Winds of change blowing in the financial planning industry

The real challenge facing independent financial advisers in South Africa is the choice that they will have to make between selling financial products versus focusing on client needs and giving clients sound advice, irrespective of what product is used in the implementation of that advice.

This according to Robert Macdonald, Director of a course on advice-based financial planning held at the University of Cape Town Graduate School of Business.

Commenting on the proposed segmentation of the financial intermediary market in South Africa, he said the segmentation will see financial advisers having to make the choice between being advice-based financial planners who are remunerated on a fee basis, or sales agents who are remunerated on the basis of commission.

Macdonald, who is also Head of Xchange Solutions, a business that partners with and supports advice-based financial planners, says that Making the shift from selling product to giving independent advice is primarily a mindset shift, although naturally there are business implications that advisers will then have to consider.

Macdonald says the proposed segmentation of the intermediary market which is contained in the Discussion Document on Contractual Savings in South Africa will in all probability be implemented. "Although the document deals with many issues, by far the most significant is the proposed segmentation of the financial intermediary market," says Macdonald.

He says the document makes it clear that the inherent conflict of interest between the intermediary and the investor is a key contributing factor to the failure of the existing system to work in the best interests of the consumer. This conflict arises from the fact that the remuneration of intermediaries by product providers means that there will inevitably be question marks over in whose interests the intermediary is acting their own, the product provider or the client? In the existing system, the triangular association between the intermediary who provides advice to the investor based on an incentive provided by the insurer (or other product provider) is fundamentally flawed.

Taking its lead from recommendations made by research conducted in other countries, the discussion paper makes the recommendation that adviser rewards be established separately from the product provider. In this regard the following specific recommendations are made:

* That every intermediary must choose to be either a sales agent of a product provider or an independent adviser.

* Sales agents will fall into two categories:
Tied agents linked to one product provider only
Independent brokers who have relationships with a number of service providers.

* Sales agents will be remunerated by the product provider only, in the form of commission.

* Independent financial advisers must be free of all product provider bias and will be remunerated by the client only, in the form of fees. No compensation, in any form, from the product provider will be allowed.

* The choice of which side of the divide an intermediary falls into will apply across the board for all of that intermediary's business. An intermediary will not be able to be a sales agent in his relationship with one client and an independent adviser in respect of another client.

* The choice of status will also need to be made by intermediary businesses on behalf of the intermediaries in their employ. A business cannot be both a sales agent and an independent adviser. All its representatives must follow the decision it makes in this regard.

Macdonald says that change is coming and every broker, agent, financial adviser and financial planner has a decision to make about the type of business they want to have in the future. Do they want an advice business or a distribution business? The choice they make will lead them down very different paths and will affect every aspect of their business. The only certainty in this environment is that intermediaries cannot assume that life will not change, or that business can continue as usual.

"Life for financial planners is going to be very different going forward. The forces of consumerism, regulatory pressure and trends internationally are combining to ensure that financial advisers need to make a choice between being advice-based financial planners or product salespeople," concludes Macdonald.

The real challenge facing independent financial advisers in South Africa is the choice that they will have to make between selling financial products versus focusing on client needs and giving clients sound advice, irrespective of what product is used in the implementation of that advice.

This according to Robert Macdonald, Director of a course on advice-based financial planning held at the University of Cape Town Graduate School of Business.

Commenting on the proposed segmentation of the financial intermediary market in South Africa, he said the segmentation will see financial advisers having to make the choice between being advice-based financial planners who are remunerated on a fee basis, or sales agents who are remunerated on the basis of commission.

Macdonald, who is also Head of Xchange Solutions, a business that partners with and supports advice-based financial planners, says that Making the shift from selling product to giving independent advice is primarily a mindset shift, although naturally there are business implications that advisers will then have to consider.

Macdonald says the proposed segmentation of the intermediary market which is contained in the Discussion Document on Contractual Savings in South Africa will in all probability be implemented. "Although the document deals with many issues, by far the most significant is the proposed segmentation of the financial intermediary market," says Macdonald.

He says the document makes it clear that the inherent conflict of interest between the intermediary and the investor is a key contributing factor to the failure of the existing system to work in the best interests of the consumer. This conflict arises from the fact that the remuneration of intermediaries by product providers means that there will inevitably be question marks over in whose interests the intermediary is acting their own, the product provider or the client? In the existing system, the triangular association between the intermediary who provides advice to the investor based on an incentive provided by the insurer (or other product provider) is fundamentally flawed.

Taking its lead from recommendations made by research conducted in other countries, the discussion paper makes the recommendation that adviser rewards be established separately from the product provider. In this regard the following specific recommendations are made:

* That every intermediary must choose to be either a sales agent of a product provider or an independent adviser.

* Sales agents will fall into two categories:
Tied agents linked to one product provider only
Independent brokers who have relationships with a number of service providers.

* Sales agents will be remunerated by the product provider only, in the form of commission.

* Independent financial advisers must be free of all product provider bias and will be remunerated by the client only, in the form of fees. No compensation, in any form, from the product provider will be allowed.

* The choice of which side of the divide an intermediary falls into will apply across the board for all of that intermediary's business. An intermediary will not be able to be a sales agent in his relationship with one client and an independent adviser in respect of another client.

* The choice of status will also need to be made by intermediary businesses on behalf of the intermediaries in their employ. A business cannot be both a sales agent and an independent adviser. All its representatives must follow the decision it makes in this regard.

Macdonald says that change is coming and every broker, agent, financial adviser and financial planner has a decision to make about the type of business they want to have in the future. Do they want an advice business or a distribution business? The choice they make will lead them down very different paths and will affect every aspect of their business. The only certainty in this environment is that intermediaries cannot assume that life will not change, or that business can continue as usual.

"Life for financial planners is going to be very different going forward. The forces of consumerism, regulatory pressure and trends internationally are combining to ensure that financial advisers need to make a choice between being advice-based financial planners or product salespeople," concludes Macdonald.