How will your career as a financial adviser change as the Retail Distribution Review (RDR) comes into play? Jacques Coetzer, General Manager: SPF Distribution, says this is a question he’s frequently asked.
RDR will undoubtedly bring significant changes in some areas, while other areas will be less affected or remain unchanged. While the finer details of RDR are still being ironed out, where some of the primary principles in the proposals are concerned, little has changed in the recent past in terms of a future dispensation, he says.
As we navigate the changing regulatory landscape, here are Jacques’ answers to eight FAQs from intermediaries:
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 only two intermediary models are permitted: product supplier agents (PSAs), currently known as tied agents, and registered financial advisers (RFAs), currently known as independent brokers.
An RFA may be either a natural person (sole proprietor) or a legal entity (RFA firm). Intermediaries won’t be allowed to operate in both capacities simultaneously. Both RFAs and PSAs will be allowed to use the term ‘financial planner’ if they’ve 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 Group’s products. 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 products of the external supplier sourced in this way (referred to as ‘gap filling’).
An RFA will continue to act like the current independent broker. They’ll be able to sell multiple product lines from different suppliers, as contracted with those suppliers.
Which intermediary model will be best for me?
There’s no one answer to this question. The most suitable intermediary model for an individual really depends on personal circumstances and appetite for risk.
Both models offer specific benefits that come at a specific price, for example:
- PSAs will have a limited range of products but in some cases could have more flexibility in terms of remuneration and incentive structures
- RFAs will have a wider range of product suppliers and products.
PSAs will enjoy all the same benefits that tied agents currently do. They’ll be remunerated under the equivalence of reward principle (yet to be finalised). While the arrangement may vary slightly, in many cases the PSA’s income structure will essentially correspond with that of an RFA, with the difference that additional benefits may be on offer for specific purposes.
It’s also likely that product suppliers will 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, as 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 licence as their agent, which means the advice risk resides with the product supplier. From a personal liability perspective, the risk is therefore potentially lower than would be the case with an RFA.
For RFAs, as practice owners, the advice risk resides with them entirely. The advice they provide shouldn’t be influenced by or biased in favour of any product or product supplier. An RFA will be operating in a highly legislated environment, which means they carry all the business and legislative risks.
Big corporate brokerages and their representatives will both be considered 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’s no one-size-fits-all answer. It’ll 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 offer their clients a wide range of products from different product suppliers. It also depends on the needs and demands of the client base.
If the former sounds like you, you may be better suited to a role as a PSA. In this case, it’s important to associate yourself with a financial services company whose brand and products you trust.
While an RFA can carry products from multiple product suppliers and offer their clients more variety, they’ll also have to stay abreast with developments related to a far wider range of products.
How important will technology be in a post-RDR dispensation?
It’ll 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.
PSAs may have an advantage in this space, as they’ll have a partner in the form of the product supplier who’ll have an equally vested interest in driving technological progression. On the other hand, 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 (SLAs) with your clients, you also need to be able to track delivery of services against these agreements so that you can:
- Deliver the contracted services according to the SLA
- Report back on the service delivery as part of the regular SLA reviews. You must also 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’re 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 remaining competitive, entrepreneurship is hands-down the most vital skill intermediaries will need. Your role under RDR will fundamentally shift from ‘selling’ to ‘advising’.
There are so many facets to being a successful entrepreneur. In order to develop a compelling business model, both RFAs and PSAs must ask themselves:
- What’s my value proposition? 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 amount, how do I determine the x and will it be enough to keep my business growing profitably?
- How am I going to acquire my income? As a single transaction, over time or via a retainer model?