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A broker by any other name

03 February 2021 Gareth Stokes

The South African financial advice community should be raked over the coals for failing to define key role players in the sector despite discussing the matter for more than six years. This staggering inability to place appropriate labels on financial advice-givers, and yes, we use advice-givers intentionally, is among the reasons that local consumers are so confused today. How can the industry expect to improve financial advice outcomes when it cannot even reach internal agreement on who consumers should ‘call’ for advice? Let us take a moment to reflect on the history.

Six years and counting

As far back as October 2014, the then Financial Services Board (FSB) published its vision for market conduct at the intersection of financial services providers (FSPs), including advice-givers, and the end-consumer. The Retail Distribution Review (RDR) contained 55 proposals which have since been sliced-and-diced by the industry and, in most cases, incorporated into the broader regulatory framework. The December 2019 RDR update, published by the Financial Sector Conduct Authority (FSCA), identified one of the unimplemented proposals as Proposal K: Types of adviser. At that time, Proposal K was subject to stakeholder consultation, with technical work at an advanced stage. 

Much of this consultation was summarised in the RDR Discussion Document on Adviser Categorisation and Related Matters alongside updated proposals for adviser categorisation in the investments sector, contained in the RDR Second Discussion Document on Investment Related Matters. These documents were published in December 2019. The FSCA writes: The former document “invites input on the final terminology to be used to describe different categories of financial advisers, as informed by the findings of a consumer testing exercise completed in September 2018 and shared with industry stakeholders”. But why all the fuss? Why do we need reams of paperwork to substantiate how advice-givers should be categorised, what they should be called and what they may advise on? 

This article will not explore the naming of financial advice-givers except to observe that the regulator has abandoned its initial three-tier mode for financial advisers, being tied, multi-tied and independent financial advisers (IFAs), for a two-tier model with product supplier agents (PSAs) and registered financial advisers (RFAs). This could be close to optimal except for the bizarre move away from words in common use among consumers, such as broker and salespersons. Perhaps the regulators should apply the plain language requirements built into the financial services regulation. 

Professional adviser versus salesperson

An FAnews reader, we will call him John, responded to a recent article on the un-advised, scripted telesales processes used by many of the country’s direct life insurers. He suggests that the solution to the adviser categorisation debate is to distinguish between professional financial advisers on the one hand, and salespeople on the other. Individuals could choose which of these two categories they belonged to. “If you are a salesperson you may earn commission and fees from a product provider; if you are a professional adviser you may only invoice your clients directly,” says John. A professional adviser would charge a fee unrelated to the products sold and be totally independent of the product provider. Is this an oversimplification of a complicated marketplace? 

The FSCA takes a rather uncompromising view of the financial services landscape. It distinguishes between product providers, who develop and provide financial products and the representatives of these product providers or other financial services providers (FSPs) who sell these products in return for compensation or commission. The FSCA presides over all of these stakeholders to ensure that all transactions they enter into are completed ethically. “But the market does not work like that,” argues John. “Brokers have been designing their own products, including policy wordings, writing the software and having them underwritten by product providers for over 40 years”. The broker, in this case, carries the can when the product provider provides poor service. In this context broker refers to an advice-giver in the non-life insurance market. 

Another major issue in the financial advice market is that the FAIS exemptions enjoyed by direct marketers are misplaced. Reflect for a moment on the following question: Which sector of the customer population is most in need of quality advice? “The way the act and regulations are structured it appears that the wealthy and most educated receive the best protection, while those with limited financial means are left to buy direct on a self-service, no advice or limited advice basis”. Product providers get away with selling product via their representatives despite the tough requirements under the FAIS General Code of Conduct; Treating Customers Fairly principles; and the Policyholder Protection Rules. The best advice, meanwhile, is being provided by professional advisers on a fee basis to competent customers. 

The problem can be summarised as one of advice versus selling. A product provider agent or representative is often more focused on closing the sale of a financial product than giving advice. “The FSCA maintains that the direct market is largely self-service, intermediary only with no advice; but I am afraid that is not true,” says John, before concluding that the compliance focus has been turned on its head. He offers a real life experience of seeking a non-life insurance personal lines quote from two of the country’s largest direct insurers. Advice shortcomings in these interactions were endemic. A salesperson could not explain the difference between specified and unspecified All Risks; but was happy to give opinions on how best to structure risk on a policy. But things got worse from there. 

