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Independent advisors concerned about ‘conflict of interest’ at Discovery

But the product provider says new contracts aren’t dependent on business volumes.

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.

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Sjoe, what a lot of spin from Kallner…

From experience I can tell there is a lot of truth in this article.

The truth is Discovery is a seller of product. Their whole business is dependent on sales. To maximise sales you need heavy duty sales people. You do not need IFA’s who waste time asking for information and
values. If he can’t or won’t sell a bucket load of policies avoid any interaction with him. This is the first rule of all product distributors. Discovery has just taken it to another level.

Is it then wise to turn health care into a for profit product? China recently surpassed the USA in length of unassisted living so it just goes to show that even without democracy regulation ( and removing profit motive) service state services can be quite effective.

This article focuses on IFAs, but aren’t tied advisers facing the same challenges in terms of targets, enforced overhead costs, and the implied risk of losing your license if targets are not met over a relatively short term?

That is a good point. Huge conflict of interest if tied-advisers have to hit certain targets, are they really trying to sell customers a policy that suits their needs or hit target? RDR cannot work with this kind of model.

This shouldn’t come as a “surprise”. It’s an open secret with the public when they do apply for medical aid or to change from their existing scheme, Discovery is always pushed first in line. It is therefore now very clear that the Commission had reason to “question” Discovery’s dominance.

Consolidation of capital in fewer and fewer financial organizations hands is to be deplored. It reduces the ability of individual’s investment choice whilst strengthening large corporates control over economic activity. This leads to a reduction in competition and leads to monopolistic practices which are in no-ones interest except that of the monopolies. This is particularly evident in the financial services sector, where financial power is patently obvious and is adversely affecting investment in expanding real productive economies.
The explosion of financial wealth in the financial, insurance and real estate sectors, breeds a mis-
allocation of capital into what is essentially an “overhead expense” activity which mistakenly is reflected as a productive element of a country’s GDP, where in fact the large proportion of these funds go towards refinancing the transfer of existing assets and not economic expansion. The result is price inflation and the reduction of capital available for expansion of the real economies of producing goods and useful services. Investment allocations are largely now applied to the musical chair activities of financial instruments and rent seekers, whilst that required for expansion of the real economy suffers.

Thank you. One of the best posts i have seen around these parts…

Let the client pay for these services when needed. It will certainly lift the quality of advice received.

A good follow up to this article would be to look at a case study of actual client experience. In real life clients with all of their products with Discovery (Life, medical aid and investments) have some of the poorest outcomes certainly from an investment perspective. Fee structures in the stratospheric zone cripple their plans and no amount of show-boating around the rewards earned in future years can offset the damage done in the early accumulation years. If you as an independent advisor seek to expose the obvious shortfalls you are deemed not to fully understand the product or the actual long-term benefits which is a convenient defense albeit based on hypothetical outcomes. I know this is spoken about and exposed frequently but the products never change. Look at actual numbers and the truth is revealed…. time to expose these larger brand offerings for what they really are before even more clients figure out 10 or twenty years down the line that Discovery has in fact not been looking after their best interests. Nice offices though…

Discovery seem hell-bent on over-complicating products. You invest in a RA and are then “rewarded” with a boost to your income when you retire based on how long you have been invested in Discovery funds.

What most people don’t realise is that the Discovery Funds are usually Investec Funds with an additional 0,5% fee added on (for the Discovery logo???) – just in case you were wondering how this “boost” is funded.

Another bug-bear is the benefits with no quantifiable value. Examples are “Credit Card Protector” and “Global Education Benefits”. If you don’t know what the Actual payout for a claim will be how can you evaluate if the premium is reasonable.

I have Discovery Medical Aid and I am on Diamond Vitality Status – despite this I will not touch any of their investment or insurance products as they are way too complex….

Another major problem for independent advisers in KZN is that Discovery provides no product training in this area – every year they “upgrade” their products with ever-more complicated twists-&-turns – you cannot, in good conscience, sell a product if you do not have the necessary knowledge and expertise to explain it to anyone. . .

@M_D. I’m not with Discovery, but in my past career years ago of dealing with Discovery’s Life & Investment products (within an independent brokerage), I’ve come to realise that all the added product complexity serves as “smoke and mirrors” in order to frustrate transparency of costs (i.e. costs to the policy holder / profit for “D”). More complexity = more confusion = easier to hide costs. If you confront Discovery, they’ll put a clever spin to it telling you it’s not to hide costs, but a result of leading “innovation” you see 😉

Ndlovu I couldn’t agree more. The regulator really should have a closer look into their products and promised boosts. In my opinion it causes a massive conflict of interest as a client is then forced to invest in Discovery funds & maintain their life policy irrespective of the Discovery funds performance. Analyzing existing client portfolios at Discovery with regards to performance and fees are some of the worst I’ve ever seen. Ripe for the picking. Good marketing though.

