Crowning the Customer
Estimated Time To Read: 6 minute(s) 2 seconds
I had a flash back the other day, as to what it was like to work in the financial advice space 25 years ago. Most of the wealthy had one third in each of a call account at the bank, an investment property and share portfolio run by a stockbroker. Scary to think that people believed that their lawyer or accountant were managing the share portfolio for them. Liberty was a sexy and an aspirational brand back then. Most people giving financial advice were tied agents to big life companies. The only independent advisers were former life company agents that held a few life company contracts. Then there were a few boring academic types starting a thing called the Institute of Life & Pension Advisers (ILPA). Unknown to everyone, they were quietly starting a revolution.
The industry is a surprisingly better place now than it was then and momentum is building for the consumer to get more than they ever expected over the next 10 years.
Who is King?
In the past, brokers and financial advisers were essentially representatives of financial services companies, life companies and in later years investment houses. They each represented a life company and their job was to find as many prospects as possible and sell their company’s products to their clients. The company then rewarded the broker with relatively large upfront commissions and an overseas incentive trip based on volume. In this model, the financial services company pays the adviser, which makes the service provider King!
The academic types I mentioned are slowly, but quietly emerging. It is a shame, but I maintain that they remain one of the best kept secrets in the world today! They are now associated with an internationally recognised academic and professional designation (Certified Financial Planner Professional). They are members of the professional body called the Financial Planning Institute (the old ILPA) and are bound to abide by a code of ethics.
Today, the emergence of truly independent financial planners and firms continues. They do not represent large service providers; they represent their clients. They give advice first and then, if needed, they implement the advice using financial products. Only then do they turn to the service provider who gives them a contract to use their products. In this new world, the client and adviser agree on the fee. In this world, the client is King, as they pay the adviser and can stop this ongoing payment if they do not think they are getting the right service.
Advice is key
Unfortunately, most people in South Africa have never experienced true financial planning; they have only experienced conversations around investment advice or a product that could help them. When you offer advice to people over a long period you begin to realise that personal financial planning is far more personal than it is financial. You need to fully understand your clients’ needs and develop the most appropriate advice that will help them to meet their financial goals.
Commissions versus Fees
In the next year or so you will find that the way in which financial product providers pay advisers will begin to change. The current system encourages brokers to move between clients quickly, so that they can get onto the next transaction. Retail Distribution Review (RDR) will begin to stop large upfront commissions which are set by product providers and paid to brokers/advisers on retirement annuity and endowment products.
The move to an ongoing fee paid monthly over a period encourages better behaviour and better client outcomes. It encourages financial planners to get back to their clients at least annually to reassess any changes in clients’ circumstances and to reconsider the value of products they are using in their investment portfolios.
The big change has been the advent of regulations on transparency in fees. This has started downward pressure on fees. Once things are out in the open, people tend to pay more attention to this. It is far from perfect, but it has become clearer and as a result cheaper to hold the same products.
Independent financial planners no longer represent service providers, unless they own funds themselves. Clients have become the central focus point of independent financial planners. As a result, clients are now sitting beside their advisers working out a plan on how best to invest their money and to achieve their lifestyle goals. The client and planner then turn to the industry to see how best to implement their financial plan. This type of relationship seems much better and safer for clients. Roll on the next 10 years.
Independent financial planners no longer represent service providers, unless they own their own funds themselves. Clients have become the central focus point of independent financial planners. As a result, clients are now sitting beside their advisers working out a plan as to what they need to achieve in life and from their money. The client and planner then turn to the industry to see how best to implement their financial plan. This type of relationship seems much better and safer for clients. Roll on the next 10 years.