Improved customer service and fair advisor remuneration will be key features of the new financial services landscape.
Jonathan Dixon, Deputy Executive Officer of the Financial Services Board’s Insurance Division, made some interesting comments at the Discovery Invest Financial Planning Summit.
He expressed an opinion shared by many in the trenches – the regulatory framework did not develop as it should have:
“It became too rules-based and compliance-heavy, evolving along the lines of sector siloes. Also, it was not clear who the customer was. Product providers tended to view the intermediary advisor as their client, when it should in fact be the end consumer. And we were seeing too many examples of poor customer outcomes.”
Dixon focussed on two key issues which are becoming increasingly relevant – Treating Customers Fairly (TCF) and the Retail Distribution Review (RDR).
Retail Distribution Review
The primary focus of RDR is to ensure that advice and distribution support the delivery of key TCF outcomes. “The current distribution model has problems regarding miss-selling and poor customer outcomes and is fundamentally flawed in terms of what advisors earn from product providers and the conflicts that can arise. The system is not transparent as commissions on products are often hidden from the client.”
An interesting view expressed by Dixon is that advisors are not always adequately remunerated for their advice.
Currently there is no reward for advice if the effort does not result in the purchase of a product and this can pose risks to the sustainability of the intermediary business.
The value of intermediary services is not always properly recognised and they can sometimes be paid the same as a call centre type of service.
The up-front commission model is not ideal as it forces intermediaries to follow a cash flow model rather than an annuity model business.
Dixon indicated that, as a general principle, advisor remuneration should be based on activities. “This includes advisors being properly remunerated for advice services. There should be separate charges for:
- financial and risk planning services
- up-front product advice and
- on-going advice.
Dixon does not anticipate caps or restrictions on income, but foresees some form of “safe harbour” rates. Various payment forms should be negotiable, depending on whether they are flat fees, trail fees, a percentage of premium or time-based.
Treating Customers Fairly
The TCF approach will require a paradigm shift. Dixon anticipates a re-balancing of responsibilities with increased scrutiny on the design of financial products and how to best meet customer needs.
“There will be a new focus on distribution channels and marketing practices. Ensuring fair outcomes for the client is now a joint responsibility of product providers and advisors. And we will also be looking at what is being delivered to the more vulnerable lower end of the market.”
Dixon recommends that financial services firms and advisors prioritise embedding TCF practices into their frameworks, as there will be increasingly harsh penalties for those who do not embrace this approach. “Customers must be confident they are dealing with firms where TCF is central to the corporate culture.”
RDR and TCF should support each other
Dixon highlighted that the primary focus of RDR is to ensure that advice and distribution support the delivery of key TCF outcomes.
He concluded by saying that, over the next two years, we will have a financial services industry that is forward looking, risk-based, and outcomes-focussed.
“We should see improved customer service as the bar is raised for industry players, enhanced competition on a level playing field, and a simpler landscape for advisors in which they can demonstrate their expertise and value add. Customers will have a real sense of trust in their financial advisors.”