Think long-term

While advisers try to predict the effects of all the regulation on their businesses, the Financial Planning Institute (FPI) Senior Manager Policy and Research, David Kop, CFP® says that if advisers make clients the centre of their business, the transition into a legislative environment that includes Treating Customers Fairly, Twin Peaks and a remuneration review should be smoother.

This advice comes in preparation for the impending implementation of TCF, Retail Distribution Review (RDR) and Twin Peaks, which threatens to change the way that advisers conduct themselves in the industry as well as how they will be compensated.

The Fees vs. Commission debate is at the heart of the RDR discussion.

 

Kop says that the current legislative environment does not support a move to a fee based practice. In the current environment one adviser will go to a client and charge him for the advice that he offers, while another adviser will go to the client and tell him that he will offer the same advice for free. This sends out mixed messages about the industry’s fee structure which may damage the industry in the long run.

"There are concerns in the market that RDR will significantly damage their businesses and I cannot say that these concerns are illegitimate "He adds that moving towards a fee industry will exclude significant portions of the population, particularly among the middle and lower income groups.

Kop points out that if an adviser is selling a preservation fund to a middle income earner, and then hands him a R4 000 invoice, how is the consumer going to pay this when his only financial asset is the fund?

There is no doubt that RDR will have a significant impact on the industry. However, Kop argues that this doesn’t have to be the case, provided that advisers change their mindsets.

 

"Because the industry currently works off a commission basis, advisers are looking for maximum immediate profit in order to sustain their business. Most adviser practices start the month with a zero income situation. This forces them to go out and sign up new business. However if they took a longer term view of the client relationship, this would not be the case, as they could build an annuity income stream.”

Taking a long term view of the client relationship would offer advisers a lot of benefits. This will allow advisers to spend more time on clients and making sure that all of their needs are catered for.

 

This will also go a long way in educating the country about the financial services industry and changing the perception that certain members of the public have about advisers.

 

One of the challenges that was highlighted at the launch of the FPI 2012 Annual Report was that certain members of the public view advisers with the same distain that was offered to tax collectors in medieval times. In their view, advisers are only seen when money needs to be collected. But this perception can change, provided there is an opportunity to negotiate the structuring of fees.

 

"At the moment, commissions are agreed between product providers and advisors (within legislative limits) before selling the product to the client. When speaking RDR, the challenge will now be to negotiate a fee with your client, and that is a mindset change many advisers may battle with. Quite a few advisers are already there, so let’s see what the future holds,” concludes Kop.