You should be treated fairly when receiving advice or buying financial products, because the principles of Treating Customers Fairly (TCF) are already in operation in the financial services industry.
But unfair practices continue, because more changes must take place to support the fair treatment principles. One of these changes will involve how product providers and many financial planners charge you, the annual conference of the Financial Planning Institute (FPI) in Sandton heard this week.
In addition, many advisers need to reconsider how they assess your investment risk, with calls being made for them to abandon using “flawed” questionnaires to determine if investment products are suitable for your risk profile.
There was much discussion at the conference about how advisers can switch to a fee-based business model, because it is likely that product providers will in future be prevented from paying advisers a commission for placing your money in an investment.
It is now widely recognised that the practice of paying commissions has not always resulted in advice that is in your best interests.
The FPI represents professional financial planners who hold the Certified Financial Planner (CFP) accreditation and seek to professionalise financial advice.
A number of issues highlighted at the conference were guided by the goals of TCF, the principles that the policymakers and regulators have adopted to regulate the financial services industry.
Leanne Jackson, the head of market conduct strategy at the Financial Services Board (FSB), acknowledged that financial advisers who comply with both the letter and the spirit of the Financial Advisory and Intermediary Services Act are already well on their way to treating you fairly, because the Act aims to ensure you are provided with advice that is appropriate to your circumstances.
But Jackson admitted that some laws will have to change to support the providers of financial products in meeting their obligation to treat you fairly.
A prime example is that financial services companies are allowed to impose penalties on your investments if you do not adhere to the terms of the contract, as a recent case before the Pension Funds Adjudicator highlights. These contracts are often sold for unnecessarily long terms, because the commission earned by advisers is based on the term.
Jackson told the conference that, although the regulator expects financial services providers to ensure you are treated fairly within the existing laws, the FSB and National Treasury are reviewing legislation to identify where it needs to be amended to ensure it further supports the goals of TCF.
To support the move to TCF, the FSB has undertaken a review of how you pay for the distribution of financial products, including paying commission to advisers. A discussion document on the Retail Distribution Review (RDR) is expected to be released in July, and its recommendations are likely to be implemented over the next two years.
Jackson said the practice of charging commission for financial products results in remuneration for different types of services being “blurred in a single pot”.
Once the recommendations of the RDR have been implemented, it is likely that financial advisers and product providers will have to detail each and every charge and the product or service to which it relates, so that you can see what you are paying for. You will then know how much you are paying for advice, how much you are paying for products and how much you are paying for other intermediary services.
Fee-based model
Past winners of the Financial Planner of the Year Award told the conference how they have set themselves up as fee-charging professionals who provide advice, rather than salesmen who earn commission on the products they sell.
Barry O’Mahony, the founder of Veritas Wealth and the winner of the award in 2013, said he charges a rand-based fee based on the time it takes him to draw up and implement a financial plan.
If the plan involves buying a product on which commission is paid, the commission can be offset against the fee, he said.
Natasja Norval-Hart, a planner at Sasfin Advisory Services and the winner in 2010, said she charges an hourly fee for drafting and implementing a financial plan.
John Campbell, the co-founder of Chartered Wealth and the 2008 winner, said he charges R20 000 for a financial plan and a separate fee – based on the work involved – to implement the plan, but he does not take commission on products.
All three planners said they draw up a financial plan only after a long initial meeting or two with a client so that they can understand his or her needs and financial goals. They all charge a fee on the amounts you invest based on their advice, to cover ongoing advice after the initial implementation of the plan.
Campbell said if you have paid for a financial plan with Chartered Wealth, you don’t have to implement it through the company.
O’Mahony said it is financially very difficult for an adviser to move from receiving commission to being paid for advice, but advisers should believe they are worth the fee they charge. Consumers, in turn, should know that it is worth paying a fee to be advised by a planner who has earned the CFP accreditation.
CFP planners have completed the Advanced Postgraduate Diploma in Financial Planning and agree to abide by the FPI’s code of ethics.
David Kop, the senior manager for policy and research at the FPI, told the conference that only a handful of advisers have moved away from commission payments.
One adviser, who told the conference that he sells financial products with the backing of a large life assurer, said he can earn upfront commission of R350 000 to R450 000 a month. He said it was at huge cost to his earnings and exceptionally difficult to change to giving fee-based advice, but he believed it was the right thing to do.
Jackson said four years have passed since the regulator and policymakers stated their intention to adopt TCF, and now, when the FSB engages with advisers, asset managers, insurers and other financial services providers, it no longer simply asks them if they have a TCF plan. Instead, she said, companies are asked if their plan is ensuring that they are starting to meet the objectives of TCF.
After the recommendations of the RDR have been phased in, it may take some time to unwind payment models that are in conflict with advice-based remuneration, but the FSB is considering interim measures to eliminate some of the conflicts, she said.
TCF is expected to receive backing when the Twin Peaks regulatory model is implemented in 2016.
Jackson says the FSB, probably under a new name, will in future be responsible for monitoring the conduct of all financial services providers, including the banks, while the Reserve Bank will be responsible for ensuring that these companies are financially sound. This division of responsibilities is known as the Twin Peaks model.