An article in Business Day last week provided an update on the long-awaited white paper on the Retail Distribution Review (RDR), which appears to be due any day now.
Caroline da Silva, DEO of the FAIS division at the FSB, is quoted as saying that the process could involve replacing commission on investment products with fees. Cognisance will be taken of the different demographics in South Africa, compared to other countries where this was introduced.
“We have a unique lower end of the market in SA, who will not pay for an advice fee, so we may need an alternative.” She said the existing proposal was to continue to allow commissions in the lower end of the market, but with greater supervision and control of those products.
At the same conference as Ms Da Silva, Peter Chun, GM of products and investments at Colonial First State in Australia, said: “…when the RDR was introduced in the UK, it hurt the middle market and, “decimated” the middle market in Australia…”
We shared this information last week in an article which pointed out that 80% of advisors in Australia work for the banks.
This was confirmed by Mr Chun:
“…the RDR transformed the Australian financial advisers’ business model, with the polarisation of the market into two camps. On the one side, the industry had consolidated under larger institutions serving the mass market. On the other side, boutique independent financial advisers servicing upper-income clients had emerged. The middle market was not served.”
In the UK, some 25% of all independent advisors left the industry, while the banks essentially abolished their advisory services.
Mr Chun also indicated that research in Australia found that less than 10% of consumers were willing to pay for the actual cost of financial planning.
Speaking at the Discovery summit earlier this year, DEO of Insurance at the FSB, Jonathan Dixon, pointed out that the primary aim of RDR is to ensure that advice and distribution supports the delivery of key TCF outcomes; in particular, to promote appropriate, affordable and fair advice and distribution.
“The FSB regards financial advice as a key element of delivering on TCF outcomes – so at the same time a key objective of RDR is to ensure a framework that supports a sustainable business model for financial advice.” In order to achieve this, care should be taken to heed what happened elsewhere in the world, and recognise the unique nature of our markets.
Mr Dixon also pointed out certain risks to intermediary sustainability:
- Advisors are not always properly remunerated for advice
- The value of intermediaries’ services are not properly recognized
- Inappropriate incentive structures expose intermediaries to regulatory risk
The latter appears to be one of the reasons for the proposals to urgently abolish sign-on bonuses which are regarded as a main driver of churning.
He indicated that up-front commission is not a sustainable business model, but made the point that there is a need to separate remuneration for financial planning, upfront product advice and ongoing advice.
If this happens, it could mean the end of commission claw-back, which was in most instances grossly unfair to the honest advisor.
A very important point made in Mr. Dixon’s presentation is that fees could be negotiated by the advisor with his client, but that the product supplier can “facilitate collection”.
The single biggest concern for advisors, who do not yet operate on a fee basis, is that clients will object to paying for this from their own pockets. Signing a document, empowering the product provider to do so on his or her behalf, is an entirely different matter. In fact, current remuneration disclosure already requires this.
We expect the RDR white paper to be far less of a threat to the continued existence of financial advisors than the market appears to fear