What does the future hold?

Transcription

1 Financial Planning What does the future hold? July 2012

2 Agenda Understand the drivers of change and what this means for Financial Planners (FPs) International Regulatory Trends What could happen in SA? How to respond? Conclusion

3 Change is the law of life. And those who look only to the past or present are certain to miss the future. John F. Kennedy 3

4 South Africa Already well regulated o No prudential failures o Market conduct a concern Regulatory reform/amendment (Market Conduct) o Conflict of Interest o Commission / Remuneration review o Treating customers fairly o FAIS Fit and Proper exams

5 South Africa (cont) o Regulation 28 e.g. member level compliance o Binder Agreements o Consumer Protection Act Taking lead from global trends Twin Peaks model for SA

6 International Trends Forced changes to remuneration models to better align the interest of the adviser with the client Status of the intermediary so the public know who they are dealing with and what their expectations should be Disclosure and Transparency Product Regulation and Simplification

7 International Trends UK Retail Distribution Review (RDR) Adviser fee model for investment products by end-2012; Can only describe as independent advice if undertake a comprehensive and fair analysis of the relevant market otherwise referred to as restricted advice ; Advice fee basis not prescribed product provider can facilitate payment in instalments; Applies to both IFAs and in-house agents; On-going charges linked to on-going service; Sales through platforms (LISPs) must be consistent with these principles.

8 International Trends Australia Ban on commissions and any form of volume based payment for investment products from July 2012; Introduction of an adviser charging regime retail clients must agree to the fees and to renew (by opting in) to an adviser s continued services every two years (unless they belong to an industry association with an approved code dealing with the issues); Advice fee basis not prescribed product providers can facilitate payments in instalments.

9 What could happen in SA? FSB Intermediary Remuneration review Objectives Background Definition of Intermediary Services Remuneration: Investment Products Remuneration: Risk Products Next steps

10 FSB Intermediary Remuneration review: Objectives Objectives of the review are to ensure that the definition of intermediary services and related remuneration structures in the insurance sector promote appropriate, affordable and fair advice and services to potential and existing policyholders; and support a sustainable business model for financial advice.

11 FSB Intermediary Remuneration review: Background Long history of debate National Treasury Discussion Paper on Contractual Savings in the Life Insurance Industry, o Intermediary status o Remuneration of risk products - described as Work Stream 2 issues International developments UK Retail Distribution Review (RDR) and Australia; FAIS has strengthened conflict of interest provisions and is raising levels of professionalism and knowledge, but structural issues remain.

12 FSB Review: Definition of Intermediary Services Definition of services as intermediary in the insurance laws is broad covers all services rendered by an intermediary during the life cycle of a policy (advice, intermediation and administration). Differences between LTI, STI and FAIS definitions; No distinction between the remuneration payable when advice is provided or not; No distinction between the remuneration payable for the initial sale versus payment for on-going service; STI Act can charge policyholder fee, but not clear in return for what services.

13 FSB Review: Remuneration Investment Products Despite recent enhancements to FAIS Consumers may not be aware of or understand the advice service they are being offered specifically whether the advice is truly independent in the sense of relating to a wider range of products; Consumers may not pay adequate attention to how much they are being charged for advice and other intermediary services given the built-in nature of commission charges, and may find it difficult to compare costs across offerings; and Adviser recommendations may be influenced by the incentives paid by different product providers particularly given the unlevel playing field that applies across sectors.

14 FSB Review: Remuneration Investment Products FSB is considering introduction of a fee basis for investment product intermediary services Fee agreed to by client, corresponding ban on commission; Applies to all types of intermediaries, including inhouse sales force; On-going fee for on-going service; Product providers can facilitate on-going fee deduction; To apply equally across sectors (LTI, CIS, LISPs); Independent advice to be defined in SA context; Consideration of how to support advice to low-income sector.

15 FSB Review: Remuneration Risk Products FSB does not propose introducing a fee-based approach for risk business. However, following concerns remain Long-term insurance Up-front commission has contributed to high churn; Some direct costs to policyholders of mis-selling; Substantial indirect cost to policyholders due to lower persistency; Up-front commission does not incentivise on-going service; Up-front commission model may distort intermediary advice and product sales; and Equivalence of reward provisions inconsistently interpreted.

16 FSB Review: Remuneration Risk Products FSB supports a shift towards an as-and-when basis for commission payments for life insurance risk products; and the introduction of revised rules that clarify the basis on which remuneration may be received for the provision of various types of services.

