Ongoing service… Is it fact or fiction?

The Financial Services Board (FSB) recently fired the first shot in what will become a lengthy debate on broker remuneration. One of the critical issues the regulator will have to decide on is whether future remuneration is based on the up-front or as-and-when commission model.

We can kick off the debate by considering at what stage of the advice process the service is delivered. A simple investigation confirms that our industry focuses on new business from new clients. And intermediaries typically earn no income unless a product is sold. It is not surprising, therefore, that an intermediary is reluctant to review products and recommendations already made.

The ongoing monitoring of a client’s situation post-sale is not seen as a priority… And – although extreme – it could be argued that this review is not even seen as part of the financial advice process. A recent international survey indicates that the delivery of a once-off financial service to a client is not unique to South Africa.

A post-implementation review of a client’s financial situation will depend on what was mutually agreed between the client, adviser and provider. As such it is important that an agreement or mandate be put in place regarding the delivery (or not) of an ongoing service to the client.

The Financial Advisory & Intermediary Services (FAIS) Act’s General Code of Conduct (Code) is clear on this requirement. It states that a service must be rendered "in accordance with the contractual relationship and reasonable requests or instructions of the client.”

The Code further includes a duty on providers to provide the client with a written statement reporting certain information in the case where the products advised on were implemented and are still in existence. This statement must include a description of the product, its main benefits and the ongoing monetary obligations associated with it.

Ongoing incentives, considerations, commissions, fees or brokerages payable to the provider (or others) in respect of these products must also be highlighted in the statement. Where the product is an investment or has an investment component, the value of the investment and the amount of such value which is accessible to the client must also be communicated.

Although the term "ongoing service” is not defined in the FAIS Act or in the Code, it can be deduced that the regulator expects that there must be an ongoing service to clients in certain circumstances.

Ongoing service may include things like advice to a client on a long-term insurance policy and on collective investment schemes, for example. This holds especially where the client is assisted in purchasing a product and the intermediary receives an ongoing commission as a result of the transaction.

Too many advisers leave communication with clients solely in the hands of the product provider. An agreement with clients to annually review products implemented by you will not only benefit your clients but will be financially rewarding too.

A review process affords the adviser an opportunity to assess the progress toward the achievement of a client’s objectives as well as make the necessary recommendations. The review process will also help to determine whether changes in the client’s circumstances or objectives necessitate adjustments to the product mix.

It is our duty to change our industry from a product driven industry to a client focused one. We can do this by offering a "real” ongoing service to our clients. If we do not change the way we do business with our clients the regulator will force us to change our behaviour by using the only tools at its disposal – policy and legislation!