The list of errors included recommending that John insure his home at a value significantly lower than market value. This suggestion was based on the representative’s desire to close a sale despite the potential insured’s home exceeding the maximum underwriting limit on that type of policy. When pushed re the application of average on subsequent claims, the representative opined that the insurer did not apply average. Absolute humbug. “That is how those with poor financial literacy are concluding their insurance,” notes John. In another example a first time motor vehicle buyer was sold vehicle finance, a non-life insurance policy and a personal accident policy without receiving a modicum of financial advice. 

“These examples go to the heart of why RDR has dragged on for more than six years,” concludes John. “The FSCA and the industry in general need to get their collective heads around the fact that selling of products and professional financial advice are not interchangeable”. The person who sells a financial product and gets paid by the producer of the product is a salesperson; the person who provides professional advice and charges the client is a financial adviser. And Any transaction following which an adviser accepts commission risks tainted advice. Professional financial advisers, meanwhile, have a fiduciary responsibility to honour their clients’ trust and give them the best advice possible, even if it is to the adviser’s detriment. 

John concludes that the regulator is on a hiding to nothing until they take steps to realign incentive-based remuneration systems with the outcomes set out in the Code. “As long as the industry is sales driven the problems will continue,” he concludes. Salespersons will always play a role in the financial services industry; but they cannot be allowed to masquerade as professional advisors. 

Writer’s thoughts:
One would think after being part of an industry or profession for decades that the naming conventions would be clear and unequivocal… Your job title should be clear from many years of interactions with clients and potential leads. Alas, this appears not to be the case. Are you surprised by the lengthy debate around naming conventions in the financial advice space? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts


Added by Gareth Stokes, 08 Feb 2021
Thank you, FIA for weighing in on the topic. It is encouraging that the association is on hand to keep advice professionals informed of the various regulatory changes, and to represent advisers’ interests in the many public discussions that take place around new regs.
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Added by Gareth Stokes, 08 Feb 2021
Interesting observations, Ben. Commission has indeed been held up as the root of all evil in the financial advice space. One wonders what the regulatory outcomes would have been if the regulators had focused as much on product design as they did on product distribution.
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Added by Gareth Stokes, 08 Feb 2021
Hello Garrick. Great observation about the difficulties in servicing the low income market. Also enjoyed your views on comparison of financial advisers to medical professionals.

The struggle to comply with the rules and regulations being foisted on us by dysfunctional municipal and other state entities is common to both individuals and small busines. Bureaucracy is bad; but an inefficient bureaucracy even worse!
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Added by Garrick Bergh, 03 Feb 2021
The closer I get to 40 years in this industry the more I see the BS flying around. So what has all this handwringing and chest beating achieved?

Absolutely no realistic solution for the greater majority of the buying public. None!

Rather it has created an indigestible increase in bureaucracy and often largely pointless administration. For example : One institution now has a Beneficiary Appointment document that runs to 5 A4 pages. That's progress!

I actually applaud the tele-sales industry. I am neither able to or wish to service their market. It's too expensive and too labour intensive for me to do so.....and then probably never get paid if I worked exclusively on a fee basis
All the FNAs in the world cannot protect the client against black swan events. An FNA is simply a very short dated snap shot of a scenario which is often out-of-date almost as soon as you leave the room.

You cannot legislate honesty. Either the adviser is honest or motivated entirely by self interest and his/her own income needs. Filling in endless Records Of Advice is not going to change that.

Yet not a word is mentioned about the almost criminal inefficiency that intermediaries have to grapple with on a daily basis as they attempt to transact and administer business with institutions whose systems are mainly malfunctioning and largely mismanaged by functionally illiterate staff who seem to enjoy 'royal game' status in terms of accountability.

......and using doctors as an example to our industry is somewhat misguided. Perhaps doing a study on overwhelmed day clinics would have been a better example as to how all that supposed 'professionalism' is forced to function in the real world.

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Added by Ben Holtzhausen, 03 Feb 2021
Great article, thank you Gareth. Sales and advice should really be separated.

Product providers' need to sell their product, and their reluctance to stop applying their perverse sales incentives is one of the primary reason why we ended up in an over regulated industry.

The industry hoped FAIS will help them deal with diligent and competent financial advisors, who are also high powered super sales people. What a paradox?

Advisors/Advisers (we cannot even reach consensus on the spelling:) ) should only provide financial advice, and then assist the client to procure the best solution/product at commensurate fee agreed to between IFA and client. There should be absolutely NO commission on the sale of the product and the procurement fee should stand autonomous from the cost of the product.

