Banning commission could have serious repercussions – CoreData

24 June 2013 | Talked About Features | Straight Talk | Fiona Zerbst

If remuneration legislation is overhauled, South African financial advisers stand to lose up to 43% of their incomes. This is according to a CoreData report entitled Advice 2013: Fees & Business Models, which sampled responses from 1 040 individual financ

The approximately 9 775 advisers who do not currently use a fee-based model of remuneration would be hard-hit by an outright ban on product commissions, which is why the Financial Services Board (FSB) has to weigh up all factors when it conducts its remuneration distribution review.

As in the UK, such a ban might compel advisers to service more profitable clients – one in 10 advisers said they would pursue this avenue, according to the report. This would obviously have serious repercussions for the mass market.

“The uncertainty of where and how their next pay check will come from is a nagging concern for many and advisers are considering the best course of action going forward. For some this means targeting more profitable clients, improving cash flow or executing a leaner structure,” the research stated.

One of the obvious problems is that there are only so many ‘big ticket’ clients around – the percentage of advisers that currently manage average accounts of over R1m is less than half the industry. Mass market clients with R5 000 to R500 000 in assets make up 36.3% of adviser clientele – this lower income segment will be hardest hit by upfront fees, which they may not be able to afford. Of course, mass affluent investors will be more inclined to pay upfront.

Change in fee regulation: The biggest challenge

CoreData’s study reveals that despite the fact that almost 60% of the industry admitted this change in fee regulation will be the biggest challenge they face over the next two years, only around half of advisers are actually aware that they may need to change their business models and feel that explicit fees will need to be agreed upon with the client.

Of the approximate 11 500 advisers registered with the FSB, only 2 300 have indicated they are actively starting to make these changes and modifying their fee structure as a result.

Financial advisers believe changes in remuneration legislation pose the biggest challenge to their businesses – a full 57.9% rank it to be the biggest hurdle they will have to face over the next two years. Another challenge is greater administration, which could lead to higher costs for businesses – something that could be even more significant if advisers lose a chunk of their incomes due to regulation.

The report also draws attention to the fact that only 14% of advisers see their clients on multiple visits throughout the year. More than half see clients only once a year. Following industry reform, annual visits are unlikely to be acceptable to clients as they become more discerning about the value of the services they pay for, particularly if they are paying a fee upfront.

FSB considering input

Back in November 2011, the FSB sent out a document entitled Contractual Savings in the Life Insurance Industry, and it has been considering input received and will release a paper in due course. Some of the issues raised were around whether ‘as-and-when’ commission might not be fitting, given that intermediary services are ongoing, and whether a separate fee could be negotiated with a client for risk planning or product service. The separation of components of advice (financial planning, risk planning, product advice and intermediary services) has also been flagged as important.

Editor’s thoughts:
The FSB has acknowledged that there should be some differentiation between components of the advice process, and there may possibly be a different licence regime for tied or multi-tied agents of product suppliers versus independent financial advisers. One can only hope that the FSB will take the unique circumstances of the South African market into consideration, as the mass market cannot be left to fend for itself, and advisers can share only so many pieces of a very small pie that makes up the high-net-worth market. We await the FSB’s paper with anticipation. What outcomes do you hope to see? Comment below or email [email protected].

Comments

Added by Peter, 03 Jul 2013

The question that begs to be answered is “who will look after the people who cannot afford to pay a fee”? Does the FSB see it as the viable and appropriate proposition that the “direct” suppliers fill this gap? Remember that the direct service providers do not give advice. Does the FSB think that only the wealthy need advice and the other 95% should be left to their own devices? Everyone needs advice on how to structure one’s risk and investment. Not only the wealth have the need for financial advice. We have a low savings culture in SA. It has been shown recently that South Africans are critically under-insured but still the FSB wishes to get rid of the advisors who provide this service. As pointed out above by Brett, a fee based structure does not guarantee honesty and ethical behaviour. You cannot legislate ethics. Many advisors have spent a lifetime to create a good, sustainable practice based on best advice and succeeded so even before the FSB introduces FAIS. Some of us had PI cover many years before it was legislated. Many of us had done most of the things that was introduced by FAIS. In other words, many advisors have been practicing with the client’s best interest. If commission is banned the majority of independent advisors will be forced to leave the industry and a huge majority of people will be left out of the financial service loop. They will be denied the right to get advice from a qualified adviser. Buying insurance over the internet or via a call centre from a direct service provider is inappropriate. Only because they are not wealthy they should not be denied the right to get advice about their financial needs.
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Added by Reagan, 01 Jul 2013

