Obituary for the middle man – the RDR factor

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buds in may
Good news. Bad News

If you’ve been following my blogs you’ve probably been reading about the “RDR” and unless you’re in the industry you’ve probably yawned and moved on, I don’t blame you. There are aspects that are going to impact on you, both positively and negatively, so I am going to try and make it as scintillating as I can.

By slicing commission on life cover in half to brokers, and the FSB has instructed the insurance providers to bring their premiums down accordingly? Yay! Let’s have a look at those massive savings you’re going to make so you can makes plans for all that grudge purchase dosh.

commission

So, on a R1m life cover example, if the commission is completely removed from the premium, you’re going to save R15 a month.

Oops sorry, an extra cup of coffee a month then? Why such a small drop? That’s the cost of the middle man – the makelaar – the broker – the smouse– you remember those ads. The sleazy guy in a raincoat ripping you off? That life premium from the policy you got from your broker is actually a number of costs all rolled up into one.

  1. The actual cost of the risk that is invested in a big pool, and will pay you out someday if you keep it.
  2. The insurance provider’s actual costs (administration, IT etc).
  3. The adviser’s planning fees, advice fees and broking fees – called commission at the moment.

 

Once the RDR is implemented there are going to be 2 types of ‘fees’ in the life environment– The upfront commission (initially dropping to 50% from current levels, but the FSB’s intention is to bring this down to zero) and the annual ongoing management fee. That annual fee you, the client, can stop if you’re not getting the ongoing servicing and advice from your adviser. (Will you get it refunded into your premium? Sure… you wish!)

What about investments? At least there is some real good news there. Those nasty RAs or endowments on insurance platforms your broker has been flogging you for the last few decades with their confiscatory penalties and maturity dates 50 years in the future? Those now come to an end and – even better – the broker isn’t going to be able to add to those so called “legacy” products and get the old fashioned commission and add to your penalty (something they have been doing since 2007 and the penalty level was reduced). Investments are now going to be a level playing field with LISP investments, with advisers only getting fees for ongoing management and advice. While this is good news, quite frankly it doesn’t go far enough. I think it’s time to put a sunset clause in place for those “legacy” products in the spirit of Treating Customers Fairly. At the moment fees on LISP platforms are regulated at 3.5% upfront and 1% ongoing. In reality, many advisers drop the upfront fee to 1% or zero. You might not be aware of it, but that 1% ongoing fee can be cancelled if you’re not happy that you’re getting ongoing management and advice from the adviser. I predict that is going to change as RDR is implemented.

The bad news? You know that advice, those reports, plans, house calls, reviews you got for free? Turns out they were never free, the cost was just bundled up in everything and called commission. Yes, premiums are going to come down, but if you’re not prepared to pay for that advice (even if it is amortised over time and facilitated by the provider’s debit order system) you are going to have to be happy with call-centres or find yourself a cheap adviser. In the industry we call this “Low or No advice” – they are held to lower standards and have the highest rate of claim repudiation (non-payment). I find it ironic that in trying to protect the consumer from a handful of rogue greedy brokers they are now going to push thousands of ordinary people into the clutches of “low or no advice” call centres when these are the people that need it the most. To make matters worse, every comparative quote I have done with a call centre, they come in 20 to 30% more expensive for the same benefits. How many of those clients that go to a call centre compare prices? Very few. It’s hard work and tedious spending hours on the phone trying to get quotes then trying to compare apples with apples (when you’re not even sure what the apple looks like). As soon as you move onto more complicated benefits like disability, income protection or dread disease it is impossible to compare benefits unless you’re in the industry and investigated at least half a dozen provider’s products (not the brochures but the technical specification documents). If the Oz experience of RDR is anything to go by, the industry was decimated leaving a smaller number of top professionals to advise to those who could afford it. In the UK, a professional won’t even see you if you have less than R4m to invest.

Insurance and Investment providers will assist the planners and advisers to collect those advice fees (with your permission of course), so, in most instances the premium will remain unchanged. If you choose a qualified professional like a CFP ® for example, then the premium might increase but the advice will be across all your policies and investments and include retirement planning, estate planning and independent investment advice on which no commission can be earned ( and so are often omitted from present plans). One of the major differences that might not be immediately apparent is that this ‘advice fee’ is likely to be a contract between you and the planner, with the provider just facilitating the collection of the fee over time. In other words if the policy is cancelled that initial plan fee might not be paid off and the client would still be liable for it. This is quite a departure from what happens at the moment where a policy can be cancelled at any time, and commission is all clawed back from the adviser (on a depreciating scale). I think that it is likely that Professional planners, if they are implementing ( a long word for broking)  life cover they will discount the commission to zero ( so that it cannot be clawed back) and work purely on amortised fees, perhaps with the addition of an upfront ‘deposit’.

The RDR is likely to see a consolidation of the ‘management’ of products with a single adviser, which might create some problems for advisers who only have access to one or two providers or platforms. The so-called ‘tied adviser’ that can only give advice on products for a single insurance company is at a disadvantage compared to independent or multi-tied advisers in many respects, but before you break out the tissues, they receive up to 40% more commission for the same product compared to non-tied brokers. A decent financial plan will give implementation suggestions which should better equip you to ‘place your order’ with a call centre.

Action: If you haven’t done so already, find a financial planner who can manage most, if not all, your wealth portfolio. If your financial plan doesn’t cover everything from medical aid, short term insurance, life insurance, investments and your estate plan -then get one. It should have recommendations right across the board (providers are not necessary at this stage) including aspects that the planner usually cannot earn commission on like bank savings products, loan consolidation, rental property portfolios, executors, trusts etc.

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Author Dawn Ridler  

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