In the article Avoiding the Problems that RDR will Cause the Independent Adviser, published by fanews.co.za on 9 June 2014, Michael Blain – then MD of Altrisk – shared his views on the likely outcomes and consequences of the Retail Distribution Review (RDR), with specific reference to remuneration models for independent financial advisers (IFAs).
“Removing commission outright as a form of remuneration will be a serious blow to the IFA,” said Blain. He noted that failure to get the RDR model spot on could trigger the demise of the IFA and independent financial advice – a result that would be detrimental to consumers, product providers and regulators alike.
A fair request
Many FAnews readers responded to Blain’s article, including Thomas. He said that it was nigh impossible for IFAs to make ends meet when considering ‘reasonable’ remuneration versus the rising costs associated with the FAIS Act and other industry-specific regulations, and also that were RDR unnecessarily restrictive, new IFAs would only join the industry if they worked as tied agents or inherited an existing brokerage. He suggested that the FIA bring pressure to bear on insurers and the regulators to ensure a sensible RDR outcome, even going so far as to call on the organisation to tell its members which supplier to support.
Was his plea to the FIA fair? My first observation is that the FIA is actively lobbying both the regulator and product suppliers in each and every interaction we have with them, whether formal or informal. But we must tread carefully, because certain proposals may not be of equal value to each of our members.
What about the suggestion that we spell out to our members which product suppliers they should support and which not? The reality is that we support a free market system which means that our members have a right – subject to the rules of market conduct as introduced by various regulations – to contract with whomsoever they choose. I expect that with the introduction of Treating Customers Fairly (TCF) a trend may emerge wherein brokers contract with fewer insurers.
It is all about the relationship
Our members must represent the client at all times and be objective in finding solutions rather than being driven by emotion, conflict, inducement or undue pressure from suppliers. Choosing a partner should be about good relationships driven by good advice and good product. You, the IFA, and not the insurer, hold the responsibility for advice to your client.
And you, the IFA, are responsible for your business relationships too. A contract dispute between an IFA and an insurer is a commercial issue in which the FIA cannot intervene. It is for the FIA member to apply their respective minds when signing these contracts. What we can say is that RDR and TCF should give our members ample opportunity to re-contract with suppliers. Do not be misled by our apparent ‘hands off’ stance in these matters. We have power, but this power vests in our ability to present a unified voice to the regulators on matters that affect our members.
There was a lot of truth in Thomas’ other observations, including his reference to the age old adage that insurance is sold rather than bought! Regardless of the intention of FAIS to professionalise the industry, we will never eliminate sales in the financial product space. The requirement is that we sell in a professional manner.
But there is a danger in generalising. By saying that all insurance is sold and not bought, we risk conflating issues, thereby making it difficult for industry stakeholders to come up with appropriate solutions across the markets and sectors we operate in. The regulator’s job is to ensure that each aspect of insurance is dealt with appropriately, to which end they have separated products, markets and insurance disciplines.
An added burden
Thomas is correct when he says that regulation comes at a cost. Brokers’ administrative and compliance burdens have increased significantly over the past decade. I remember in the late 1990s that certain insurers introduced administration fees which were charged as a separate line alongside the premium. With hindsight the decision not to allow such charges in the short-term space was a mistake.
One of the biggest oversights following the 2004 implementation of FAIS was that broker remuneration structures remained unchanged despite significant increases in compliance costs. Neither the Short-Term Insurance Act nor the Long-Term Insurance Act recognises the changing demand on risk and financial advisers.
Among Thomas’ assertions is that there is only one consistent ‘winner’ in all business concluded by intermediaries for their clients and that is the insurer. He said that insurers receive their premiums ‘as regular as clockwork’ whether markets rise or fall and also pointed out that it was better to own insurer shares then their respective products.
Regulation and more
The FIA believes that TCF will balance the scale by better apportioning risks among product suppliers (and their shareholders) on the one hand and risk and financial advisers on the other. We know and understand that over time the six principles of TCF will be built into all other legislation to safeguard both IFAs and their clients.
What about RDR? Will it kill independent advice? The review must consider the possibility of new entrants to the financial services market being closed out and acknowledge the surge in tied agents that could follow radical changes in the broker remuneration model. It must also recognise that IFAs will not be able to run their practises if they are paid for the sale only and not for ongoing advice.
I spent many years in the life industry during which time it underwent numerous changes. Today’s brokers, for example, were born out of yesterday’s tied agents. New entrants would enter the so-called agency businesses from where they learnt the ropes, matured and then branched off as IFAs. Many of these IFAs are now returning to the tied agency fold to benefit from a more secure environment.
The “churn” dilemma
There is nothing wrong with being a tied agent, but problems do arise due to the incentives that are sometimes offered to IFAs to bring them into the fold. Concern has also been raised over the unsavoury behaviours that occur immediately following the ‘deal’.
I mention churn and the decision by the very same tied agents to migrate to new insurers every couple of years as examples of behaviours that lend credence to the claim that we are sometimes our own worst enemy. And the regulator is already on record that it will come down hard on such conduct, even proposing to address it prior to finalising RDR.
In closing, the FIA supports Blain’s view that it must ensure that independent brokerages are able to appropriately prepare for regulatory changes while ensuring that their businesses remain solvent and profitable. It is also worth noting that risk and financial brokers are, in some instances, underpaid for what they do (which is required by law of them). From an IFA perspective we want to ensure that RDR results in a fair income stream for intermediaries to ensure sustainable practices.
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