My concern is what happens to the distribution fees that product providers have become accustomed to pay? We are well aware that product providers make massive profits on orphan client's and they are happy to keep it unchanged. We will see an exodus of advisers as seen in the UK with their changes in the remuneration models and that will result in more orphan clients, meaning insurers will make more money on in force contracts. I'm already considering obtaining other skills as a back up to my livelihood.
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Added by Judge, 25 Jun 2013

For.starters i think the mountain goat should join the fsb , they will have a vacancy for him. I don't know what all the fuss is all about . I agree with the fsb , lets take away upfront , as and when , investment and risk comm . This will result in 90% of brokers and insurance reps without work , insurance companies will cut personnel by 90% , the insurance industry wil be dumped into chaos (nothing new in SA) and the fsb and Bruce cameron will be happy . For the rest of us we will all live happily ever after .
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Added by Cynical Simon, 25 Jun 2013

I just realised that this idiotic push by the authorities is not likely to go away.Although there are traces of differentiating between Risk Products and Investments ,we Intermediaries who have become the scurge of thefinancial industry ,the perpetrators of unthinkable evil,the scapegoats for the FSB's lack of oversight(Property syndication being the case in point);we good have reason to fear a one solution for all. Intermediaries have become the untouchables,uncouth,uncultured and unwanted. The Direct Writers have become Gods Gift to Mankind.Perhaps the Intermediaries should form a secret society where we can plan and plot and decide on disruptive activities.I suggest we call it "The Broker Bond!"
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Added by Shaun, 25 Jun 2013

I believe that the industry needed a shake-down due to excessive penalties, unneeded churning and undisclosed costs. However, over regulation is going to result in most IFA's leaving the industry. The FSB has come a long way in cleaning up the industry, yet its on-going attacks on our lively-hood is going to result in this industry having the same problem as the other industries. No-one to look after clients, especially the man on the street.
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Added by Brett Red, 25 Jun 2013

I do belive that a fee model does work and has a place - however this WILL NOT fit all and by killing commissions it will NOT fix the problem of bad advice and dishonesty. simply look at the accounting / legal / medical industry where people are paid on a fee only basis and confirm that there are no complaints regarding advice / fraud / unethical behaviour. I have earned commisions for 15 years in the industry - this does not mean that my advice was any better / worse than those that only provide advice for a fee. It just means i was paid differently.
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Added by Craig A, 24 Jun 2013

Let's see the government regulate the taxi industry first! They do not abide by any laws, dont pay tax or toll fees, (when they are implemented), are responsible for thousands of deaths and create havoc Not to mention the drain thay put on the RAF! But the fnancial advisor is being milked to the point that no one will be able to survive if regulation goes through. I think the guvvament is trying to assist the people of this country, they could start with the taxi mafia. Oops, i forgot, the guvvament is the taxi industry!
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Added by Rob, 24 Jun 2013

I hope to heck the idiots at the fsb and treasury are only talking about investment commissions because if they try to cancel commissions on risk products then no-one in the country will ever buy them. The net result of that is that an already under-insured country becomes a non insured country and the responsibility will fall to the government which after all, will prove once again that the government of South Africa is stupid.
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Added by Caig A, 24 Jun 2013

The FSB are useless! I have spent 40 minutes on the phone trying to get hold of anyone to sort out a query!!! Its a pity that they dont work on commission! In the past few weeks, i must have left 10 voicemail messages with not one response.
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Added by Ian, 24 Jun 2013

The problem is that in general insurances and investments are sold not bought because they are intangible products with a possible future benefit. Regardless of the professionalism of the industry consumers will still have to be convinced to plan for intangible events and retirement far in the future. If you don't have enough advisers seeing clients and convincing them to start planning you are not going to solve the problem. Making it harder for advisers to survive is a serious error with a whole range of unintended consequences. Wake up advisers - especially independents - start with the companies you represent and ask them what they are doing to ensure you survive. Of the seven insurance and investment companies I have contracts with only one seems to have my survival as a concern.
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Added by Thomas, 24 Jun 2013

This debate is actually very simple. All the insurers..whole lot has created avenues for so called direct business where no independent "fin advisors" are concerned. Go and look carefully...Frank/Liberty and so on...they all know the writing is on the wall and has acted accordingly. Through all the years the insurance companies were all operating without real risk. They simply appointed brokers agents and others and did their business. The persons with the risk are the following: Clients and brokers. When we as broker recommend a investment or life product ... and client accept and the investment does not perform the client and fin advisor loose but never the insurer. They simply took their fees through all and that is that. I foresee that in a couple of years all independent advisors will disappear and will all be working as agents with salaries for insurers and maybe one or 2 huge brokerages. It is nearly impossible for any new persons to enter the business..proof me wrong please. Go and look at the average age of fin advisors.
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Added by The Mountain Goat, 24 Jun 2013

