HERMANUS – The first phase of the Retail Distribution Review (RDR) is set to arrive on January 1. As the Financial Services Board’s Leanne Jackson told the Momentum Consult Mindshift conference last week, the reason for introducing RDR in South Africa is because the old models for giving advice and selling financial products have created a number of issues that need to be addressed.
“It’s not anyone’s fault,” Jackson said. “It’s about the framework itself. The way it is designed builds conflict into the model.”
She argued that one of the key objectives is to create sustainable business models for financial advice.
“This is not a ‘gotcha’,” Jackson said. “It’s about us believing that good quality, appropriate advice is crucial and needs to be delivered in a way that is sustainable for everyone in the value chain.”
The question many in the financial services industry have been asking, however, is what that sustainable model looks like and how it works. Many advisors are worried that they can’t be profitable under the coming regime.
However, Brian Foster, the co-founder of Beyond RDR, told the conference that advisors should re-think their approach.
“RDR is not about regulation,” said Foster. “It’s about business models. We have been running a business model that’s been broken for a long long time. Now is the time to change it.”
He explained that most people initially came into the industry as salespeople. They were not trained as advisors, but to sell products on behalf of life insurers.
That model has persisted, but it is inherently problematic.
“You come into the industry by learning to sell policies,” Foster said. “The industry has trained us with this industrial mindset. They build these factories, and send us out to distribute their products. That’s industrial age thinking.”
In this model, Foster argued, you “eat what you kill”.
“If you don’t sell this month, you don’t eat next month,” he said. “And that just repeats. I call that a transaction treadmill. You’re running fast, running hard, but not actually going anywhere.”
Financial advisors however have something to offer that is far more valuable than just policies or fund wrappers.
“As financial advisors, what’s our product? What is it that we’re selling?” Foster asked. “Do you get paid for advice, or do you get paid to sell something?
“I think we should have our own product,” he argued, “Because actually what we’re doing is selling other people’s products. We’re not selling our own product because we don’t know how to package it. And what’s really stupid is that the bit that’s really valuable, we give away for free.”
In a model based purely on commissions, clients never see that they are actually paying for advice. And often, advisors will say that there is no fee for their advice because nothing is paid up-front.
However, this totally devalues what the adviser is doing.
“Who makes the money?” Foster asked. “The industry. Who’s got all the control? The industry. But who has the client relationships? We do. Who takes all the responsibility? We do. Can you see that this business model is broken? The only people that want this model is the industry that wants more distribution and doesn’t care how they get it. And the client suffers as a result.”
The solution, Foster argued is to re-think what advisors are offering and how they promote it. In this respect the move to a financial planning model has been significant, however he believes that there is yet another step that needs to be taken, and one in which the client is treated more holistically.
“How can you separate a client’s money from their life? You can’t,” Foster argued. “We have to get much better at having lifestyle coaching-type conversations, and my experience is that clients are willing to pay a lot of money for that.”
To get this right, however, advisors will have to separate advice from intermediation. In other words, the advice becomes something completely separate to the products that the client eventually chooses.
“I don’t think people buy a financial planner,” Foster said. “But if you ask someone whether they would like you to help them to have the lifestyle you want without running out of money, they will buy that.
“It does require a complete change in the way we think,” he said. “And not everyone is going to get it – either advisors or clients. But it is being done, and done successfully.”
This journalist is attending the conference as a guest of Momentum Consult.
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