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The business of brokers: What will ensure sustainability?

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Lizelle van der Merwe, FIA CEO

With so much happening in the world and industry today, which business can afford not to be part of a professional business community? Many FSPs make a choice not to belong to a trade association because they can’t afford it or, very concerningly, don’t see the value in joining the call to action.

To be a successful business today, you need foresight. This involves future-oriented awareness and planning – enabling your business to respond quickly to future market threats and opportunities. If you don’t belong to a professional business community such as the FIA, you have no insight into what your competitors are doing, you have limited access to industry experts and knowledge sharing on key industry matters and you don’t have a voice to represent the legitimate interests of your livelihood: your business.

Reacting to regulation

Members often complain about the regulatory burden on their businesses. Here is a succinct overview, prepared by Samantha Williams, Head of Legal and Regulatory Affairs at the FIA, of what regulatory burden means for member businesses:

In addition to the obvious financial services legislation such as FAIS and its subordinate legislation, the Long and Short-Term Insurance Acts, the Insurance Act (and Regulations), the Medical Schemes Act, Pension Funds Act, FICA, and the Financial Sector Regulation Act, amongst others – to which financial intermediaries will need to comply to greater or lesser extents, depending on their licenses – there are also many other pieces of legislation which will have a bearing on running an intermediary business such as the Companies Act, POPIA, the Employment Equity Act, the Income Tax Act, the Labour Relations Act, the Cybercrimes Act, and many more.

These are all detailed pieces of legislation in respect of which it is nearly impossible for anyone to be a subject matter expert on all requirements. While larger organisations may have large compliance, legal and HR departments which come at a very high cost, smaller businesses will be especially challenged to run their business and know and meet all the requirements that apply to them.

Even without employing large teams to assist in knowing and understanding all these requirements, all of these pieces of legislation are regularly updated which means that consequent changes will need to be made to business, which again adds to costs in terms of system changes, resourcing and potential re-contracting. The amendments to the FAIS Fit & Proper requirements alone, in 2017 (BN194) resulted in huge additional training and oversight requirements being imposed on regulated entities, with the need to ensure all staff meet their CPD, class of business and product specific training requirements in order to be able to continue to provide advice.

Additionally with the move to more outcomes-based regulation, and the onus being placed on product providers to police those that sell their products (amendments to the Policyholder Protection Rules), more and varying controls are being imposed by providers adding an additional layer of work and cost to the market.

With the advent of CoFI, the whole financial services sector is going to be affected in that a number of pieces of existing legislation will be repealed or substantially changed. All entities will be required to re-license as part of the process and submit transformation plans against which they will be measured. Again, the implementation of this comes at a time and labour cost, and while the measured and considered approach being adopted by the regulator is to be welcomed this in no way detracts from the amount of work that will be required across the industry to give effect to this change.

While the above increases labour and time costs, there have also been high/over inflationary increases in the fees imposed by the regulators, and with the introduction of the proposed Levies Bill to give effect to the Twin Peaks model in an already financially constrained market, we may see a number of businesses close their doors or merge with others simply to manage these increased costs. Healthcare brokers are furthermore subject to the dual regulation of both the FSCA and CMS, which means even further regulatory burden and cost.

Is this not a strong enough reason to motivate FSPs who are not members of the FIA community to come onboard? How can the existing 1700 member FSPs fight this battle on behalf of all registered FSPs who operate as independent intermediary businesses in the sector?

There has been a rise in direct players over the last 10 years. Customer buying behaviour has changed; the pandemic has dramatically improved online shopping, with online transactions up by 30% year on year. This self-service, direct-to-consumer trend is present across all industries. Insurance is not exempt from this trend; today it’s a strategic imperative for all insurers and advisors to provide a digital solution in addition to more digital offerings.

Insurers are also under significant pressure to reduce operational costs and intermediated distribution is a big expense. There is also an unlevel playing field between direct vs indirect selling, direct selling vs providing holistic financial advice is vastly different and takes much more time, requires skill and increased cost.

The risk landscape is changing

In the last 2 years, risks changed dramatically. According to the World Economic Forum Global Risks Report for 2022, societal and environmental risks are most concerning for respondents.

Environmental risks are perceived as critical long-term threats to the world. How are advisors incorporating ESG investment strategies into their advice process?

There is a growing dependency on digital systems, intensified by Covid-19. As a result, cyber threats are growing. In 2020, malware and ransomware attacks grew by 358% and 435% respectively.

Reflecting on the distinct resilience goals between government, business and community will help ensure that agendas are aligned in achieving an approach to tackle critical risks of any nature. This is another reason why your business should partake in an active business community such as the FIA.

What has sustained member businesses over the last 10 years? Our client and partner relationships remain key – our “inherent sales skill” makes us very good at engaging with clients. The professional representation of an organization such as the FIA over the last 10 years cannot be under estimated. Members have made a significant contribution to protecting the value of intermediary business. Claims advocacy remains key, a high touch is required at the point when a client needs you most – in the event of a claim. We also help make life easy for clients.

What will ensure the future success of advisory businesses in South Africa? For decades, intermediaries have done things more or less the same way. In the case of financial advice, an advisor may check in once or twice a year and the primary focus is on providing a product to satisfy a need. There is a need to reshape the way advisors interact with their clients to stay ahead and relevant. You simply can’t rely on maybe one engagement a year to discuss your client’s changing needs, desires and expectations.

Technology enablers such as robo-advice should do the “easy lifting” for your business. Automate as much as you can, without losing the relationship. In the opinion of a large member of the FIA, the robo-advice concept becomes more relevant to provide a basic service or advice to clients that have a single need and can’t afford a financial planner.

The key to effectively manage a practice in the future would be to be able to offer these types of platforms internally. You can then maintain a relationship with the client while they are busy building a portfolio that would later be feasible to look after.

We need technology to increase transparency with clients, to empower clients to increase their knowledge regarding their investments and understand when to seek advice. This will also drastically improve trust levels with the industry.

By embracing technology in financial planning, we can also bring down the cost of financial planning to make financial advice more accessible to the lower income market.

Focus on clients’ lives

Advisors should transition their business from financial product selling to life-centered financial planning. You need to be able to add value to the point where you are not competing against an online tool or a calculator. Clients have access to these things online. They will need advisors to assist with the complexities and details of financial planning beyond what could be found online.

Our future clients have grown up with the internet, they are comfortable engaging digitally. Have we considered the global opportunities this creates? I would also add that successful practices will be those that have found the balance between using technology to communicate and engage with clients to improve efficiency, while at the same time maintaining a personal relationship with clients.

The biggest transfer in intergenerational wealth that is about to take place. Practices that focus only on their existing clients may find themselves losing out on business as their clients start passing their wealth to the next generation. If they don’t have a relationship with the next generation, the business will be lost.

The fuel of the future is the superpowers of skills that can’t be digitised – says Abdullah Verachia, senior faculty and strategist at the Gordon Institute of Business Science.

The World Economic Forum Global Risks Report 2022 states that 41.8% of world experts believe we will operate in consistently volatile markets with multiple surprises. 23% of respondents are worried about the outlook of the world – this should excite us!

We value our relationships with our members a great deal. Our door is always open and you are welcome to contact us at any time to share whatever is on your mind. We’d love to hear from you.

Lizelle

lizelle@fia.org.za