Having read Craig's comments, I was left with the feeling that either he, or I, are on the wrong website. I don't see how his comment has any bearing on the article whatsoever, and it sounds like he's just using this forum to air his grievances about the taxi industry, which has absolutely nothing to do with the Financial Services industry. Had he perhaps drawn parallels with a similar industry (say: estate agents, and had presented an argument that the FSB should perhaps be looking at the scaling down of the inflationary commissions that agents levy on house sales vs the once-off nature of their services, etc etc), and then equate that to the on-going servicing that financial intermediaries need to undertake to earn a fraction of what they earn, then I would be more inclined say that his point has merit. As it stands, his knee jerk comment appears to be pure drivel. What is needed is sensible and meritorious comment on the article to stimulate debate and the possible reforms that the FSB may be wanting to introduce. P.S. This is not to be deemed as an attack on estate agents - I could have used any other industry that is likewise controlled by FSB regulations and the various Acts that relate to the financial industry, of which I'm sure the taxi industry has no bearing.
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Added by Eric, 24 Jun 2013

I have been in the insurance industry for 18 years now. 13 as an independent. We now consist of 5 brokers and service roughly 2500 clients. All of us have more than one university degree of which at least one is in insurance. If commission of risk products are outlawed I will close my doors within one month of that happening. One can only hope someone with half a brain at the FSB realises that SA is not UK, AUS or US. We are already regulated and under threat if unsuitable advice is given. Why not let us earn our daily bread? Consumers have ample options (direct marketers and banks that offer no commission products) and if that is what they want, the market will dictate and we will have to change our role in the industry. But why try and regulate each and every aspect of society? Have the FSB not grown sufficiently and are we not creating enough jobs for them? And still consumers are no better protected as when all these regulations started!! Investors are still losing money left right and centre and the FSB is never to blame! I can only hope that when IFA's are forced into extinction by the FSB it would mean mass retrenchments on their side as well, or have they forgotten that it is we that pay them? Or is it then the hope of the FSB to govern the state operated risk and investment schemes where money can disappear without question and all who is suppose to guard it can prosper?? As government has so clearly shown their capability to govern and provide to all citizens (for government and FSB employees, the last statement is a clear form of sarcasm and not meant as a compliment!!)
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Added by Paul K, 24 Jun 2013

To the respondents above - whether Eric expressed himself eloquently enough or not ( apparently not to Mountain Goats liking ) this whole evolution is a joke - I to will close doors as what would be the point investing hours of time & work into a dying industry . - for no return - I have just done a comparative analysis for a prospect that was sold an Outsurance Online Policy - if you analyse the definitions of what they offer on Disability & Critical Illness Cover - pity the poor Policyholder at Claim time and thats aside from the "manipulation" bad business practice of upfront quoting for Retrenchment - but hidden in the fine print explaining that since he is self employed he does not qualify - so I say pity the FSB doesnt rather apply itself to where it would actually matter to the investing public -
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Added by Eligos, 24 Jun 2013

Thomas is close to the real reason for the proposed regulation: It is the corporatisation of all the IFAs have established over the years. Insurers lobby the regulator and present the most plausible rationale for the increased control, knowing full well that the result will be more business for them. Corporates are taking over our world - or trying to. Maybe we should learn a lesson from Turkey or Brazil.
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Added by dup 5, 24 Jun 2013

A 'Vavi' approach seems to be the only thing that grabs attention. Grind everything to a halt. Sadly then it becomes an emotional issue. I wonder if reason works with the FSB anyway. A few missing players is ASISA and the Product Factories (also known as the western sweat shops - shareholder is number 1, 2 & 3. The client and the rep is merely a means to an end) The product factories requires more regulation rather than the agent/broker/rep, etc. No wonder RE level 2 has become an open ended operation - the products defined in the act and the stuff being sold are worlds apart.
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Added by Certainty, 24 Jun 2013

Why has no body representing the adviser community spoken up about the proposed changes? FPI? It really seems that the adviser community has no voice with which to lobby.
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Added by Anonymous, 24 Jun 2013

We are a Fee Based practice and we engaged a number of new Representatives working with us in our practice who struggled to earn a decent income. We agreed to allow these representatives to work on commission with a view to their becoming fee based planners. They have been doing research on their clients and do not believe it will be beneficial for them to continue in the industry if they are compelled to charge fees. We have been monitoring the research internally and believe that there is a very large part of the market that will be UNSERVICED if commission is removed.
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Banning commission could have serious repercussions – CoreData

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Banning commission could have serious repercussions – CoreData

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