Can your pocket afford to have a hole in it?

The date for industry comment on the Financial Services Board’s (FSB) Retail Distribution Review (RDR) White Paper has come and gone, now the industry has to sit and wait to see what will be the final standpoint of the FSB on this controversial matter.

One thing is certain; there will definitely be a change in remuneration structures. The key question is: can you survive a 43% drop in income? This is the projected average drop in income for South African Financial Service Providers (FSP) in South Africa should commissions be scrapped.

The expected average

Less than 13% of advisers have implemented, to some degree, fee based models. Of the estimated 11 500 registered advisors, less than 2 300 advisers are currently changing their fee structures in preparation of regulatory reform.

Clearly, the introduction of RDR is going to have an impact on financial planning practices in South Africa - it is only a matter of time. The regulators have said that Phase I will be introduced in 2015 and what this means at this stage is unknown.

We also know that RDR is tied to the Twin Peaks proposed legislation which is also not yet in force. What is for certain is that change is inevitable, no matter how long it takes to be implemented.

Taking proactive action

So, what should advisers be doing now? Clearly, there is significant movement away from product sales towards advice orientated business models. There is no doubt that advisers are deeply concerned with these proposed changes and rightly so. The potential impact on many practices will be catastrophic if advisers choose to play the waiting game.

The only threat to adviser practices is the advisers themselves. The financial services sector is notorious for postponing decisions of such importance or waiting for other to change.

Here is the rub, the financial planning practices that we talk to have one single common outlook. They already see themselves as advisers and not salespeople looking to earn a commission. Half the war is already won.

It is the first most important step. In fact, speak to any advisor about commissions and they will tell you that yes, this is their income source but this is not what they are about. Looking deeper, it immediately becomes evident that there is significant time, effort, integrity and skill behind the financial planning process and client service including a significant amount of work unrelated to selling a product.

A history of value proposition

The realization that most advisers feel the same should also allow them to discover that all along they have been delivering a value proposition to their clients. The problem is that all this effort is invisible to the market.

The simple reason for this is that very few adviser practices have formalized their client value propositions. This is the second most important step in the evolution of evolving a financial planning practice.

Once this formal proposition is documented, the rest falls into place. The focus is then on sustained delivery. Anyone can promise anything. In the new world, it is about the ability of financial planning practices to deliver there value promise consistently, seamlessly and economically.

At the end of the day, advisers need to be seen as professionals who are offering an indispensable service to clients. You need to maybe look at it from a different point of view, if you are seriously sick you will most likely go to a doctor. You will also enlist the services of a lawyer if you run into legal issues. Seems logical right? Now go to a doctor or a lawyer and tell them that their fees are being cut by 43% and see the reaction on their faces.

The industry cannot survive without professional advice, so move your practices to fee based models before it is too late.