Professional financial services intermediaries all face the “should I stay or should I go” question at some stage. What should you consider before leaving the “fold” to become independent? Should you consider that lucrative offer to re-join the “tied” age
A financial adviser’s career often starts with one of the larger product providers as a member of their “tied” agent force. They typically work at a product provider, bank brokerage or corporate brokerage. As part of a financial organisation the “tied” agent enjoys certain benefits over those who choose the independent route.
Pros and cons of being “tied”
As a “tied” agent you benefit from an organisation with the necessary clout to back your advice. You have access to qualified leads and a comprehensive support system including training, management, administration, financial assistance and personal benefits. And you can head in to work each day safe in the knowledge your salary will be paid at the end of the month.
But being “tied” has its drawbacks. You work for someone else and are “managed” to the ultimate benefit of the product provider and its shareholders. As a “tied” agent you are subject to production targets, limited in terms of choice of product provider and product options and have to make do with a “share” of the commission.
Can you offer a professional service when you’re limited to certain products? “Tied agents often struggle to marry the specific needs of their client with the available products,” says Ronald King of PSG Konsult. “The more advanced the client and the less he fits into a little box, the greater the desire for independent thought processes and products.” And that’s why many advisers set off on their own, either in partnership or as sole proprietors.
The entrepreneur factor
Another reason intermediaries choose the independent route is the entrepreneur factor – the ability to build value in something they own. A self-employed individual decides what to do and how to do it. They get to build and create their own brand and reputation rather than hanging on the coattails of their employer. And forty years down the line, when retirement looms, they can convert their independent practice into a nice retirement nest egg. Every policy you write, every customer you “sell”, every commission you generate accrues for your account.
Best for the client
Paul Kruger of Moonstone stands firmly in the independent camp. He believes the independent structure enables the intermediary to offer the client a choice of what he or she believes will best suit the client’s needs. Having more options makes finding the most appropriate solution a lot easier. He uses a quote from Benjamin Franklin’s Historical Review of Pennsylvania, 1759 to back his sentiment: “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” His words ring true in an environment where product providers are offering lucrative “deals” to bring independent intermediaries back into the fold.
Kruger’s views are shared by Ian Middleton, managing director of Masthead. “We fundamentally believe that an advised consumer is better off than a non-advised consumer,” he says, “and from our perspective the advice from an independent broker is far better for the consumer.” His arguments for independent advice centre on freedom of choice and the benefit this offers the individual client. An independent intermediary can boast “choice of provider” rather than “choice of product”.
Not the easy way
Of course, there are challenges being an independent broker. Costs, loneliness, exposure and risk all appear on the minus side of the equation. Licence fees, professional indemnity cover, operating expenses and regulatory exams soon add up. And that’s before you consider impact of the time “lost” to administration.
One can loosely view the benefits of going it alone as the drawbacks of staying “tied”, and vice versa. Fortunately costs needn’t be a deal breaker. Most business costs can be offset against income tax, notes Masthead. If you factor in the sacrifice in commissions made by “tied” agents you gain a better perspective.
No need to “go it alone”
There are many organisations focused on making the life of an independent intermediary easier. “To stay independent and viable brokers need to partner with someone who has the expertise that they need,” says Middleton. Anything outside of your core competencies – think compliance and administration – eats into your time, dilutes your focus, and therefore eats into your profits. At the end of the day the successful practice boils down to the age-old economic equation of income and expense, and the balance between profit and loss.
“The independent advisor has seldom if ever been under more threat than at this current juncture,” adds Middleton. “This is mainly as a result of over-regulation, and to a lesser degree to rapidly changing market conditions and competition from new age ‘providers’ such as supermarkets and direct marketing.” Continuous changes in the regulatory and product environments make it extremely difficult for the independent to stay ahead of the game. It’s a constant battle to stay up to date with the slew of new products and avoid the myriad “questionable” products too.
A new breed of brokers
“Independence places more responsibility on the financial advisor,” says King. They have to navigate the treacherous financial services waters and avoid pitfalls, always keeping their client’s best interests at heart. “Ironically, independence is what the new regulations – including conflict of interest legislation – demands.”
The regulatory environment is creating a new breed of independent brokers – because it’s forcing them to accept less and less assistance from product providers. “The conflict of interest regulation will prevent product providers or associated companies from funding the running costs of independent brokers,” says Middleton. They will no longer receive “free” financial needs analysis or administration software, compliance services, and more. The independent is also increasingly being left to fend for himself in the event a complaint is brought against him.
Back into the fold?
Middleton suggests that independent intermediaries should think carefully before considering lucrative offers to rejoin the “tied” agent force and essentially becoming an employee of the product provider. “You share commission, give away ownership of your customer base, become subject to corporate targets and become limited in your choice of company and product options,” says Middleton. A bank might supply you with an endless string of leads, but they withhold as much as 50% of your commission, and tell you what to sell.
Unintended consequences
Those who walk the independent route are prepared to make sacrifices and suffer setbacks to perpetuate freedom of choice in the financial services space. But their principled stance is under threat. Product providers are increasingly “on the hunt” for independent businesses with strong books. They cherry pick from the available practices, absorb the once independently advised clients and immediately set about balancing (some use the word churning) individual portfolios.
The irony is the Financial Service Board – supposedly in the financial consumer’s best interest – is driving independents back into the “tied” agency game. The financial services landscape they’re carving out is weighted heavily in favour of product providers, tied agents and large financial services providers. South Africa will probably emulate Australia over the next couple of years, with a continued decline in the number of independent agents.
A decade from now consumers will either deal with a “tied” agent, or an independent practice with the critical mass to compete!
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