How will my career as a financial adviser change as the Retail Distribution Review (RDR) comes into play? Jacques Coetzer, General Manager: SPF Distribution says he is asked this question frequently. “There will undoubtedly be significant changes in some areas, and others will be less affected or not change at all. While the finer details of RDR are still being ironed out, on some of the primary principles in the proposals little has changed in the recent past in terms of a future dispensation.”
Here are Coetzer’s answers to eight FAQs relevant to intermediaries as we navigate the changing regulatory landscape brought about by RDR.
- Under what intermediary model will I be able to render financial services?
Currently, financial advisers can be ‘tied’ to a product provider, completely independent or, within limitations, a combination or both. This will change slightly because under RDR there will only be two intermediary models permitted: product supplier agents (PSA), currently known as a “tied agent”, and registered financial advisers (RFA), currently known as independent brokers. An RFA may be either a natural person (sole proprietor) or a legal entity (RFA firm). Intermediaries will not be allowed to operate in both capacities simultaneously. Both RFAs and PSAs will be allowed to use the term financial planner if they have met certain professional body standards.
- What products will I be able to sell?
This will differ according to which of the two intermediary models you operate under. A PSA will only be allowed to market and sell the products offered by the product supplier they represent. Where the product supplier is part of a group structure, the regulatory provisions will make it possible for the PSA to render financial services in respect of the products of the Group. An exception will be allowed where a product supplier does not have products in a specific line of business. The product supplier will be able to source products from another, external product supplier, thus enabling the PSA to sell the products of the external supplier that have been sourced in this way (referred to as “gap filling”).
An RFA will continue to act like an independent broker today. They’ll be able to sell multiple product lines from different suppliers, as contracted with those suppliers.
- Which intermediary model will be the most beneficial for me?
There is no one answer to this question. The most suitable intermediary model for an individual really depends on personal circumstances and appetite for risk. Both intermediary models offer specific benefits that come at a specific price e.g.:
- a PSA will have a limited range of products but in some cases could have more flexibility in remuneration and incentive structures;
- an RFA will have a wider range of product suppliers and products.
A PSA will enjoy all the same benefits that a tied agent does today. They will be remunerated under the equivalence of reward principle (which remains to be finalised). While the arrangement may vary slightly, in many cases the income structure of a PSA will essentially correspond with that of an RFA, with the difference that additional benefits may be on offer for specific purposes. It is also likely that product suppliers would be able to assist new PSAs financially to enter the industry. The PSA and product supplier will contractually agree on the appropriate structure.
An RFA, being an independent business owner on a separate FSP license, will be entitled to a combination of commissions and fees as determined in the RDR proposals.
- Where will advice risk reside?
A PSA writes business under the product supplier’s FSP license as their agent, which means the advice risk resides with the product supplier. There is therefore potentially a lower risk from a personal liability perspective than would be the case with an RFA.
For RFAs, as the practice owners, the advice risk resides with the RFA entirely. Advice provided by RFAs should not be subject to influence by or bias in favour of any products or product suppliers. An RFA will be operating a business in a highly legislated environment, which means they carry all the business and legislative risks. Big corporate brokerages and their representatives will both be seen as RFAs. The brokerage carries the advice risk and could recoup some or all of its losses from the individual representative who gave the inappropriate advice.
- Will it be more lucrative to offer one group’s products or multiple product lines?
Again, there is no one-size-fits-all answer. It will depend on the individual. Some intermediaries prefer to get to know one company’s set of products intimately and to market only those. Others, on the other hand, prefer to have a wide range of products from different product suppliers on offer to their clients. It also depends on what the client-base calls for.
If the former sounds like you, you may be better suited to a role as a PSA. In this case, it is important to associate yourself with a financial services company in whose brand and product you have faith.
An RFA can carry products from multiple product suppliers. This offers clients more variety, but it also implies that the RFA will have to stay abreast with developments in respect of a far wider range of products.
- How important will technology be in a post-RDR dispensation?
It will become increasingly important. Clients continue to want value for money, a relationship built on trust and the certainty of benefits – however, the way they access these needs will change. Technology will transform the way in which all intermediaries are required to engage with their clients in future. The PSA may have an advantage in this space, as they will have a partner in the form of the product supplier who’ll have an equally vested interest in driving technological progression. On the other side, RFAs have the advantage of introducing tech on their terms in support of their individual client value propositions.
- What is a key consideration if I charge clients fees?
When you charge fees for advice and services, you not only need Advice and Service level agreements with your clients, you also need the ability to track the delivery of services against these agreements so that you can (1) deliver the contracted services according to the SLA and (2) report back on the services delivery as part of the regular SLA reviews. You also need to ensure you have a compelling, well-articulated value proposition so clients are more inclined to pay a fee for your service, and understand what they are paying for.
- What is the one skill I need to master under RDR?
In view of the fact that PSAs and RFAs will have to consider their own pricing structures while also ensuring these compete with ‘the guy next door’, entrepreneurship is, hands down, the most vital skill intermediaries will need. Your role will fundamentally shift from ‘selling’ to ‘advising’ under RDR. There are so many facets to being a successful entrepreneur. In order to develop a compelling business model both RFAs and PSAs need to be asking themselves:
- What’s my value proposition? (i.e. Why would a prospective client choose me as their financial partner?)
- What’s my commercial model? How am I rewarded for what I do?
- What can I afford to offer and is this competitive?
- When I decide to charge x, how do I determine the x and will it be enough to keep my business profitably growing?
- How am I going to acquire my income? As a single transaction, over time or via a retainer model?