Having previously worked with a number of financial advisers in the past I can tell you that from experience, a fair number of them are extremely lazy, arrogant and entitled. They believe that it is beneath them to keep their product knowledge up to date and that they “know it all”. For goodness sake, how on earth can you give proper financial advice, regardless of which provider you are selling for, if you don’t have proper and up to date knowledge of what you are selling? That is the REAL injustice to a client. It is like trying to sell a new 3-series BMW using the spec sheet from the 1990’s

As I said earlier: Another major problem for independent advisers in KZN is that Discovery provides no product training in this area – every year they “upgrade” their products with ever-more complicated twists-&-turns – you cannot, in good conscience, sell a product if you do not have the necessary knowledge and expertise to explain it to anyone. . .

I have never heard of contracts being pulled from independent advisors if ‘targets’ aren’t met.
Any proper independent would immediately show said product provider the door, trust me on that. Discovery’s suite is innovative and strong but there there are plenty of other good options in the life, investment and health markets.

This whole article looks odd though – who is the advisor quoted? If they are independent why then the tied agent DFC agent in their office anyway? That’s nonsense – it should be clear to potential clients whether you as a practice are tied or not.

Exactly, an independent advisor would be with the DCS, not DFC.
Besides Discovery, this is a factor with all companies.The Broker consultants are also paid on production… so it is unfortunately never comfortable explaining that you are wanting a contract purely for servicing, as you intend using another provider for a specific category of business.
However, that being said… it would be ideal from a client point of view if the advisor did maintain different contracts on his books, as the relationship is with the advisor. So, from their point of view… they could use one advisor, which is what they want.
On the other hand, that said advisor would have a real problem keeping up with product changes of a lot of contracts (I know I once had 13 product providers… welcome to reading till 3 in the morning every night)… that is also not sustainable.
So, basically you should be choosing your product provider for that specific product line and you should be able to use a desk consultant to bounce questions off for the other (experienced advisors will know what questions they want to ask).
Unfortunately, as products get more and more complicated… this is the situation. Ideally you want to align a client with an advisor that cares about their interests… and go from that point.
Caring comes before product. People still buy the advisor… not the product. They will use the product if the advisor shows that he cares about it.

It is a massive issue being addressed by the FPI as well as the FIA. If you have never heard of it happening, then you not an independent or you not associated with any of the above institutions.

The servicing channel is irrelevant, if you not pushing committed business their way, they pull the contract.

Certainly never in our experience. My practice is fully independent and I have been a member of the FPI for many years. If this has been happening then why do you let the providers trample all over you Charles? Tell them you’ll close the code from your side and move the business.

@JustTheFacts – so you seem to have missed the various conversations and threads on this exact topic on the member notice board for the FPI for the past 3 months?

Why don’t I “close the code and move the business” – because I provide financial advice to clients, and it may not be in their best interest or the most appropriate advice to move them…. What kind of comment is that? We not policy churners JTF.

Just another example of what is wrong with this industry, even with a CFP at the end of your name.

As it relates to financial advice, show me one advisor that is both independent and free of conflicts? I’m not saying there aren’t advisors managing these issues properly but they are few and far between. Discovery just plays this ‘game’ better than others and now others are upset.

There are many who put the client first and who are not conflicted. The industry is changing, be it slowly.

Yes because human beings try to do the right thing/follow the golden rule and the question here is why humanity should be saddled with an economic system that penalizes( sometimes severely) those who try to help others without extracting maximal payment.

I am an IFA with a Discovery contract and have experienced the pressure to provide more new business or face having to deal with a call center. The Discovery broker consultants are each limited as to how many brokers they can call on or have on their “book” so to speak. They are almost solely rewarded on new business and therefore understandably want to deal with the higher producing IFA’s. The system is flawed as they are only rewarded for new business and receive little or nothing for existing business. This means no matter how many new clients I give them, the pressure will always remain. If I end up having to deal with a call center I can’t service my existing clients as effectively and that’s not fair on the clients. Added to that is the fact I do not deal exclusively with Discovery and if their quote or product is not competitive they won’t get the business. Lastly there are very few people (and I include the broker consultants) who can honestly say they understand every last detail of every Discovery product which, although innovative, are extremely complex.

Brutus you make a valid point re broker consultants being rewarded on new business only, I believe there should be a business retention element too – but that is prevalent across the industry (and a global phenomenon too) as is the possibility of being moved to a call centre. But really – so what? It is the advisor’s responsibility to stay educated on products and also service clients efficiently regardless of provider distribution models. That’s just what a decent IFA has to do.

I can also understand that a BC cannot dedicate time and effort if no business results. But this is all a far cry from the issue Charles raises above of contracts apparently actually being closed re new business. If that is happening then it is in my view unethical and likely illegal as a breach of contract which separates client and advisor. Interesting.

I have personally found Discovery’s products too be extremely innovative and rewarding not just for myself but also for a number of our Practise’s clients.Yes it requires appropriate knowledge and that you have a proper understanding of the suitability of the products in respect of your clients needs but then again Board Notice 194(PST) pretty much emphasises one’s required compliance in this regard as an intermediary.
As with our clients I have products not only with Discovery but also with other providers where appropriate.
The standard of training is on a par with other top drawer providers and when coupled with their DIT Portal is really exceptional.

IFA KZN

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