A thriving independent intermediary force

Since 1999, the South African financial industry has been going through significant regulatory changes. The recent Retail Distribution Review (RDR) is one such example, and we need to take a step back and look at what it hopes to achieve. I am of the belief that the RDR proposals are largely well thought out, and if implemented properly, over a reasonable timeframe, stand a good chance of success.

Financial intermediaries are to be categorised into independent, multi-tied or tied. In short, a tied intermediary will be any individual who has a contractual relationship with a product supplier that restricts the intermediary from providing services relating to the products of that product supplier. Multi-tied is any intermediary who does not have an exclusive contract with a provider and who does not satisfy the independence criteria laid out in the draft regulations which permit the use of the term independent financial advisor (IFA).

Meeting the criteria

It is necessary to view the two sets of independence criteria the Financial Services Board (FSB) has laid out in the regulations, withthe core being the need for an advisor to have freedom from product supply influence if they are to meet the definition of an IFA, and call themselves this in the marketplace.

The proposed criteria includes no agency representative outsourcing or other mandated related relationship, no product supplier targets, no indirect ownership and no restrictions or other influence from any product suppliers.

The level that this bar has set is of course extremely important because if set too high, the number of firms that are able to market themselves as independent financial advisors (IFA), will drop with a commensurate rise in the number of multi-tied intermediaries.

No bad intentions

I doubt that the FSB would wish the RDR to be remembered as the beginning of the end of the IFA. It is therefore likely that a balanced approach will be taken to ensure that the number of intermediary firms that are able to use the word independent or IFA in their marketing documentation in a post-RDR environment is not restricted to a few select individuals who have access to a class A client base.

Clearly those intermediaries who currently run fee-based practices, with minimal pressure from product suppliers, will find it easier to meet the independence bar than the majority who are currently contracted to product providers. If independent advice is to survive, the manner in which product providers contract with such advisors will also need to be reviewed.

A well balanced industry

Regardless of what transpires, it is likely that the post-RDR landscape will in any case consist of a relative handful of independent financial advisors with the balance either falling into the multi-tied or tied categories.

In another threat to independence, some product suppliers have been known to chase the acquisition of intermediary practices. This process has of course not been without controversy as so-called sign-on bonuses have been used in many instances to lure intermediaries into the fold.

In these instances, the RDR is being presented as the near end-of-the-world for smaller advisors, or indeed medium-sized advisors, who will struggle to paddle their own canoe in a post-RDR environment.

I find this argument convenient and disingenuous as if you read the RDR text, or attend a presentation from the FSB, one theme comes through strongly; they are committed to a thriving independent intermediary force. This would then lead one to believe that the Regulator will not set the independent bar so high that it becomes difficult to reach.

I have high hopes that at the end of the day we will see a thriving intermediary space that is able to render reputable advice and services to an audience who desperately needs it.