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‘RDR is not about regulation’

It’s about sustainable business models.

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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A financial advisor is a service provider. Like a doctor or engineer. You don’t go to your doctor to be sold a breast implant when you have the sniffles.
Historically the financial industry was and is doing exactly that- selling inappropriate products to appropriate people.
I created a new rule for myself and my family.
To keep my financial advisor honest and ensuring I receive the best and most appropriate financial advice (for me, not for him), I stated that under no circumstance will I buy any product through him.
I pay for his professional, experienced, open, unbiased and honest advice.
The result: a well worked out, customised and optimised financial plan.

Also, you do not continue to pay the doctor the service years after he/she helped you.

I think you have a great setup, will keep it in mind

As a Financial Adviser who has been a leader in charging fees for a decade, i am happy with the thoughts of RDR. However, my biggest concern with the current RDR proposal is simply this: Are clients going to be paying less for financial products and advice?
The answer is simply no! The products will not become cheaper as the Companies will still keep the built in commissions and still keep fees high. The man in the street will now have to pay the same price for the products and an additional fees for the adviser to sell him and service him annually on the product. I think RDR is a brilliantly structured con by the insurance companies to keep profits high for them, and to pass an extra expense onto the client using brokers commissions( or the perceived fees debate) as the catalyst to keep there fee income high as normal. Show me any Life assurer who’s premium on risk business will decrease to the benefit of the consumer. A lot is been written about fees , yet very little is said about Life insurance fees decreasing, everything is about investment fees seemingly decreasing , but are they?

I would have thought the insurers would not take the commission out of the cost. I know plenty of them that would. Let’s see… Mm, no I can’t.

All good and well to talk about sustainability but the problem comes in that with an ageing advisor force,the model needs to be sustainable for the person entering the industry.If its going to take an average person 3-5 years to break even,then i am afraid the client will suffer.What will happen in practise is that the advisor will be forced to earn second and third sources of income to meet overheads,and I know this is one area the FSB is grappling with.Also ,its a bit of a farce when we talk about commissions being done away with,but the advice fee payable on an investment may result in the same outcome.But dare you say that to the the holier than thou FSB.

Brian Foster will argue, and I will agree with him, that it shouldn’t take 3-5 years to break even. If advisers re-imagine their business models, they can be profitable immediately.

I also don’t understand how commissions and advice fees can result in the same outcome. The one is being paid by the product provider to someone for selling a product. The other is being paid by a client to someone for advice. They are completely different. It may be that the client pays the same amount, but that isn’t the point. The point is removing the conflict of interest inherent in the former arrangement so whatever transaction takes place is in the client’s best interests, not in the best interests of the product provider.

Patrick ,i disagree with the sentiments of Brian Foster that the new model will be viable for advisors.The new advisor attrition rate among the likes of Liberty and Mutual is probably in excess of 80%,and while many ,were probably not suitable for the industry to start off with,the new model will make it even more difficult for advisors to earn a reasonable living.Even in the Bank space,many new advisors are struggling,and their they have the luxury of referrals and information systems to call on.
To conclude a transaction with a middle income client can take up to 3 meetings,and even then we talking delays in finalising medicals.Investment proposals take a lot longer to finalise as clients take their time.I do think that much more input is required from all parties before opting which way to go.The FSB have already back tracked on the rules surrounding replacements.

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