At a roundtable discussion on RDR hosted recently by Liberty, Johan Minnie, head of Sales, Distribution & Bancassurance at Liberty said while questions are being asked as to whether or not the industry is ready for RDR, the real question to ask is whether clients are ready for it. With transparency in fees comes the awareness that advice is something you have to pay for.
As Minnie explained, currently the cost of advice is built into the commission which does not separate the cost of advice from the cost of the product. Experience in other jurisdictions that have introduced fee transparency has shown that when customers realise they are paying R5 000 for advice, they don’t see the value for something they thought they used to get for free. “Yet they will go buy the latest cellphone or spend that on a car each month that depreciates. The question is whether clients are ready for RDR.”
A case in point is a story told to me by a highly qualified financial adviser. She met with a woman who had recently been widowed and needed advice on how to invest the proceeds of her husband’s life policy to provide her with an income. Now this requires some high-level planning around cash flow analysis, potential returns, risks as well as understanding the woman’s financial needs.
The planner works on an advice fee as recommended under RDR and charges for a full financial plan but waives all upfront fees. The widow declined the service. A few months later the financial planner discovered that the widow had invested the entire amount in a single fund through a fund manager who made a total upfront commission of R30 000, let alone ongoing fees. A very rudimentary needs analysis had been done, just enough to tick the box. Because the widow was not prepared to pay upfront and separately for advice, she paid through her nose in a commission structure.
When it comes to transparency, clients themselves need to understand the value of advice, but they also need to feel that the products and services offered to them are relevant to their needs.
Catering to people’s needs
Gerald Mwandiambira, financial planner and acting head of the Savings Institute believes that at the heart of financial planning is the fact that it requires people to delay gratification and that is a challenge in a world where everything is about having something now. That is worsened by the fact that many individuals, especially in the mass, emerging market, do not see financial products as actually having a benefit because the products do not cater to their needs. “At this stage a funeral policy is the only product that is seen to meet a person’s key need. I hope that RDR leads to a new generation of products that understands the current landscape like the need to provide for extended family. Clients need to know what they are getting and that it is worth it. We have a market who want to create wealth but do we as providers really have the solutions? Can we create more than funeral policies?”
And then there is the role of basic financial literacy. While the RDR does make provision for providing simple, cost-effective solutions for lower-income earners, in most cases what clients really need is basic financial education like how to settle their debts. The reality is that the financial industry is facing a shrinking market. The more debt people have and the greater their financial stress due to lack of financial education, the less they have to invest and save. But this advice costs an adviser time.
David Kop head of advocacy and consumer affairs for the Financial Planning Institute believes that the financial planning profession should be giving back to the people it serves by providing pro-bono work and not charging for financial education. “We need to give information out for free and uplift the entire nation. This will enable the industry to create its own future clients. That is what we need to focus on.”
This article first appeared in City Press.