Not the time to procrastinate
The retail distribution review (RDR) is going to come under increasing scrutiny over the next months and years. There have been be numerous talks, conferences and articles – and this is bound to escalate. I intend to blog on various aspects of the RDR, to not only increase the understanding of fellow financial planners, advisers and brokers but also the consumer. There is nothing like going through the 95 page report with a fine tooth comb to make one realise the possible implications for the entire financial advisor industry and our current and future clients. I have uploaded a copy to my website HERE (under government papers) if you want the full report.
I was prompted to write this after hearing one too many platitude, usually from ivory towered provider representatives, that advisers just have to ‘suck it up’ and that the industry is just ‘resisting change’. After all, we sucked up doing the regulatory exams (RE), sometimes kicking and screaming, and this isn’t any different – right? Wrong! This isn’t a matter of hitting the books for a couple of weeks and writing an exam (and again, and again if necessary – I think the record was 8 times, so that we got the tick in the “RE” box. These changes directly affect your rice bowl and unless you plan your harvest season soon – now – there will be a famine. These changes will not take a few weeks, they will take years and I will illustrate that below.
So… What aspects deal directly with advisory remuneration?
On Life business – the proposal is a reduction of upfront commission to 50%, the rest must be ongoing commission and this must be from virgin business (in other words, not replacing another policy). Sounds perfectly reasonable – right? I will deal with replacement business in another blog. But let’s look at the changes to commission on life business…
The table below shows a real R1m life cover proposal (no annual increases, level premium) with 3 different commission structures (drawn up with one of the providers that has put this function in place already).
Right now the typical first and second year commissions on this quote for R1m life cover would amount to R2745. How long will it take to reach this amount with a 50/50 split? 90 months or 7.5 years. That’s without taking the time value of money into account which would put it beyond 8 years. How about 100% ongoing commission? 87 months or 7 ¼ years. If your business is primarily from ‘Life’ cover, your cash-flow is going to be severely impacted. Basically it is going to take 7 years to get back to the same position. Either those people telling advisers to suck it up are salaried employees or they haven’t done the maths.
This is the reason I am starting to talk about it now. If it’s going to take 7 years to get back to the same place – best start now. Very few advisers can make this switch overnight – so how can you go about it?
- Do your own budget and a detailed breakdown of your commission flow. Know what your monthly needs are and what is excess (hopefully there is some). When your new business plus renewals hits that number, put the rest of the policies in that month onto 50/50 or even better 0/100%. Once the regulations are implemented you’ll have built up a significant ‘ongoing’ book. Because the money loses value in the future, it will still make sense to take the 50/50 approach in the long term.
- If you also do a fair amount of investment on insurance platforms with upfront commission – these are going to move to 100% ongoing advice fees. It is far more common for advisers to have already made this switch. If you aren’t doing it already, get friendly with LISP platforms and start building your ‘Assets under Management’ right away.
- The biggest upside to having ongoing monthly commission is that it stops the wild fluctuations in commission – and the very lean festive season.
- Advice isn’t going to be free anymore, you need to start charging for financial plans, estate plans, retirement plans etc. In other words in order to protect your career going forward you need to move from being an adviser or broker, to being a professional planner. This might require some up-skilling. You’re not going to be able to charge much for that cookie cutter stuff that comes out of the program on your computer on on the web.
- The FSB is probably going to set ‘advice fee’ guidelines (if you read the RDR report), but much in the same way as lawyers can vary their charges according to their competence, financial planners will be able to do so too. One of the biggest challenges we are going to have as an industry is to get our clients and consumers to change their perceptions of the advice and start paying for it, in the same way as they do lawyers, doctors, coaches and other professionals. Get an idea of how much you can charge per hour, based on your qualifications and experience. Have a set fee you charge for a financial plan, estate plan, retirement plan so that you can answer a query immediately.
- Start separating ‘advice’ and ‘implementation’. They are two different things and should be treated differently. Implementation is order taking, it isn’t much different from what the direct insurers do (but with much more compliance).
Action: RDR isn’t going to go away. The sooner you, the adviser, understands how it’ll effect your income, the sooner you can modify your practice in anticipation.
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Author Dawn Ridler