Rising up to challenges by conquering the barriers
Regulatory change continues to be anticipated with a growing pressure on compliance, as firms navigate both international and domestic markets and rules. And as such, adapting to these changes is critical if intermediaries are to survive in these shark infested waters.
Insight, Discovery’s South African Investment Panorama (SAIP) report that was recently published in partnership with Moonstone Information Refinery, Investec, Founding Partner, and Coronation Fund Managers, shows how Independent Financial Advisers (IFAs) are dealing with the changing regulatory environment. The report is based on research that involved interviews with 314 IFAs and wealth managers working in South Africa with a key focus on the challenges and regulatory changes this market faces.
According to the report, 2015-16 is going to be a challenging year for many IFAs in South Africa. Regardless of the final form of the Financial Services Board’s (FSB) Retail Distribution Review (RDR), the burden of regulation is rising. This will contribute to higher operating costs, as the industry moves from commission-based remuneration towards compensation by fees for service.
FAnews interviewed Nigel Sillitoe, Chief Executive Officer of Insight Discovery about these findings and his thoughts on the challenges intermediaries face.
Regulatory environment insight
The key findings of the report are that 60% of IFAs say that changing regulations are the main challenge facing them. There are mixed views about the RDR regime that has been proposed by the FSB with survey responses including positive and negative feedback such as, “The advisers who comply have no problem” and “It will kill independent IFAs.”
When asked about what is the single most important issue facing an IFA’s business in terms of the regulatory environment, there were also positive and negative responses with some saying that the challenge of managing to survive has become a costly business and the ever increasing danger of liability is decreasing the income stream. A few advisers also feel that the positive sentiment is the competitive fee structure; creating a value proposition linked to a fee menu to offer and calculate fees due.
Ninety seven percent of IFAs think the FSB should do more to monitor unregulated schemes/products, with 23% of IFAs believing that there is a lot of room for improvement to professional standards. Furthermore, 91% of IFAs think the investment industry’s image/ reputation is tarnished because of unregulated schemes/products.
Sixty nine percent of IFAs believe that the downward pressure on fees is the main challenge, while 79% of IFAs see technological change as the biggest opportunity. Eighty seven percent of IFAs work with products of three or more asset management companies, while 89% of IFAs use offshore funds to some degree.
Delving into developed markets
Furthermore, when looking at what IFAs want from companies they are dealing with, 84% of IFAs say that fund ratings from independent agencies are important as a fund selection criterion, while 54% of IFAs mention they will be lifting their clients’ weightings to global equities (developed markets) in the coming year. At least one third are cutting weightings to each of South Africa equity funds, multi-asset (high equity) funds and cash.
Sillitoe said that multi-asset funds, which are great risk diversifiers and provide access to international markets, have been popular in South Africa for quite a while. “In other parts of the world where IFAs have a strong presence, only now are IFAs starting to embrace these types of products, particularly in the UK, post RDR,” he said.
Employing external resources
“RDR is only one of a raft of regulatory interventions aimed at protecting consumers of financial products. The gist of the RDR proposals is to ensure that clients understand what they get, and what they pay for. The fact that payment of an advice fee will be facilitated via product providers, much like the current commission payments, will mean far less of a disruption that many foresee,” said Sillitoe.
When asked what regulatory challenges and developments the insurance industry or intermediaries face, Sillitoe mentioned that the smaller independent advisers, in particular, lack the resources to conform to the myriad of compliance requirements whilst at the same time maintaining production levels.
“The current environment is already too complicated for a financial adviser to stay on track with developments. In order to ensure enough time to produce an income, external resources will have to be employed,” he said.
“Rather than shifting goal posts, the proposed legislative measures should be seen as adapting to international standards of professionalism. Compliance services providers, without the necessary research and development backup, will battle to keep their clients informed of changes,” concluded Sillitoe.
Editor’s Thoughts:
Like Sillitoe mentioned, the smaller players in the industry lack the resources to combat the hurricane of compliance requirements. He points out that in order to survive, these players have to employ external resources. However, in an industry ruled by big players, the question remains is there really room for the smaller ones to win this battle or is it just a matter of playing your cards right?Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
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