17 FSB Remuneration Review Review to be informed by following principles Commission structures should strike a balance between supporting on-going service and adequately compensating intermediaries for up-front advice and intermediary services; Remuneration structures should promote a level playing field between independent intermediaries and in-house agents; An intermediary may not be remunerated for the same or a similar service twice; All fees must be motivated, disclosed and explicitly agreed to by the client; All remuneration must be reasonable and commensurate with the actual services rendered; and On-going fees and commission may only be paid if on-going advice and services are indeed rendered.

18 FSB Remuneration Review: Steps taken so far FSB letter (November 2011) to industry associations requesting contributions / inputs to assist the FSB in formulating a comprehensive discussion document which will form the basis for extensive public consultation. ASISA members formed a Working Group which had robust discussion around the issues and submitted their views to the FSB.

19 FSB Remuneration Review: ASISA recommendations Advice is valuable and needs to be paid for new regulation needs to ensure it remains accessible. Single premium investments: Fee based arrangement is appropriate. Recurring premium: Flexibility should be allowed fees or commission or combination of both, depending on client requirements and always with clear, transparent disclosure to and agreement with client. Legislation needs to make it clear that advice and other services may be remunerated. However, we agree that there should not be payment for same work twice - should not be sanctioned. Low income market: needs special, separate consideration. Risk commissions should not be re-structured. NOTE: In several instances, there were divergent views. All views were communicated to FSB.

20 Advice Need Growing Move from DB to DC retirement funds Surveys on retirement show the need is growing ASISA Surveys on Insurance Gap show South Africans are underinsured Research on the value of advice *Irrefutable evidence that there is growing need for advice and that good advice makes a difference *Too much focus on the costs. Good advice adds value. Reference: Association of Independent Financial Advisers (2010); The value of Financial Advice: Colin Dutkiewicz, Steven Levin, Anuska Dukhi (2007)

21 Opportunities Insurance gap Retirement need Value of advice financial fitness coach Understand that State safety net is very limited Impact of living longer and inflation on retirement provision Cost of health care, particularly post retirement Planning industry is professionalizing (good for reputation)

22 NetWorth Advice is for all life stages Events that most People think they won t experience Living your retirement Long-Term Disability Critical illness Dealing with tax changes Planning for retirement Receiving an inheritance Planning for your estate Losing a loved one Getting your first job Opening an account Caring for a loved one Getting divorced Starting a business Buying a car 22 Getting married Having a baby Losing a job Buying your first home AGE

23 Adviser Charging an example Design the proposition Identify stages of advice process What charging method Pricing based on Revenue needs Holistic Generalist Specialist 1 st meeting Review Recommendations Execution On going service Time based Task based Retainer % based Who pays Firm fixed costs Profit expectations Current client base Expected new clients

24 Main changes for FPs? The focus has shifted from being a salesperson or simple product order taker to running a business Is moving slowly but surely to fee based financial planning as the preferred business model This requires new skills and expertise and higher levels of professionalism The most important survival strategy will be to assess where your skills lie, focus on these skills and get business partners to support you for the rest

25 What should FPs be doing? Professional standards will be in place Prepare properly for all F&P exams and focus on upgrading your knowledge and skills continually Ruthlessly relook at your business model Service offering Client segmentation Charging basis Advice process Develop and implement standardised procedures Consider broker networks

26 What should FPs be doing?(cont) Look at high value activities from the client s perspective and outsource the rest Look at your product mix Look to slowly moving to charging fees Follow the 6 steps in financial planning model Keep proper records and manage the advice risk Look at your professional indemnity cover

27 Manage costs What should FPs be doing? (Cont) Comply with all Regulations Consider the para-planner model - build a back-office team Succession Planning Measure your success

28 Opportunities / Threats Einstein said Out of difficulty comes opportunity Churchill differentiated optimists as those that see the opportunity in the difficulty and pessimists as those that see the difficulty in the opportunity.

29 What s your mindset going to be? Resist and fight change? Slowly adapt to change?

30 Conclusion There will be casualties The real winners will be those who proactively embrace these changes, identify the opportunities it brings and align themselves with this There will be a rosy future for those that can make the transition successfully from product order taker, to adviser, to financial planner to life style coach The changing environment is forcing advisers to make hard choices

31 THANK YOU QUESTIONS?