The Retail Distribution Review (RDR) will change the South African financial advice industry in fundamental ways. The shift to a client-focused, transparent system is both welcome and overdue. So, why has it taken so long?
The investment advice industry is going through major changes. An overhaul to the financial relationship between investors and advisors has already rolled out in the UK and is in process in South Africa.
Thanks to the incoming RDR, the future of financial advice is positive – despite what you may have heard.
The aim of RDR is to ensure more transparency and fairness for investors by unbundling investment costs from funds. Your actual costs will be clear and independent financial advisors can no longer bundle funds and advice together to generate an extra layer of revenue at the fund level. RDR also requires advisors to choose between being tied agents of a product house or wholly independent. Customers get the benefit of clear fees and easy to understand advice propositions.
The three basic outcomes of RDR
1. The way that financial advisors charge fees is changing
Currently, advisors in South Africa are mixed in the way they earn from client work. Some old-style advisors receive large percentage commissions from product providers when they sell the policy to a client. A second, smaller lump-sum commission is paid to the IFA at year two of managing the fund. This switches to a smaller “trailing” commission at year three. This provider-advisor relationship makes it profitable to sell a different policy to clients every two to three years. This could be against the client’s best interest if their current fund is performing well. Other large advisory firms work on a fee basis with an initial advice fee and an ongoing fee structure, but the client’s funds are invested in in-house funds run by external managers. These in-house funds are priced above the cost of the funds provided by the external managers, resulting in an additional layer of income for the advice firm.
RDR will require financial advisors to charge an upfront, negotiated fee for their service. They will be prevented from using vertically integrated investment structures such as those described above. This shifts the power back to the client as they can negotiate a fee that works for them. The incentive is now to focus on the client’s needs instead of which product provider provides the most financial benefit to the advisory firm. RDR ensures a complete separation of the investment solution from the advice.
2. Financial advisors will need to be better qualified
IFAs will need to pass category and product exams to show that their industry knowledge is up to date, and that they can recommend the best product. Ongoing training also ensures that advisors build trust with clients.
3. It’s clearer for consumers exactly what advice they are getting
Financial advisors will fall into two categories. Truly independent advisors take a “whole of market” approach to funds and consider every product option for their clients. A “tied” advisor may choose to only sell a certain provider’s funds. This allows IFAs to specialise in a specific product if they choose to.
This process is placing the consumer at the forefront. Investors can now be sure that they’re getting sound advice. Removing financial “kickback” commissions from product providers should make advisors focus on getting you the best return for your investment.
UK reaction to RDR
Initially introduced in the UK, RDR caused a reduction in advisor numbers. The focus on qualifications meant that some IFAs couldn’t keep up with the changes. The shift towards transparency exposed and pushed away advisors biased by provider scheme kickbacks.
The result? A more focused, professional and transparent client-based industry.
What RDR means for South Africa
A similar outcome can be expected for the South African investment landscape. Although it’s been a long time coming (with an initial proposal in 2014), the Financial Sector Conduct Authority (FSCA) is slowly rolling out the plan. Changes already implemented include:
- Enough credits need to be attained during the financial advisor’s qualification
- A product category exam must be completed as part of getting a licence
- When using a product provider, financial advisors need to complete a product specific exam
- Continued professional development (CPD) points for ongoing knowledge and training
Instead of IFAs and “tied advisors”, the FSCA is proposing the terms Registered Financial Advisor (RFA) and Product Supplier Agent (PSA) respectively. This will help consumers distinguish whether or not their advisor is truly independent.
The timeline for completion
South Africa’s slow rollout is due to pushback from the large life companies who need time to figure out how to navigate RDR. A shift away from large upfront commissions means going from high-earning provider percentages to smaller client fees. IFAs and product providers will have to refocus their businesses and update their advice and product offerings – and that takes time. The delay gives these companies the opportunity to get ready for RDR by building open architecture to better meet their clients’ needs.
Why we’re happy about RDR
Sable International is a UK and South Africa regulated cross-border financial planning firm. We’ve always been fee based, independent and client centric. Bringing a UK style of advice to South Africa means we undercut most local advisors on advice fees while offering a deeper international set of solutions. Most IFAs in South Africa have been working on vertical integration with their products by offering fund of funds (FOFs). This drives up the price of the investment solution and goes against the principles of RDR. These IFAs need to scramble to adapt to the new climate, while we’ve been international, independent and product agnostic since day one.
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