Why TCF should be in your DNA

Fiona Zerbst, FAnews Online Editor

An online article appearing in The Scotsman caught my eye as it suggested that DIY investing is booming globally because of a growing disconnection between the financial services industry and its clients. The worry for financial advisors, the article said

The article goes on to suggest that ordinary investors have been left out in the cold, fending for themselves, with some taking the drastic step of investing their pension monies online rather than pay exorbitant fees to advisors.

Surviving in a changing landscape

It was therefore interesting to hear what Sanlam UK’s Head of Investment Solutions, Rick Eling, had to say at Glacier by Sanlam’s regulatory seminar held in Johannesburg (and elsewhere around the country) this month. Eling suggested ways in which independent financial advisors (IFAs) can ‘survive’ RDR and TCF, acknowledging that the changes have met with some resistance and scepticism.

Some context is needed. Prior to RDR, consumers believed financial advice to be free. There was less need to explain what an advisor does, how much of the total fee goes to the advisor and what the ongoing service is. This is, however, vital post-RDR. It is not products that will drive an advisor’s pay, but service. Eling suggested advisors consider what that service is, and whether their clients know what it is.

All this is likely to sound familiar to advisors in South Africa, who will face the same challenges in the near future. It is TCF that will make all the difference to your clients, according to Eling, and you have to be acutely aware of how TCF outcomes will affect your business.

TCF in your DNA

“TCF is a cultural issue,” said Eling. “It is only through establishing the right culture that senior management can convert their good intentions into actual fair outcomes for consumers.” The cultural framework should encompass leadership, strategy, decision-making, controls, performance management and rewards.

Findings in the market reveal that most senior managers can explain TCF but intermediaries often fail to deliver the outcomes, largely because they lack guidance from senior management. Some employees are unwilling to challenge decisions that have arisen as a result of poorly applied TCF. Eling also said that incentive schemes don’t always include TCF and when they do it is given insufficient weight when weighed against other objectives.

He pointed out that advisors keen on RDR and TCF are invariably younger and well-qualified, and who have no problem with the idea of a fee-based model. Older advisors earning 90% of income from commission have obviously been far less enthusiastic. Some of the worries raised were criticism of fee levels and uncertainty about whether one could charge proportionately higher fees for lower-value clients.

Strategies for success

Eling said that, post-RDR, products don’t drive advisors’ pay – service does. There is therefore a greater necessity for understanding your client in depth, producing measurable results and, above all, communicating well. “Maximise face-time, use advice tools and employ ‘soft skills,” he suggested. “Report against objectives and relate outcomes to your client”.

Importantly, don’t use terms your client may not be comfortable with. For example, don’t say “Your portfolio gained 12% this year against a market average of 11%, with below-average volatility.” Say, “The money allocated to your retirement has grown by 12% this year. This is more than we expected for an average year and leaves your retirement plan well on track. When the markets had bad months, you never lost more than you would have expected.”

Eling identified seven important ‘rules’ to follow:

· Understand your client base.
· Understand the clients you would like to have in future.
· Define your offering – can you put it into one sentence?
· What will you do yourself? What will you outsource? And to whom?
· Which risk system will you use?
· Are you independent or restricted? Or hybrid? Why?
· TCF in everything, and mean it!

Editor’s thoughts:
TCF places advisors at a crossroads and it is interesting to see how the UK has been faring. Do you think we will face similar challenges here in South Africa, or are they likely to be somewhat different? Comment below or email fiona@news.co.za .