What will SA advice businesses look like in a post-RDR world?

Henry van Deventer, Wealth Strategist at Old Mutual Wealth.

Today, South African financial advisers are facing greater change and uncertainty than ever before. Of the many disruptors that will impact on the financial advisory arena in the coming years, the greatest will likely be the implementation of new regulation in the form of Retail Distribution Review (RDR).

Henry van Deventer, Wealth Strategist at Old Mutual Wealth, says that if the implementation of RDR in the United Kingdom is any indication, the biggest impact in South Africa will likely be felt when the manner in which financial advisers are remunerated comes into effect.

“The intention of the Financial Sector Conduct Authority is to shift to an environment where adviser remuneration is not paid by product providers, but by clients agreeing to pay a fee. In short, this means commissions and rebates on investments will be abolished, and there will be a significant reduction in up-front commissions on life insurance products payable to advisers.”

But what does this mean and what should South African advisers do to ensure a successful transition to this model? In answering these questions, van Deventer points to a 2017 survey conducted by the Financial Planning Institute of Southern Africa (‘FPI’) amongst its Approved Financial Planning firms.

“The survey was commissioned to gain insight into what our differences are (pre-RDR) relative to similar firms in the United Kingdom, where RDR was implemented five years ago. This gives South African advisers a unique look at how our businesses will need to evolve in order to prosper in a post-RDR world,” he explains.

Among the insights gained from this survey, van Deventer highlights that South African businesses will need to become more profitable. “In South Africa, 77% of financial planning businesses are running at profit margins of less than 20%, whereas 48% of UK businesses are running at profit margins of more than 20%. Of these, half run at a profit margin of more than 30%.

This relative unprofitability appears to be due to three main factors, says van Deventer. “Firstly, South African businesses employ too many people to support financial advisers; secondly, South African advisers have too many clients; and finally, although both countries primarily charged their clients by way of percentage-based ongoing fees, South African firms tend to charge significantly less than their UK counterparts.”

So, are South African financial planning businesses doomed? “Not if we evolve as the top UK businesses did,” says van Deventer. He shares insight on some of the key steps South African firms will have to take in the near future in order to thrive when RDR is implemented:

1. Charge more

As commissions and rebates fall away or are reduced, South African advisers will need to charge their clients more in order to retain profitability. The average ongoing advice fee will need to be nearer to 1% than the current rough average of 0.5%.

2. Reduce costs

This can be done by reducing or putting a freeze on the number of support staff employed. There are several alternatives in the form of automation and outsourcing that allow for financial planning businesses to be run much more efficiently than 10 years ago.

3. Have a strategy for getting less clients

A strategy focused on growing the number of clients rather than the quality and size of the client portfolio will struggle. We live in an era where clients demand more personalisation and attention than ever before. This becomes harder to deliver as we increase our client base. Most of the largest financial planning businesses in both South Africa and the UK grow their client numbers fairly slowly, but are fanatical about what their clients should look like and delivering a meaningful value proposition to these clients.

Over the course of the upcoming years, RDR will invariably bring about a great deal of change to the financial advisory landscape, and failing to adapt, according to van Deventer, is not an option. “There is no doubt about the direction of the wind when looking at regulatory reform in South Africa. We can’t change the direction of the wind, but we can adjust our sails,” he concludes.