Retail Distribution Review – Putting you in a box

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Where will you fit? IFA/Multi Tied Adviser/Tied Adviser

One of the core debates in the Retail Distribution Review (RDR) is how brokers/advisers/planners should be defined. (I am only going to focus on the Risk adviser here, although the RDR also covers health and short-term advisers). This has been a somewhat grey area, with individuals pretty much calling themselves whatever they please and clients being none the wiser to the implications. Spending so much time and effort on these sort of semantics might seem like a waste of time, but if you look at the recommendations more closely, it is at the core of the professionalisation of the industry. Just like you want to know if your ‘doctor’ is a qualified medical professional or has received an honorary doctorate in video game playing, so should the designation of your broker/adviser/planner be less subjective. I have uploaded a copy of the RDR on my website HERE (under Government) if you want to look at the verbage yourself, chapter 4 deals with the proposed 3 types of ‘adviser’.

One of the most important distinctions that will be made is the differentiations between Financial Planning, Product Advice and Product Implementation – Planning, Advising and Broking. This is much more pertinent in the Risk environment, but also applies to the investments on Life Insurance Platforms (that still pay upfront commission and charge clients early termination penalties). In the RDR paper investment and risk have been handled separately – a welcomed and long overdue move. Those legacy insurance investment products are going to be closed off so that brokers can’t circumvent the RDR and add to these dated products and get upfront commission. Personally I would like to have seen a sunset clause set on the ‘early termination’ penalties that have been allowed to continue since 2005. Haven’t these providers had adeqaute opportunity to write these off in their books? Just saying.

Historically, Planning, Advising and Broking have been lumped together, but only paid (through commission) by one of the roles– the implementation/broking of the product – the easiest and quickest of the 3 processes. Broking can be seen as the ‘order taking’ part of the process, and really requires little or no advice just some experience. This is the distinction that call-centres hide behind in their ‘limited advice’ model. At that call-centre level the discussion is ‘what can you afford, and how can we spend it for you’ (order taking) rather than a robust discussion on an individual’s needs. As much as the RDR has tried to protect the right to the lower income groups to financial advice, the reality is that these proposals is going to make it further out of their reach. Call centres will be rubbing their hands together in glee.

In a nutshell, there are 3 proposed types of adviser: Independent Financial Adviser (IFA), multi-tied financial adviser and Tied financial adviser. These definitions are summarised in “Proposal K” in the paper and still requires more input. The ability to use the designation ‘Financial Planner’ is dealt with in “Proposal U”. Let’s start with the easiest one first – a Tied Adviser. They are a representative of a product supplier, and may only give ‘Product Advice’ on that provider’s products. In other words, having determined your needs, the recommendations will be restricted to products on that one provider’s platform (You need a million rand in life cover and I can offer you Liberty, Liberty or Liberty). One of the questions that needs to be asked here is whether a tied agent can give advice to a client to cancel another provider’s product if they are not an authorised representative? Most experienced IFAs with multiple product platform experience will have come across instances where tied agents or brokers with no experience in a product, will cancel a client’s cover and unwittingly cancel or impact bonuses, paybacks and investments.

A multi-tied agent will be able to give advice on ‘several’ different product providers. This is where it starts to become more complicated. At the low end, more than one is multi, so only 2? So the discussion evolves to ” I can offer you Liberty or Old Mutual” (for example).

Once we get to the coveted “IFA” designation, things get a lot more sticky. If you read chapter 4 of the paper, the crux of the IFA designation seems to be focussed on investment rather than risk. To quote (Page 34 of the paper if you want to research further) “An IFA, licensed in his or her own right to provide independent advice (and may also provide multi-tied advice in relation to certain non-investment products.)”

Let’s look at that IFA designation in more detail then…

In order to be considered an IFA you need to ‘demonstrate an adequate degree of independence in relation to product and product supplier choice.‘ Clearly “the whole market” is unworkable and unnecessary – so where do you draw the line? The IFA is going to have to be able to show high standards of product specific knowledge on products available to them – and how many that is going to differ from adviser to adviser. Understanding the technical specifications and keeping up with the changes takes days every month. This can be particularly onerous for a sole-proprietor or small FSP.

