A recent survey by CoreData research tested the current state of readiness and awareness of advisors concerning the proposed replacement of commission with a fee structure. The data in this study was gathered over a four week period spanning March 2013 and includes valid responses from a sample of 1040 individual financial advisers active in South Africa.
Around 9,775 South African advisers do not currently use a fee-based model. The Financial Services Board (FSB) is in the process of a ‘Remuneration Distribution Review’ and the industry is likely to see a ban on product commissions sooner than it expects.
If such a ban is enforced, one in 10 advisers indicated they will turn to servicing more profitable clients, according to the Adviser 2013: Fees & Business Models report – but this could have serious repercussions on advice for the mass market.
CoreData Research stated: “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.
“Many advisers feel they will need or intend to focus on the ‘big ticket’ clients post-review, however, there are only so many golden tickets around – the percentage of advisers that currently manage average accounts of over R1m is less than half of the industry.” Currently, mass market clients with R5000 to R500,000 in assets make up 36.3% of adviser clientele – it is this lower income segment that is most likely to be adversely affected by upfront fees which they may not be able to afford, while some mass affluent investors may be more inclined to pay upfront fees.
It may very well be that the authorities will consider a hybrid alternative, where clients can elect to use the current arrangement, but it is unlikely that it will continue ad infinitum. This challenge certainly featured in the UK and Australia as well, and it is likely that we will apply the lessons learnt there to our particular situation. The FSB indicated in its feedback that it will take cognisance of our demographics, which differ vastly from that of the two “role models”.
This 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 they may need to change their business models and feel that explicit fees will need to be agreed upon with the client going forward.
Of the approximate 11,500 advisers registered with the FSB, only 2,300 indicated they are actively starting to make these changes and modifying their fee structure as a result.
We are not aware of how the figure of 11 500 advisors is arrived at, so will not comment on this. If you are likely to be affected, we recommend that you stay abreast of developments. The media release from CoreData contained the following summary:
- With a South African industry review in the pipeline, if SA follows the global trend towards transparency and a ban on inducements and other such commission payments, advisers could stand to lose up to 43% of their income.
- The majority (9,775) of advisers do not currently use a fee-based model.
- Of the approximate 11,500 adviser firms registered with the FSB, less than half are seriously planning for regulatory change. Of that, only 2,300 advisers have actively begun to change their fee structure in preparation.
- The greatest challenge financial advisers currently face is changes in remuneration legislation with 57.9% ranking it the biggest hurdle over the next 2 years.
- Other challenges, including more administration, may lead to higher costs for businesses – a factor that needs to be considered if advisers lose a chunk of their incomes due to regulation.
- One in 10 financial advisers will turn to servicing more profitable clients to stay afloat – but this could have serious repercussions on advice for the mass market.
- Mass market investors with R5000 to R500 000 in assets make up 36.3% of adviser clientele.
- Emerging high-net-worth (HNW) and HNW investors are more likely to have the funds to pay the upfront fees stipulated by upcoming regulation, however the percentage of advisers that manage average accounts of over R1m is less than half of the industry.
- Only 14% of advisers see their clients on multiple visits throughout the year. More than half of advisers only see clients once a year.
- Upfront fee structures will lead to clientele becoming more discerning about the value of the services they pay for – annual visits are unlikely to be acceptable following an industry reform.
One should refrain from over reacting to all the news currently doing the rounds. Whilst it is interesting to stay abreast of developments, the research being done by the FSB, which will culminate in a discussion paper, is the single biggest indicator of where we are heading.
The fact that the Regulator indicated that changes to current remuneration practices could not be done on an ad hoc basis, but should form part of a comprehensive remuneration review, should be welcomed. Next week, we discuss a model we developed and tested in Australia to assist advisors to calculate fees for various services. It is already used extensively there, and will need little modification for application to our circumstances.