Low advice models – an option in SA?

South Africa’s Retail Distribution Review (RDR) expands upon that of the United Kingdom in that it proposes changes to the intermediated distribution model in the life, investment and short-term disciplines as opposed to investment only. By Gareth Stokes: Communications Manager at the Financial Intermediaries Association of Southern Africa (FIA).

However, when it comes to defining key concepts such as ‘types of advice’ or specifying the business models that might be applied by intermediary Financial Service Providers (FSPs), both South African and UK regulators seem to be in agreement.

In South Africa, the Financial Services Board (FSB) proposes three types of advice defined as financial planning, up-front product advice and ongoing product advice. Financial planning involves a holistic overview of the consumers’ financial needs while the upfront and ongoing product advice concepts are self-explanatory. These definitions set out the touch-points a consumer might have with an adviser during the advice process.

Underlying dangers

The same cannot be said for the non-advice or ‘low advice’ distribution models as proposed in RDR. The intention is to restrict these advice models to simple products that comply with explicit product standards; but this might prove difficult in a competitive market where product suppliers and direct sellers vie for market share.

While non-advice is quite easily understood, the level of consumer-adviser interaction that will be needed in a ‘low advice’ model is not and will certainly vary from one product to the next. Thought should also be given to the consumer who is blissfully unaware of the components that make up suitable product advice, regardless of the model employed.

There are a number of dangers in introducing non-advice and ‘low advice’ models. They pose risks due to consumers transacting for financial products without adequate advice, they may accelerate the exodus of independent financial advisers from the advice space and FSPs in the intermediated environment may take advantage of the regulatory arbitrage inherent in such advice solutions.

New class of advice

What may happen is that a new class of advice firm could emerge that specialise in self-service advice built around non-advice and ‘low advice’ financial products. The ‘advisers’ employed by such a firm could insulate themselves from any advice risk in the financial planning process by operating, as it were, at arms’ length from the consumer. Product suppliers could also use this category to corner the market by offering many default solutions through so-called self-service channels.

Another major concern post-RDR is that non-advice and ‘low advice’ models could result in a concentration of the advice market in the hands of insurers, banks and other large financial institutions. It is already common practice for banks to offer their high-net worth clients ‘free’ financial planning as part of their private clients’ accounts benefit package.

What will happen to independent advisers and the quality of advice if banks offer free advice services to their clients via salaried bank employees? It is quite possible that advisers who charge for their services through a fee for advice model could be squeezed out of the market, meaning that RDR would play into the hands of large financial institutions at the cost of the small independent planner.

Simplifying complexities

Time will tell whether any of the above behaviours exhibit in our market. At this stage the Financial Intermediaries Association of Southern Africa (FIA) sees nothing wrong with financial institutions building on the close relationships with their clients – because banks and insurers have been upselling to their high-net worth clients, through agency forces and franchises, for decades.

We will however, keep a close eye on regulatory developments in the non-advice and ‘low advice’ space to ensure that complex financial products are always ‘sold’ with advice from a professional adviser. And we fully expect that the concept of ‘free’ advice will soon fall by the wayside. Good advice from a professional financial adviser is a valuable commodity that cannot be given away.