If you look at “Proposal N” it is important to note the second provision: You will not be able to consider yourself and IFA if “The adviser is directly or indirectly subject to production or sales targets in relation to products of the product supplier.” Many of the large insurance providers have production targets for FSPs, which, if not met, contracts are cancelled with impunity and often zero notice (and all future commission with it). If one has to tailor recommendations based on ‘spreading the sales’ in order to keep the license with the various providers – this is no longer independent, and goes counter to the TCF. I predict that this is going to cause significant David versus Goliath battles in the future as insurers insist that they can ‘choose’ their supporters and IFAs battle to keep product licenses during times when a provider’s products are out-of-date or uncompetitive (which happens all the time!) This is a subtle way that provider’s will be able to exert influence over implementation advice given by tied and multi-tied brokers.

Investment platforms, especially LISP platforms, (probably because the remuneration is based on ‘assets under management’ and not commission), are far less prescriptive on production targets. At worst you might not get the services of a consultant but have to deal with the call centre. This should make it easier for IFAs to show ‘an adequate degree of independence’. Advisers that still use insurance company platforms for investment advice will not find it as easy ( and some LISP platforms like Momentum wealth and Sanlam Glacier have their licenses tied up with their insurance platform licenses, so when you lose one, you lose both). Advisers that only give long term insurance investment and risk advice are probably going to find it more difficult to be considered an IFA. Reading between the lines, most IFAs will be independent investment advisers with a multi-tied risk business. A ‘pure’ IFA will work exclusively on an advice fee, usually paid directly by the client, and is likely to have the ‘Financial Planner’ designation too. The FSB has recognised that the South African market is not ready for fee-only advice right across the board, and that this is restricted to high net worth individuals. I touched on this subject in a recent blog that you can read HERE, and I will be looking at the ‘Financial Adviser’ designation and fee-based advice (not just commission) in a future blog.

Going back to the beginning of the process – what about Financial Planning? In order to call yourself a Financial Planner, competency standards will be required. Much of this certification is already in place through the FPI (for example), with the Certified Financial Planner ® being the top designation and requiring significant qualifications and a board exam. It is equivalent to a Honours degree, and having obtained one, believe me it is as much, if not more, work. The various levels of designation are likely to govern the fees that can be charged by Financial Planners, in much the same way as an Advocate will charge more than a Lawyer. Financial planning is completely independent of product advice. I will handle this aspect, and the recommendations in a future blog. FAIS does require a certain level of ‘financial planning’ to be done, but this is going to be formalised.

Is there anything in these proposals that an IFA can start to anticipate, and so reduce the impact on their practice?

There are a couple of things: Start getting the qualifications required to be considered a ‘Financial Planner’ if you haven’t done so already. This will enable you to charge higher fees for financial, retirement and estate plans. Focus on building up your investment (AUM) business on LISP platforms. This is going to be the primary consideration in being designated an IFA. On the plus side, there are some superb portfolio building tools available on some LISP platforms, particularly Sanlam Glacier and Investec, which will help you give far better financial advice on investments. Start thinking about how many risk licenses you’re going to need to be at least ‘multi-tied’, and really know those products. How many do you really need? In my experience 4 is more than enough. As a result of being on the Risk Competency Committee of the FPI I have had an indepth look at most of the major providers and as a result dropped a couple from my panel. You should do the same. The one possible weakness I have picked up in the RDR (and I will deal with in another blog) is the assumption by the FSB that all risk providers and their products are created equal. They aren’t. Some of the benefits offered are decades out of date, and the claims process so onerous as to be unfair to a client. This has implications when it comes to ‘reasonable replacement’ of policies.

Action: If you want to be designated an IFA and a Financial Planner, you are going to have to start making those plans now – they all take time.

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Author Dawn Ridler  

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