CAPE TOWN – The topic of financial advisers draws some strong opinions in South Africa. Not everyone has the best opinion of the profession.
But how much of this criticism has merit? Is the financial advice industry full of people more interested in their own pockets than those of their clients, or do a few bad apples spoil the bunch?
The CEO of Insight Discovery, Nigel Sillitoe, believes it is very much the latter. His company recently completed a survey of over 300 independent financial advisers (IFAs) in South Africa that offers some novel insights into how they see the challenges and opportunities they are facing.
“Even though South Africa is regarded as an emerging market, it’s been far more advanced than many other countries when it comes to regulating financial advisers,” Sillitoe says. “Brokers here are registered and regulated by the Financial Services Board (FSB), they believe in the importance of taking exams and they do see it as a profession. In other parts of the world, IFAs would love to be treated as professionals but they are viewed more as just sales people or product pushers.”
Sillitoe believes that the standard of independent financial advice in South Africa is high compared to many other parts of the world. There is already a lot of disclosure around fees, and there will be even more in the implementation of the Retail Distribution Review (RDR).
“I feel that the attention to customer care is incredibly high here,” Sillitoe adds. “It’s quite difficult to be a rogue broker in South Africa because it’s very easy for clients to report you. In many other parts of the world there is no ombud like there is here.”
He adds that the transparency inherent in the industry is a big positive for investors.
“I think the number of scandals in South Africa when it comes to Ponzi schemes or bad funds is far lower than in other parts of the world,” Sillitoe says. “That’s not to say it doesn’t happen, because it happens everywhere. But there is far tighter regulation here and it is getting even tighter.”
Sillitoe also points out that in South Africa most advisers have thought about what happens to their clients if something were to happen to them.
“Generally there is succession planning in place, which you wouldn’t necessarily see in other parts of the world,” he says. “They have arrangements in place to ensure that their clients are looked after.”
The study found that 60% of IFAs say that changing regulations are their primary challenge. RDR is obviously a large part of this, and although advisers have mixed views on the proposals put forward by the FSB, the study found that their view is generally positive.
“We did get some responses that it is going to kill IFAs, but most were willing to endorse it,” Sillitoe says. “The sentiment generally was that this actually is no bad thing, but obviously there are some brokers who are going to be worried about their business models.”
Where IFAs did have very strong views was on the question of whether the FSB should be doing more to monitor and act against unregulated schemes and products. A total of 97% felt that the FSB could do more.
“You find this anywhere in the world because if you are a regulated broker paying fees, you get very upset when you see companies acting illegally,” Sillitoe says. “Furthermore, 91% of IFAs think the investment industry’s reputation is tarnished because of these unregulated products.”
Sillitoe also believes that the study revealed a very sophisticated industry. When asked which strategies advisers will be increasing their client’s exposure to, the majority said that they would not be changing asset allocation.
However, those that were considering alterations highlighted global equities in developed markets and equity exchange-traded funds as the strategies they will be looking at.
“This is very different to other parts of the world,” Sillitoe said. “We never see ETFs as a preferred strategy in the Middle East or Asia because there are no commissions paid on them.”
He also pointed out that South Africa is ahead of world trends when it comes to appreciating multi-asset strategies. Multi-asset ranked as third on the list of strategies IFAs will be increasing.
“A lot of brokers around the world are now moving towards multi-asset funds, but in South Africa it’s been an accepted strategy for quite a few years,” Sillitoe says. “It’s taking off in places like the UK and Asia, but South Africa is already a step ahead.”
Local advisers also use independent companies to assist them in choosing funds for their clients. Fund ratings by agencies like Morningstar are important to 88% of IFAs in the local market. This finding is important when considered alongside the statistic that 87% of IFAs work with products from three or more asset management companies.
Other noteworthy statistics highlighted by the study include:
- 69% of IFAs feel that downward pressure on fees is the main challenge;
- 80% of IFAs see technological change as the greatest opportunity;
- 90% of IFAs use offshore funds to some degree;
- 94% of IFAs are in favour of the ‘clean pricing’ of funds proposed by the FSB;
- 7% of IFAs manage their own white label broker funds;
- 40% of IFAs report that their clients have asked for specific funds from certain fund companies in the last year.