I believe banning commissions can ultimately bring a huge relief in some senseless draconian regulations and certainly reduce costs.
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Added by FIA (Llani Miller), 03 Feb 2021
Great to see conversations are taking place, the FIA has been providing training to members in this regard. We are still awaiting the final legislation to be passed and are keeping our members informed and have made a detailed submission to the FSCA. If you are not a member of the FIA we encourage you to get in touch with us, we engage constantly with regulators and government to ensure that the interests of our members are represented and that our members are kept informed.
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Added by Gareth Stokes, 03 Feb 2021
@Gillian Garish: Glad to see some agreement on the sales versus advice angle.
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Added by Gareth Stokes, 03 Feb 2021
I am broadly in agreement with Cynical Simon’s comment, except to say that the linking of remuneration to product, by way of commission, appears to be the root of all evil in the advice market. Access to financial services and remuneration for low-income advice are, in my view, areas that will prove more difficult to resolve than either adviser naming or adviser remuneration!
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Added by Gareth Stokes, 03 Feb 2021
Thank you for your detailed comment, Carol Lenzi. I enjoyed your separation of roles and risks between adviser, or whatever this role is eventually called, and product provider. You also appear to support differentiating between an advice and sales function, which was the gist of the article.
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Added by Carol Lenzi, 03 Feb 2021
Thank you for putting this topic out there again, Gareth. In order to win this war, the FSCA needs to ultimately separate product from advice. I know it is easier said than done as there are many role players and stakeholders and distribution channels etc. etc. Financial advice is a professional service and is intangible. Much like a doctor (or lawyer) who provides advice on a specific condition (or in some instances where a full medical is done - on everything) - Nothing is being sold. They may perform the operation, but it is irrelevant as to which hospital it is performed at. Doctors do not have systems that gear their advice towards selling a particular operation they perform. The doctor may perform the operation as well and be paid for this "implementation" at an additional fee. He / she does not get incentivised or paid by the hospital to do so. Although the doctor can be held liable for the procedure performed, the hospital where the operation is performed will also be liable. I hope you see where I am going with this. I do however see all the defences pricking up too and I understand. There is a separation of services between the doctor and the hospital (and other providers). What the product providers are doing is ticking the boxes with the FSCA by 'qualifying' people on their products (and 'advice') by putting them through a couple of weeks of training so that they can ultimately sell their product and give ‘advice’. They are then able to call themselves a 'Financial Advisor' but are given targets to attain to earn their commissions and incentives, and if they do not attain them in a few months, they are fired for incompetence. There should be a distinguishing between who can give professional intangible advice and sellers of product (i.e. to give advice you need to have qualifying criteria such as e.g. a CFP minimum – to get your CFP you need at least three years’ experience). And I understand that many who have been in the industry for years with experience and no qualifications, will have the hairs raised on their back. Many are enjoying the commissions, fees from assets under management and incentives that have been coming through from the product providers and to think of having to work for a fee for service and and perhaps a fee for implementation is just unfathomable. What could be the saving grace is if a product provider will not be able to sell a product until the professional (and independent) financial advice box has been ticked. People employed at product houses who are given a few weeks training to be competent are not qualified financial advisors, but rather product re-sellers or salespeople. This is where the professional financial advisory industry is getting the bad name when consumers are approached by unqualified and inexperienced salespeople calling themselves financial advisors. With this being said, there are some amazing unqualified sales people who truly add value to their clients and want to see them flourish and ‘know what they are doing’. But do we want a doctor to just ‘know what they are doing’? Only a qualified doctor who has gone through years of study and practical, can give advice - this should be followed through to financial advice, and is so for legal advice. A product is a product and is a solution to the client's dilemma, and is truly valued. One should be able to read the characteristics of a product off a fact sheet in plain and simple language. The risk of defining and characterising a product should lie with the product provider, the advice with the professional advisor. Although the advisor can explain the fund fact sheet to the consumer, the product provider should be accountable for the information that is laid out in plain and simple language for a consumer to understand. What is happening is that the product providers are trying to combine the two – advice and product and this is where the problem lies for the consumer, and the professional financial planning industry. In closing, there needs to be a distinguishment between (independent) financial advice and product seller but need not be as complicated as it has been in pages and pages of discussions.
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Added by cynical simon, 03 Feb 2021
A Brokers role does not end with advice, it continues with administration of the policy and most importantly at claims stage.
The mode of remuneration, I am sorry to opine, does not define professional advice.
Unless commission remains a method of remuneration many poorer clients will not be able to afford decent advice..
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Added by Gillian Garisch , 03 Feb 2021
Excellent article could not agree more with the writer. The FSCA needs to make a much clearer defined distinctio between a call centre operator asking questions form 'script', to that of a non life (or life) professional financial adviser completing a detailed needs analysis and going to the market without fear or favour in the clients best interests.
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