Why TCF should be in your DNA

In recognition of how critical this regulation is, and how it will affect advisors’ businesses going forward, Glacier invited international speakers to share their practical experiences with delegates around the country. The speakers highlighted the opportunities available for those who get it right.

Sanlam UK’s Head of Investment Solutions, Rick Eling, suggested ways in which independent financial advisors (IFAs) can ‘survive’ the retail distribution review (RDR) and Treating Customers Fairly (TCF), which have been implemented in the UK – of course, TCF will be implemented in South Africa before long, which means that we, too, need to know how to adapt.

In the UK, the retail distribution review (RDR) rules, which came into force in January have had some wide-ranging implications. Investment advice arms of banks are increasingly closing, and banks are imposing a high minimum investment level on clients. Financial advisors are leaving the industry in part because of a ban on commission, which aims to stamp out mis-selling – the higher qualification standards are also forcing out those advisors who can’t meet them. Those advisors who are staying put appear to be focusing on clients they consider ‘affluent’.

Some context is needed. Prior to RDR, consumers believed financial advice to be free. There was less need to explain what an advisor does, how much of the total fee goes to the advisor and what the ongoing service is. This is, however, vital post-RDR. It is not products that will drive an advisor’s pay, but service. Eling suggested advisors consider what that service is, and whether their clients know what it is.

"TCF is a cultural issue,” said Eling. "It is only through establishing the right culture that senior management can convert their good intentions into actual fair outcomes for consumers.” The cultural framework should encompass leadership, strategy, decision-making, controls, performance management and rewards.

Findings in the market reveal that most senior managers can explain TCF but intermediaries often fail to deliver the outcomes, largely because they lack guidance from senior management. Some employees are unwilling to challenge decisions that have arisen as a result of poorly applied TCF. Eling also said that incentive schemes don’t always include TCF and when they do it is given insufficient weight when weighed against other objectives.

He pointed out that advisors keen on RDR and TCF are invariably younger and well-qualified, and who have no problem with the idea of a fee-based model. Older advisors earning 90% of income from commission have obviously been far less enthusiastic. Some of the worries raised were criticism of fee levels and uncertainty about whether one could charge proportionately higher fees for lower-value clients.

Eling said that, post-RDR, products don’t drive advisors’ pay – service does. There is therefore a greater necessity for understanding your client in depth, producing measurable results and, above all, communicating well. "Maximise face-time, use advice tools and employ ‘soft skills,” he suggested. "Report against objectives and relate outcomes to your client”.

Importantly, don’t use terms your client may not be comfortable with. For example, don’t say "Your portfolio gained 12% this year against a market average of 11%, with below-average volatility.” Say, "The money allocated to your retirement has grown by 12% this year. This is more than we expected for an average year and leaves your retirement plan well on track. When the markets had bad months, you never lost more than you would have expected.”

Eling identified seven important ‘rules’ to follow:

• Understand your client base.

• Understand the clients you would like to have in future.

• Define your offering – can you put it into one sentence?

• What will you do yourself? What will you outsource? And to whom?

• Which risk system will you use?

• Are you independent or restricted? Or hybrid? Why?

• TCF in everything, and mean it!

• In this issue of FAnews, you will find Deloitte’s handy insert on TCF,

‘Weaving customer fairness into the fabric of the distribution network’. The insert was distributed at the seminar.