The way forward for remuneration of advisers
01 October 2013 | Magazine Archives FAnews & FAnuus | Features / Profiles | Wessel Oosthuizen, University of the Free State
In a recent interview, the CEO of Old Mutual Wealth said that people want their adviser to add value and that product suppliers and advisors should be more customer-centric and advice-led rather than just excellent at products and distributing them.
It seems we are starting to reach a tipping point in our industry regarding remuneration of financial services providers, especially taking into account that more financial services firms are currently looking at changing their processes and remuneration models. The sad aspect of this is that these changes are brought about by statutory pressures and not always because there is a realisation of the duty-of-care principle or the fiduciary duty owed to consumers.
Following international trends
In South Africa, which is following similar laws to the UK and Australia, we needed Treating Customers Fairly (TCF) principles and other regulatory measures to effect changes to the way we treat customers.
In the UK, HSBC implemented a system to remove all product sales incentives so that employees are rewarded on client experience, sales quality and a values measure. Under HSBC’s compensation structure, advisers are paid a salary plus a quarterly discretionary bonus. Soon we will start to see similar remuneration structures introduced in South Africa.
A note of warning, firms should carefully consider and research the pros and cons of possible changes., A standard salary and bonus compensation structure may be detrimental to adviser’s motivation to build their businesses and cause them to leave to seek remuneration where they can earn more with commission orientated compensation. This is obviously depending on what government decides to introduce regarding adviser remuneration regulations.
Both sides of the story
On the positive side, standard salary and bonus compensation structures would better align adviser and client interests by removing commissions as a sales incentive. These structures can be a good way to present the overall value proposition of a firm, which includes wealth.
A huge possible negative of these regulatory changes will be that financial advice and planning will be something only to be afforded by wealthy clients. In an article by Alex Steger in the UK, he wrote that Barclays was planning to stop offering financial advice through its retail branches by closing Barclays Financial Planning after a review deemed it no longer commercially viable. He said further that Barclays expected to offer retail investment advice online, and that it expected financial advice in bank branches to decline.
The critical question is whether financial advice delivered to the lower and middle classes will still deliver a return that would justify the time and investment required. Old Mutual Wealth declared via their CEO, Andrew Bradley that they would like too cater for clients who have R5 million in investible assets. He however added that they are not excluding clients who have less than that.
Although remuneration is crucial in the industry going forward, we should realise that it is only one of several factors which influence the quality of investment advice. Other such factors are the financial literacy of consumers, cost transparency, handling of complex products, advisor qualifications and other internal incentive systems.
It is clear that globally commission based remuneration models is slowly giving way to new client-centric reward and incentive structures and it follows that ensuring the quality of advice must not be reduced to the issue of the remuneration model. Quality assurance with the aim of preventing miss-selling requires a holistic approach, both for the regulatory regime and from a firm’s internal management perspective.
