This article was first published in the 1st quarter 2018 edition of Personal Finance.
Do you receive financial advice from “an adviser” or “an agent”? What is the difference between the two, and if there is a difference, why does it matter? These questions are at the heart of some of the financial services industry’s most vigorous discussions, and you can expect more heated debate before the designations “Product Supplier Agent” and “Registered Financial Adviser” are finalised in the current Retail Distribution Review (RDR) discussion document and the legislation that flows from it.
Treating customers fairly
The RDR document will guide new legislation that will define and regulate financial advice in South Africa. This law will dictate how advisers provide advice, what they need to disclose to their clients or potential clients, what they can charge, what recourse clients will have if they receive bad advice, and how regulatory bodies can restrict and punish advisers who act unethically or irresponsibly.
At the heart of the RDR document is a set of rules on how customers should be treated that are aptly called “Treating customers fairly” (TCF). Rule four is of particular interest, because it states: “Where advice is given, it is suitable and takes account of customer circumstances.” You may think this is stating the obvious, and it certainly should be. But the inclusion of this rule indicates that, in some instances, the principle is being ignored.
Fees and independence
Rule four – suitable advice that takes the customer’s circumstances into account – invariably leads to the debate over fees and adviser independence.
The RDR document states that fees must:
• Be reasonable and based on the actual services rendered;
• Not create a conflict of interest that affects service delivery or fair customer outcomes;
• Strike a balance between supporting service delivery and compensating intermediaries for the services they have rendered; and
• Be ongoing only if ongoing advice is rendered.
Although the above four principles are simple, they mark a significant shift from today’s complex structures where clients often pay monthly fees on every financial product they own, regardless of whether they see the person who sold them the product again. These complex structures often include fees, levies and recurring payments to the sales agent, product creator, trading platform and other intermediaries. Often, clients have no idea of the cost structure or financial relationship between the person who advises them to purchase a product and the creator or owner of the product. This leads to the next big point of discussion: is your financial adviser independent and can he or she provide you with independent advice?
Whenever this issue is raised, many advisers start wringing their hands and explaining that independence is “complex”, “irrelevant” or even “impossible”. They may question why it matters if they receive a monthly salary and commission from only one product provider if that provider creates good products and has been in existence for decades.
Although some of these arguments have been polished to perfection from regular use, they cannot withstand the spirit of the TCF rules, which state that a customer should be able to make an informed choice, knowing all the costs, the adviser’s affiliation and the other options on the market, before entrusting his or her future financial well-being and retirement to an adviser.
Tied or not?
The debate on the titles of different financial advisers started with the publication of the first RDR document in 2014. From this first draft, it was clear that legislators wanted to protect customers from unscrupulous business practices, bad financial advice and misleading products and their advertising. Back then, the RDR document defined three types of financial advisers:
• Tied advisers, who are contractually bound to sell the products of a specific product supplier;
• Multi-tied advisers, who are similarly linked to more than one product supplier; and
• Independent advisers, who are not associated with a specific product supplier and who can provide independent advice.
More recent versions of the RDR document have done away with the term “adviser” for any person who is in the tied or multi-tied categories, referring to them as “agents”, because they sell products on behalf of a supplier and limit their advice and opinions to these products.
Product Supplier Agents
In the most recent version of the RDR document, the designation product supplier agent (PSA) refers to any financial adviser who is tied to a specific financial product group or, in some cases, to several product groups. Currently, these advisers can act as a financial adviser and offer to plan your investments, choose retirement funds on your behalf or help you to save for your child’s tuition, without any independent verification of their ability to do this well. They may also withhold that they are affiliated to one product provider, or a few providers, even though they sell only their products.
The RDR will change this dramatically and require PSAs to state clearly that they do not offer independent advice, but simply advise on the products they have been trained to sell by the product supplier for which they work. At the same time, the product supplier will have to take full responsibility for the advice that its agent provides and for the quality of the product that its agent sells.
Registered Financial Advisers
Once the RDR legislation is promulgated, Registered Financial Advisers (RFAs) will be the only advisers who will be able to offer financial advice. According to the current version of the RDR, an RFA can be an individual or a company, but, in either case, its ability to provide professional, independent financial advice will have to be verified by an external source.
The RDR imposes strict rules on the conduct of RFAs, and it requires them to be professional and ethical in their conduct. It also places a heavy burden of compliance on RFAs, recognising that the wrong financial advice can cost clients dearly – for example, when they need to retire but do not have enough money to do so.
True for both: fees and full disclosure
The finer details, rules and responsibilities of PSAs and RFAs are still being discussed, and the actual titles of these two types of professionals may change, but some things will hold true regardless.
The first is that clients will have to be fully informed of the fees and costs associated with any advice they receive. The RDR allows RFAs to charge for advice, to ensure that a client receives professional advice and is not being “sold to”.
The RDR also states that all fees, commissions and costs should be clearly identified and that advisers – of any description – may not charge recurring fees if they are not providing recurring advice.
The second significant change that will hold true is that all types of financial services providers, RFAs and PSAs will be required to be completely transparent about their financial relationship with product suppliers. This is a very welcome change, because people are often sold policies or products because the “adviser” is receiving a commission, not because the policies or products are appropriate for the client after taking into account his or her income, lifestyle and retirement goals.
What can you do now?
The RDR legislation has not been promulgated, so you don’t have access to the recourse proposed in the Act. But the gaps the RDR document has identified in the provision of financial advice can help you when you obtain advice.
First, try to find an accredited, independently verified financial adviser. The Financial Planning Institute of Southern Africa (FPI) is the only recognised professional body for financial planners in South Africa. It is the only institution in the country to offer the Certified Financial Planner (CFP) certification. It is also an approved examination body for the examinations required by the Financial Advisory and Intermediary Services Act’s regulations. Its members subscribe to a code of ethics and must maintain their level of knowledge by attending continuous professional development training. To find a CFP professional, visit www.fpi.co.za.
Second, at your first meeting with a financial adviser, ask whether he or she is “tied” to any financial product provider. Only a handful of advisers can claim to be truly independent, which enables them to choose products from any provider. These advisers often charge for their advice, which means they do not have to sell you anything to be compensated for their advice.
Last, ask who makes money from your investment and for how long. You may find that your adviser, the provider of the financial product, an intermediary and even the trading platform that your adviser uses take a fee – once off and/or monthly – and that your investment’s growth rate is significantly reduced because of these fees.
Ultimately, no piece of legislation can comprehensively protect you from incompetent or unscrupulous advisers, so try to understand as much as you can about your investments and do not be shy to ask for a second, or even a third, opinion.
Wouter Fourie was the 2015/16 FPI Financial Planner of the Year. The award honours the most proficient professional financial planner in South Africa. Fourie, a CFP professional, is managing director of Ascor Independent Wealth Managers, and a professional accountant and tax practitioner with more than two decades’ experience. He holds advanced postgraduate qualifications in tax, investment, estate planning and financial planning. He is a non-executive director of the FPI’s board of directors.