Supporting critical principles in the wealth space

Regulatory change was again the key topic of discussion at PSG’s Annual Conference. Filled with a jam-packed programme that boasted a variety of speakers, Jeremy Maggs, Journalist and key note speaker, facilitated a discussion with wealth panelists Adriaan Pask, Chief Investment Officer at PSG Wealth; Ronald King, Head of Technical Support Services at PSG Wealth; Riaan Strydom, Financial Planner at PSG Wealth in Port Elizabeth (and winner of PSG Financial Planner of the Year 2015) as well as Jaco van Tonder, Adviser Services Director at Investec Asset Management, who all shared their thoughts with financial advisers and product providers on the approach to regulatory change and the challenges that lie ahead.

Tweaking traditional systems

According to Van Tonder, the Retail Distribution Review (RDR) at its heart has quality principles in terms of remuneration models, management of conflict of interest, product provider responsibility, etc. "It changes the way an adviser’s payment for services is conducted and therefore, changes the adviser’s value chain. This changes the competitive dynamics around cross subsidies that existed in the system where larger investors were cross subsidising smaller investors,” he said. 

However, he mentioned that we all look at the proposals and end up discussing the meat of the document, but what is often missed is the subtleness that will happen two to three years after its implementation. 

Van Tonder said advisers need to be very careful when tweaking this system that is built on very fine balanced tradeoffs around parts of the market, and cross-subsidising others to ensure equal access. “The principles of regulation are good, but the execution is absolutely critical. You need to be clear so that you do not end up destroying certain segments of the market who will then not have access to certain services anymore,” he continued. 

“The unintended consequence, as Van Tonder mentioned, with client segmentation, is that clients most in need of advice will not be able to afford it, because advisers will spend time with clients who are profitable and this is the old principle. The clients at the bottom end of the line will almost become un-serviced, which is a big problem,” said Strydom. 

Strydom suggested that advisers should accommodate everyone in their practice, because you cannot tell a client that you would like to interview him or her to determine if he or she can afford the services you are offering as this will damage your reputation. “The strategy going forward, given that we are locked in this position, is to utilise every single tool at our disposal like technology to aid in administrative and costly burdens, or Human Resources, to appoint junior staff that can look after a portion of the client base,” he said. 

Changing the dynamics of business

Strydom mentioned that RDR is not about the advice advisers give to clients but rather how advisers get remunerated for that advice. “In preparation for this, we have for some time been disclosing fees clearly, breaking down the fees into different segments such as fees for product providers, fund managers and financial advisers. However, we will still see a big change because we have been doing this on a percentage basis but RDR will most probably force us to do this on a rand and cents basis,” he said. 

“We support the principle of unbundling fees in the wealth space so that fund managers and advisers are all remunerated separately and clearly. However, if we show the regulator how it should be done, by being a leading player in the market, and actually implementing this change responsibly, then we almost guide the regulator about how to implement successfully,” said van Tonder. 

Advisers and product providers should, according to Van Tonder and King, engage with the regulator on a regular basis about where some issues arise and where incorrect implementation can cause a problem. They should take a leadership position, be bold and actually make the change in the business before the regulations change and then they can show how it can be done. 

Jumping on board

Pask believes that the regulator has done a good job to entice more hedge fund business as competition will change the landscape. “Competition will drive a lot of improvement in hedge fund product quality and will help to meet customer needs. There will also be greater transparency. The challenge, however, is figuring out when this asset class is delivering superior risk-adjusted returns at a reasonable price.” 

The operational challenge, according to Van Tonder, is looking at this dynamic and determining how to change this into an opportunity, because every financial adviser is facing this same challenge. “The advisers who can find a service model that caters at the delivery level for clients who are sub scaled today may benefit. The advisers that  get that right will have a massive market because all of the clients are going to be pushed away by their advisers who say they are unaffordable and cannot service them anymore,” he continued. 

He suggested that advisers should pull the service model all the way through delivery and harmonise their technology engines at their disposal to work with their clients for the long term. 

Van Tonder believes that alternative products should be made palatable for high-net worth South African retail investors and the adviser community to commit assets to investments. “There is a development opportunity in South Africa for clients to commit money to asset classes that are slightly more non-traditional. Advisers should carefully manage the risk investor profile with investor appetite.” 

“The investment return gap and the alpha opportunity is the real way to convince investors. The legal framework change making these products become unit trusts will address a lot of uncomfortableness amongst investors, combined with an opportunity for long-term growth,” continued van Tonder. 

Editor’s Thoughts:
As an adviser, you have to be part of the solution of how you are going to manage the client’s investment. To understand the client segment, revise advice models for certain client bases to build more opportunities. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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