The impact of retirement reform on advisers

It is becoming clear that the relationships advisers build with their clients must be based on trust and innovation.

The adviser plays a big role in helping a client save enough towards retirement. With increasing longevity and improvements in technology, many people can expect to spend as long, if not longer, in retirement than they did working. Therefore, it is essential that the adviser plays a role well past retirement stage.

Equipping advisers with the right tools was the purpose of the Sanlam i3 Summit, which was held on the 18^th of September in Rosebank. Panel members discussed the changing landscape of the financial services industry and surviving and thriving amid geopolitical and regulatory change.

Regulation at hand

Retirement investing has become a hot topic in South Africa and will remain in the public spotlight until the Financial Services Board (FSB) finalises the Retail Distribution Review (RDR). This will be a significant point of departure for advisers as one of the objectives of RDR is to define advice. 

According to Jean Lombard, Head of Business Integration and Researcher at Glacier by Sanlam, South Africa’s distribution landscape is complex with a range of different distribution models from which clients can select. “We have seen a number of changes in the regulatory landscape- all of which have changed how service providers and intermediaries conduct their business. Retirement reform remains a work in progress, although the introduction of a tax-efficient savings vehicle has been earmarked for March 2015,” says Lombard.

“Once again, the FSB will be taking their cue from changes which have already taken place in the UK,” continues Lombard. 

The international landscape

Lombard outlined that advice has never been free and financial advisers are compelled to be transparent about the cost of their advice. “Clients need to understand who they are paying fees to and what these fees are for,” he says. There are two categories of advisers in the UK; restricted and independent advisers. “Restricted advisers deal with two or three platforms only (they are not tied agents). Independent advisers can advise on any product, although many have changed, and continue to change, to restricted status,” says Lombard. 

Lombard mentioned that the reason for this is that the UK legislation requires independent advisers to give the whole of the market advice every time they see a client- making it an expensive and time-consuming way to service the client. Advisers are also required to sign an agreement relating to TCF and firms are monitored to ensure they meet key standards.

“Advisers are no longer allowed to receive commission. They can only receive fees as negotiated with the client, often resulting in more documentation to explain to the client exactly what they are buying. Advisers no longer spend their time on portfolio construction, but rather on identifying, quantifying, understanding, prioritising, fulfilling and servicing their clients’ financial needs. As a result, multi-national and risk-profiled solutions have become more prevalent,” says Lombard.

With more pressure on fees and increased disclosure, passive investments have seen significant growth in the UK over the last few years- giving investors exposure to world markets at reduced fees.

The Australian landscape

Peter Chun, General Manager Product & Investments Colonial First State, Australia says that, “South Africa can learn from the happenings of Australia by spotting the opportunities that come with regulatory change and reaping the rewards. The Australian market is maturing. There is intense fee competition and greater advice fee functionality.” 

Australia has three pillars for retirement reform government age pension: employer compulsory contributions and individual voluntary contributions. In 2013, Australia had the fourth largest pool of retirement savings. However, the system is yet to fully mature. Weaknesses of the Australian system include:

•         Superannuation is often withdrawn as a lump sum rather than an income stream;
•         Labour force participation among older people is low and disincentivised;
•         Superannuation benefits are accessible long before Age Pension eligibility;
•         There are regulatory barriers to product innovation and
•         There is a growing gap between Age Pension eligibility age and life expectancy.

The increased regulatory burden has made it uneconomical for Independent Financial Advisers (IFAs) to service the mass market. They have become product manufacturers themselves or vertically integrated with institutional manufacturers and practice revenue is increasingly derived from fee for service.

Chun says, “although advice reform has been a key concern, planners have largely weathered it. Businesses have been forced to transform polarisation and consolidation.”

The evolution of financial advice

 “South Africa can learn from the UK and Australian experience. Clients want good advice and products that perform; they are prepared to pay for independent advice as long as restricted advice process is clear and ultimately meets their needs. In this sense, through declining fee structure there will be opportunities for those advisers who can match these expectations,” concludes Lombard. 

“Consumers need access to fair affordable advice, and products should also be simple and easy for consumers to understand. This is crucial in the investment advice space,” says Caroline Da Silva, Deputy Executive Officer at the FSB. 

David Ferguson, Chief Executive Officer of Nucleus, a platform for advisers and clients says, “If advisers think funds, the advice element fades away. The value chain is important. The key is to manage the cost across the value chain. Sustain the value chain, nurture the client relationship and offer simple solutions for individual needs.”

David Gluckman, Executive Committee Member within Sanlam Employee Benefits concluded by saying, “the trick is offering flexible options.”

Editor’s Thoughts:
With regulatory change happening at a rapid pace it is evident from the above that advisers are weathering the storm. However, it is only through change and adaption that they can survive. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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