Financial advisers analyse their industry

The first South Africa Investment Panorama (SAIP) report, which has provided insight into independent financial advisers’ (IFAs) views of the local investment industry, was conducted this year by Insight Discovery in partnership with Investec Asset Management and Moonstone Information Refinery.
 
IFAs cautious of new RDR model
 
One of the main concerns of IFAs is that the new retail distribution review (RDR) model.
 
The Financial Services Board (FSB) explained that RDR “proposes far reaching reforms to the regulatory framework for distributing retail financial products to customers in South Africa.”
 
 “[Essentially the IFAs] are concerned that the same model that was applied in the UK will also be implemented here where they are not allowed to get commission as they did in the past, but they will have to charge [fees that have been agreed upon with the client],” explained Paul Kruger, head of communications at Moonstone.
 
According to Kruger customers will probably end up paying less on the new model. “The fee is based on hourly fees, so if you do the same amount of work for a R1 million investment that you did for a R10 million investment, then the fee will be the same, [so in essence] the adviser will get less.”
 
IFAs are also concerned that the new regulations will put some of them out of business. This is partly due to the extra costs that not all of the smaller firms are able to afford.
 
However, he noted that South Africa has had a regulatory frame work since the mid-2000s, unlike other countries that introduced RDR.
 
When RDR was introduced in these other countries, the number of firms and advisers did drop. But Sillitoe does not believe that this will happen in South Africa, at least not to such a degree that countries such as the UK experienced.
 
“I don’t think that [the number of firms and advisers will drop in the South African] market, because the adviser is already qualified. They also often have succession planning in place (which is required in RDR). Even though South Africa is an emerging market, its regulatory market is actually far more advanced than many developed markets,” stated Sillitoe.
 
A succession plan essentially means that an adviser needs to have a person who will take over their clients’ investments in the event that something happens to them to prevent them from performing their job as adviser.
 
Technological changes are an opportunity
 
According to Sillitoe and Kruger, one of the main opportunities that technology provides IFAs is that the entire process going through an application and a client’s information is a lot quicker.
 
“South Africa is a bit more advanced than most countries, but a lot of service providers elsewhere rely on paper and it can take hours to go through an application with a customer, so a lot of brokers want to embrace the technology revolution, not just from a marketing perspective through social media, but more importantly in dealing with clients. If you were personally using an IFA I’m sure you don’t want to have to wait days and weeks for your valuation to arrive, you should be able to go via an IPad and actually get your details there and then,” explained Sillitoe.
 
Independent, tied and multi-tied advisers
 
The new regulations specify that customers should have a clear understanding of what services they are being provided with, as well as the relationship between the financial adviser and the different financial product suppliers.
 
An independent financial adviser will need to offer customers advice on a variety of products offered by multiple product suppliers. The advice that the adviser provides needs must not be restricted to a limited set of products or product suppliers.
 
A tied financial adviser has a contract or some other form of relationship with a financial product supplier, and provides advice in relation to the products supplied by this supplier only.
 
A multi-tied financial adviser does not fall into either of these categories, as they are not tied to one specific supplier, yet they do not meet the requirements to be classified as an independent financial adviser.
 
Kruger added: “Essentially a tied agent only sells one company’s products, and that still has to be clarified. A multi-agent can provide up to, say three different companies, and the independent advisor is one who solely relies on an advice fee, and he is not in any way financially dependent on the product providers, so he does what’s best for the client.”
 
For more information on the classification of financial advisers, click here.
 
The importance of fund ratings
 
There are various companies that analyse funds, looking at past performance, the risk profile of the investment, the tenure of the fund manager, and so on and provide the fund with a rating between zero and five.
 
Sillitoe highlighted that financial advisers use these fund ratings to help them identify funds which they will, in turn, suggest to their clients. A fund with a rating of four or five is more likely to be recommended as the risk profile is a lot smaller, and the fund has been analysed by an independent investment research company, such as Morningstar.
 
“The survey confirmed that [IFAs] do rely quite heavily on the fund rating organisations. Morningstar is one I know particularly well, they are [a global company]. They are very active in the US and the Middle East, for example, and in our studies elsewhere we have seen that more and more brokers are relying on fund rating companies,” explained Sillitoe.
 
Clean pricing
 
In order to make it easier for financial advisers and their customers to compare different funds, the new regulations (RDR) specify that funds must now provide clear costing.
 
Kruger stated: “Everyone will have to use the same formula, and will have to produce the same disclosure to allow clients to compare apples with apples.”
 
Until now, not all costs were clearly disclosed, and each fund could represent their costs/fees in a different format, making it difficult or impossible to compare different companies and their products. Sillitoe believes that the new pricing structure will be a benefit for consumers.
 
RDR will be implemented in three phases. Leanne Jackson, head of market conduct strategy at the FSB explained: “We have indicated in the RDR Discussion Document that the reforms will be introduced in a phased and consultative fashion. The final RDR proposals will be phased in as the Twin Peaks legislative architecture evolves, in 3 phases. Some changes we can make this year – within the current regulatory framework – while others will require a great deal more deliberation and legislative changes. The final “live” date for the more substantial structural changes is estimated to be in the course of 2017, to allow sufficient time for business model and system changes. 
 
“Between now and the end of this year, we aim to analyse the comments received, carry out additional technical work and consultation on selected proposals, and finalise, consult on, and implement identified priority proposals – likely to be staggered during the course of the year.  We also aim to finalise and communicate a roadmap for the remaining proposals toward the end of this year, aligned to the Twin Peaks changes. 
 
“Changes to actual regulated commission levels on risk products are likely to form part of the substantive changes targeted for 2017, and we will also be considering the extent to which a shift from fully up front commission for life risk products should be phased in over a period.”