It’s always good to exercise your democratic right to speak out. As we’ve mentioned before on our newsletter platform, there is intense discussion around Treasury’s plans to reform the financial services industry, with the aim of better and more justly serving the consumer.

In October 2014, Treasury issued its 70-page RDR (Retail Distribution Review) Paper, the latest of various pieces of legislation it is moving forward, and put out a call for response from interested parties. Central to this discussion is the issue of how financial advisers position themselves to clients.

We at Veritas felt it was vital to respond and drove that process, drawing together a group of 97 independent financial planners (which includes 80 CFP Professionals and eight FPI/Personal Finance Financial Planners of the Year). This group is a community of like-minded professionals dating back to 1999, in which there is an on-going exchange of information and opinions about our industry.

What holds us together as a group is a shared philosophy of how to provide financial advice, called Lifestyle Financial Planning. We also share a view of how to be remunerated and run our businesses so that we best serve our clients’ interests and simultaneously provide a solid business for our employees and shareholders alike. Often, only the big corporations respond to these government papers, but we believed it was important for the voices of independent financial advisors to be heard. We represent one of the few sectors of the financial services industry in which quality is constantly improving; therefore it seemed critical to make a statement.

Here are some of the thoughts we put forward in our response, submitted to Treasury earlier this month:

Multi-tied advisers are a bad idea

Treasury is recommending that financial advisers be separated into three categories: Tied, Multi-tied and Independent Advisers.
Tied refers to an adviser who has an employment contract with a Financial Services Provider (FSP) with a product offering. It also applies to an FSP who has a shareholding interest in a product provider or a product provider that has shareholding in the FSP.
Multi-tied is when an adviser has a contract with more than one product provider.
Independent is when the only form of remuneration is a financial planning fee agreed and paid to the adviser by the client.

If our starting point is to help clients understand who they are doing business with, we believe that there should only be two groups: Tied and Independent. This is because much of the industry will be desperate to avoid the Tied category and hide themselves in the Multi-tied group. Think of it like this: if you are looking to buy a car and walk into a Ford dealership, you will walk out with a Ford. The dealer might say he has other car brands to sell, but there is a 99% plus chance you’re going to buy a Ford, whether or not it’s the best car for you.

If there is a Multi-tied category, most advisers will end up in it and clients will find it difficult to establish and understand with whom they are dealing, therefore lowering industry trust. Transparency is what we should be aspiring to, rather than further clouding of the industry.

Independent advisors are only independent if they only receive a financial planning fee

In the RDR paper, Treasury asked for the definition of Independent, and itself recommended a definition based on choice available to the adviser. This would mean going down the route of needing to spread assets across companies in order for advisers to remain independent. We believe this is an incorrect definition, and if legislated, would not be in clients’ best interests, as these ‘independent’ advisers could be pushed by various factors into making decisions about where assets are invested that could detrimentally impact clients.

Here is the definition we recommended: Independent means that the only fee the Financial Service Provider (FSP), shareholders or advisers get is the disclosed and transparent financial planning fee agreed to by the client. No other remuneration is payable. The FSP has sole unfettered discretion to contract with any product provider. The FSP must disclose the product providers contracted within their disclosure documentation upfront.

Asset manager charges

There were a variety of other technical and mass market issues we provided comment on, regarding the need for product providers to take more responsibility, remuneration on risk products, the continuation of retirement reform and safe harbour fees. We also voiced concern about issues we were surprised were not mentioned in the paper, such as the often astronomical performance fees set by asset managers and the need for multi-manager asset management fees to pass on bulk discounts that they receive from the asset manager, ultimately reducing fees to clients.

Currently, we await a second paper or bill to be released later this year, which would then be discussed by the relevant Portfolio Committee in Parliament before being made into law.
Throughout this process, our aim is always first, to look out for the interests of our clients, and second, to assist Government in its efforts to make the financial planning industry more credible and transparent. Clarity and disclosure make for trust, which is crucial in a client/adviser relationship.

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