A broker by any other name
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 [email protected].
Comments
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! Report Abuse
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
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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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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. Report Abuse
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.. Report Abuse