Living in a box

The Retail Distribution Review (RDR) discussion document introduces the concept of categorisation of intermediaries, and looks at how intermediaries should be remunerated.

Some think that the strict categorisation of intermediaries, and the changes in remuneration structures, will have an impact on the number of intermediaries that will remain in the industry. Of greater concern though is whether the industry will be able to attract young people.

The fine balancing act

It is a fine balancing act between making a living, and servicing the best interests of a client.

Whether we like it or not, the business of being an intermediary has to evolve. Many industries have gone through change. Just because things will be different, or it will be more difficult to conduct business, does not mean that there are valid reasons for opposing change.

Those who embrace the changes and alter their business models will survive in this constant changing industry.

Appropriate advice

Intermediaries need to understand that the focus of RDR is to ensure that clients are provided with adequate and appropriate advice.

If the insurance industry is to remain stable, there must be integrity in the market place; not only from product suppliers, but also from the intermediaries who service the market. In fact, RDR proposes that good quality advice should be adequately and correctly remunerated.

Recognising value

If clients know the value the intermediary offers, this will be beneficial to the intermediary because it will develop its client base and ensure loyalty from clients.

It is this loyalty and a steady client base that creates the real equity in the intermediary’s business, and not the commission payment due to the business which can vary from month to month.

If a client views the intermediary as a trusted advisor, he or she is more willing to consider saving and investing in additional financial services products offered by the intermediary.

Another kind of Brexit

Doomists will use the UK as an example of how the number of intermediaries dwindled. In 2011 there were 40 000 intermediaries in the market, which dropped to 31 000 in 2013.

One of the reasons was that UK insurers adopted technology that did away with the requirement to having intermediaries providing advice. The industry was able to develop products that required little to no advice. Customers had the option to either use intermediaries, or to subscribe to less complex financial products.

There has been some criticism about the little to no advice products. Many believe that these customers are far more vulnerable because they have no recourse against a third party. They rely on their own judgement to purchase a financial product and if it does not meet their ultimate needs, they are no better off had they not obtained the financial product.

This scenario is unlikely to happen in South Africa as majority of consumers still do not have access to certain technology or the requisite level of understanding when purchasing financial products without guidance from a trusted adviser.

A new concept

The concept of insurance is still new to a big part of the South African market. Intermediaries are required to help educate the population. Who are you likely to trust? A person or a computer to sell you a financial product?

As the market develops and grows, we will require intermediaries to service this market. In addition, as clients become more sophisticated, they will still need intermediaries to source and provide them with more complex products to meet their financial needs.

RDR will shape our industry for years to come. It is an exciting opportunity for intermediaries to reinvent themselves and their businesses. It is not the categorisation that will reduce the number or limit the entry of intermediaries in the market. It will be the inability of intermediaries to change their business model and build equity in their business.