Financial advisers will have to focus on the quality of their advice and will probably have to charge more or reduce their overheads, or both, if they want to remain profitable under the incoming Retail Distribution Review (RDR) regulations.
This is the view of Henry van Deventer, wealth strategist at Old Mutual Wealth, who says that if the implementation of RDR in the United Kingdom is any indication, the biggest impact in South Africa is likely to be felt when the manner in which financial advisers are remunerated comes into effect.
“The intention of the Financial Sector Conduct Authority is to shift to an environment where advisers are not remunerated by product providers, but by clients agreeing to pay a fee. In short, this means commissions and rebates on investments will be abolished, and there will be a significant reduction in up-front commissions on life insurance products.”
Van Deventer refers to a survey conducted by the Financial Planning Institute among its approved financial planning practices “to gain insight into what our differences are (pre-RDR) relative to similar firms in the United Kingdom, where RDR was implemented five years ago. It gives South African advisers a unique look at how our businesses will need to evolve in order to prosper in a post-RDR world.” he says.
“In South Africa, 77% of financial planning businesses are running at profit margins of less than 20%, whereas 48% of UK businesses are running at profit margins of more than 20%. Of these, half run at a profit margin of more than 30%.
This relative unprofitability appears to be due to three main factors, says van Deventer. “First, South African businesses employ too many people to support financial advisers. Second, South African advisers have too many clients; and finally, although both countries primarily charged their clients by way of percentage-based ongoing fees, South African firms tend to charge significantly less than their UK counterparts.”
He says South African firms will have to take the following key steps in the near future to remain profitable under the RDR regime:
- Charge more. As commissions and rebates fall away or are reduced, the average ongoing annual advice fee will need to be nearer to 1% than the current average of about 0.5%, Van Deventer says.
- Reduce costs. This can be done by reducing or putting a freeze on the number of support staff employed. “There are alternatives in the forms of automation and outsourcing that allow for financial planning businesses to be run more efficiently than 10 years ago,” he says.
- Put quality over quantity. Advisers need to focus on improving the quality of their advice for a select group of clients instead of simply increasing their client base. “We live in an era where clients demand more personalisation and attention than ever before. This becomes harder to deliver as we increase our client base. Most of the largest financial planning businesses in both South Africa and the UK grow their client numbers fairly slowly, but they are fanatical about what their clients should look like and they deliver a meaningful value proposition to these clients.”
“There is no doubt about the direction of the wind when looking at regulatory reform in South Africa. We can’t change the direction of the wind, but we can adjust our sails,” Van Deventer says.