing revenue income stream Our control freak government has seen an opportunity they believe is going to make them look good in the eyes of the public and like many other issues, there is NO way anyone will derail them from their senseless plans. Why should we waste more time and energy fighting them? There is a wonderful tactic called Business Judo, whereby we can smack them with their own force. In the same way they refuse to be convinced that legalised Rhino Horn trading will save our rhinos, they also don't realise that banning commissions will eventually make most of FAIS redundant and put a lot of government officials out of jobs. Independent Financial Advisors have only 3 options 1.) MAKE THAT PARADIGM SHIFT NOW and you'll not only to survive in this industry, but you'll flourish far beyond your wildest dreams. 2.) Engage in a process to eventually sell or close your practice. 3.) Get back to corporate life and work for a boss again. Use it, Don't use it, Whatever
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Majority of South African financial advisers are unprepared for RDR, CoreData

quick poll

Question

COFI is coming, bringing a wave of change for financial planners. Which one of the following disruptors will have the biggest impact on your business?

Answer

Adviser categorisation Omni CBR Remuneration models We are ready for all of it

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Majority of South African financial advisers are unprepared for RDR, CoreData

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