A closer look at professionalism in the financial services industry
During the course of 2007 FAnews Online often carried articles on the need for professionalism in the financial services industry. We recall a presentation by FAIS Ombud Charles Pillai which focussed on exactly that. This week we attended a Life & Disabil
A shady past
A decade ago the financial adviser had things much easier. Entering the financial services world was simple – with no barriers to entry or formal qualification required. In fact “you could be selling cars yesterday – and financial services today,” said Govender, noting that insurance was “an industry to enter if all else should fail!” Practising as a financial adviser had very few drawbacks: advisers took no responsibility for the advice given; had few regulations to worry about; and the consumer enjoyed virtually no protection.
For many years product providers and product sellers enjoyed carte blanch at the customer’s expense. Both were guilty of fleecing innocent parties… It was all about commission. And according to Govender there was “little by way of after sales services unless the adviser wanted to earn more money.”
Today the landscape is entirely different. The Financial Advisory & Intermediary Services Act (FAIS) demands a great deal more from all the stakeholders in the industry. The FAIS Ombud and Pension Funds Adjudicator act as watchdogs to ensure that all industry stakeholders toe the line. And while some argue there is a consumer bias in some of the rulings; few would deny the financial industry is streets better than before. There is still work to do: “The FSB will be the first to acknowledge that we have come a long way; but are not nearly there,” said Govender. We have at least five years of hard work ahead – with plenty of battles to come.
Professionals desperately needed
Thus the first step toward professionalism in the industry has been to address the legacy issues that stem from years of sub-standard interaction with the consumer. The result of this neglect is that today’s retirees are struggling to meet their financial requirements due to a combination of bad advice, poor product returns and their own ill discipline. These issues have subsequently been addressed through the various Acts in an increasingly tough regulatory environment. And as teething problems are ironed out we can be confident the next generation of retirees will be far better off.
Of course the financial adviser cannot ignore the new set of challenges facing today’s saver. Changes in life expectancy mean the need for retirement saving has never been greater. Longer life expectancy means the average retiree will spend more years drawing on the pension funds accumulated during the working years. And studies have shown that this retiree might have to support two sets of additional dependants too: the aged parents AND the children who now take much longer to leave the nest. South Africa’s financial advisers have the difficult tasks of encouraging consumers to drop the South African tradition for debt over savings and picking appropriate products from a growing list of more complex offerings.
The only way to provide enough funds for this scenario is to have a ‘cradle to grave’ financial plan presided over by a professional financial adviser. Govender notes that “the quest for professionalism is a world-wide trend.” She says the hallmark of a professional is a degree and some form of continued learning. And although degrees are not a requirement in South Africa, the ongoing learning aspect has been addressed.
Evolution of a client-centred model
The regulation of the industry has changed the model that product providers and financial advisers use. In the past this model was product-centred with a short-term focus. Advisers used to push the product they had regardless of the appropriateness thereof.
Today the model is client centred, with advice geared to meet a client’s needs over the long-term. The new model focuses on transparency and disclosure. Clients are informed upfront who their financial adviser is, what the financial adviser should do, how the adviser is remunerated and how possible conflicts can be resolved. This openness encourages ethical behaviour, fairness and ultimately results in sustainable practices built on trust. Govender notes that financial planners are “building sustainable practices and keeping their clients for longer.” As Govender says, the industry has come a long way in the last five to 10 years.
And longer-term relationships will help address the issue of remuneration in coming years, bridging the gap between advisers who believe “clients are not ready to pay for the plan” and clients who say “financial planners are only in it for the ‘product’ commission.”
Editors’ thoughts:
We recently reported on a FAIS Ombud ruling which instructed a financial adviser to refund a disgruntled client a portion of the upfront commission fee. His error was in being vague about the commission when asked by the client. Although transparency goes a long way to preventing future disputes – it may also discourage individuals from purchasing the appropriate product. Are South African consumers ready to ‘pay for the plan’? Add your comments below, or send them to [email protected]
