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Simplified Advice

It has long been my contention that, unlike the socks I buy at Woollies, there are few products which can satisfy clients’ needs with a “one-size-fits-all” approach, particularly in the financial services industry.

In his address at the Discovery Financial Planning summit, Jonathan Dixon, the man in charge of insurance regulation at the FSB, indicated that, in the past, the FSB followed a “backward-looking, compliance-based approach”. The focus was also not always on where the biggest risk lies.

The guiding principles for the road ahead, as outlined by Dixon, sees a forward-looking Regulator who acts pre-emptively to ensure that satisfactory outcomes for clients are achieved and that regulation is risk-based, proportionate, comprehensive and consistent.

A look at recent history reveals that customers in the investment space are far more exposed to risk than for instance those who purchase short-term or healthcare products.

Coupled with the global financial crisis in 2009, it is small wonder that the focus on prevention, through interventions like the Twin Peaks model of regulation, has become the norm.

An interesting proposal, as part of the Retail Distribution Review (RDR), concerns a differentiation in the remuneration of advisors, based on the nature of the services they render to clients.

The basic principle on which the new model is based is that, where a service is provided to a client, the client pays for it. There is a widely held fallacy that product providers pay advisors to sell their products. The truth of the matter is, of course, that the client pays for the service, whether the commission is built into the premium, or is paid on behalf of the client and reclaimed over the term of the policy.

Under the RDR proposals, a distinction will be made between remuneration for financial planning, risk planning, up-front product advice and ongoing advice. Provision must also be made for other outsourced product supplier services such as premium collection and administration.

I recently came across an interesting article by the UK regulator titled “Simplified Advice”. The need for such advice arose as part of the RDR process in the UK, and considered whether “…the investment advice needs of low and middle income earners were being met by the market…”. This is of course one of the main concerns in South Africa, where it is postulated that the replacement of commission with fees will result in advice becoming unaffordable for low and middle income clients.

The UK document outlines the “simplified advice process” as appropriate for consumers who:

  1. have their priority needs met, that is, they do not need to reduce existing debt, they have adequate access to liquid cash (i.e. savings), and have any core protection needs met;
  2. have some disposable income or capital that they wish to invest; and
  3. do not want a holistic assessment of their financial situation, but rather advice on a specific investment need.

Perhaps this is also the way forward in South Africa in terms of distinguishing between financial advice requiring in-depth analysis as part of a holistic financial plan, and custom made products across all sectors of the industry which only require fine tuning to meet the client’s needs, rather than extensive research by the advisor.

This will certainly be welcomed by those in the non-investment sectors of the industry who are currently subject to the same requirements as those involved in intricate investment planning.

In line with the RDR proposals discussed above, the client requiring more work and expertise will have to pay more.

This should also assist the two main objectives of changing the current remuneration model as outlined by Dixon in his presentation:

  • the delivery of affordable and fair advice and
  • ensuring a framework that supports a sustainable business model for financial advice.

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