Independent financial advisors (IFAs) have expressed concern and frustration about practices at Discovery they believe are not in line with the spirit of the Retail Distribution Review (RDR) or Treating Customers Fairly (TCF) frameworks as set out by the Financial Sector Conduct Authority (FSCA), and which compromise their independence.
One financial advisor who spoke on condition of anonymity says a financial planner at their practice had a contract with the Discovery Consulting Franchise (DCF), but when the firm wanted to obtain codes (contracts) for two new planners, the franchise did not want to issue more codes unless the advisors committed to writing a certain amount of business.
They then approached Discovery’s self-service centre for new codes so they could service clients with existing Discovery products, but since they indicated that they would only recommend a new Discovery product where it was in the client’s best interest and weren’t fully bought into the firm’s offering, they were unsuccessful.
The advisor says this is “incredibly problematic” because it means they can’t service existing Discovery clients without some commitment to write future business.
She believes this is not in line with the RDR proposals as it means that planners may be recommending products because they have a contract with Discovery, and not because it is in the client’s best interest to do so.
Another independent advisor, who charges a monthly or once-off fee and doesn’t receive commission, says the franchise also previously required him to commit to a certain amount of business, but because he couldn’t, he was referred to the direct service channel. After about a year of servicing existing Discovery medical aid clients in this manner, Discovery started questioning why he wasn’t recommending other products as well.
“I told them the client did not need it. At this point, the client only needed the medical aid.”
Shortly afterwards, he was unable to access the website to process a client’s medical aid. The call centre later advised that his contract had been cancelled, and that he would be provided with a letter from their legal department.
The advisor says he is still awaiting written feedback, and in the meantime he can’t service his current Discovery clients. Where clients have existing medical conditions, moving them to a new provider will leave them without cover during the waiting period, and even where the client is young, healthy and able to move to a new provider, they do not necessarily want to.
The Financial Planning Institute of Southern Africa (FPI) says it is aware of the concerns and will be engaging with Discovery on the matter to try and understand its position.
David Kop, head of public policy, says in terms of the RDR proposals the setting of targets by product suppliers for independent advisors is a concern because it creates a conflict of interest. If an IFA ends up giving business to a product provider to maintain his contract or secure a contract, it may not be in the best interest of the client.
The expectation is that such practices would be implicitly or explicitly banned in future.
However, there is also a realisation that maintaining a contract with an independent advisor has certain cost implications for service providers, Kop says. One solution may be to use an advisor ‘segmentation model’ to make sure that the client can be serviced by their chosen advisor.
Hylton Kallner, Discovery Life CEO, says the company does not require an IFA to commit to a certain volume of new business when applying for a new code or contract.
“However, a comprehensive due diligence assessment is part of our contracting process. This [is] due to the fact that an IFA’s ability to provide appropriate and accurate product advice to our clients is a fundamental principle of the TCF regulatory framework adopted by Discovery.”
Kallner says in granting a new advisor contract or assessing an ongoing contractual relationship with an existing advisor, Discovery takes several factors into account.
This includes an assessment of the advisor’s industry experience, track record and ‘fit and proper’ status; their experience in selling Discovery’s products and providing ongoing client service; the completion of ongoing assessments to ensure that their product knowledge is at a requisite level; financial guarantees provided by an advisor as well as their general financial stability and good standing; and the frequency of their interactions with Discovery’s representatives and support structures.
“This allows Discovery to qualitatively evaluate the level of risk associated with an advisor.”
Kallner says the contract termination does not occur where advisors have completed their required product knowledge assessments, actively serviced at least one of the Discovery clients over the last 12 months, or where they are supported by one of Discovery’s face-to-face support channels (which also have qualification criteria).
“Discovery’s differentiated service model takes all advisors’ circumstances into account – and includes a dedicated call centre. We provide over 4 000 advisors with face-to-face support and approximately a further 2 000 advisors with telephonic call-centre-based support.”
Kallner says all stakeholders agree that the legislative environment has become substantially more complex for both product suppliers and financial advisors in recent years.
“There is also a clear onus on Discovery to ensure that IFAs have sufficient up-to-date knowledge of our products and processes and are able to provide accurate and appropriate product advice to our clients. The absence of such input poses both a TCF and a reputational risk to product suppliers in a post-RDR environment.”
He says while a self-service or call-centre model can mitigate some of the costs associated with supporting advisors, it does not absolve a product supplier from its responsibilities. In fact, it potentially exposes a product supplier to a risk if contact with the advisor is infrequent or superficial.
“Past experience has demonstrated that IFAs who do not regularly engage with our products and do not have a sound knowledge and understanding of product features are more likely to provide inappropriate or inaccurate information to a client. In addition, we also experience higher rates of client complaints and negative outcomes where advisors do not provide ongoing advice to clients and fail to review the appropriateness of their benefits and policies on an ongoing basis.
“We do not require our IFAs to write a specific number of new business cases over a specific period to maintain their contract with us. But we do monitor that IFAs update and service existing policies on an annual basis – in line with the principles of providing clients with the best advice.”
Kallner says Discovery’s approach is based on the principles enshrined in the RDR, while the ongoing assessment of advisor contracts ultimately provides a better TCF outcome to clients.