The implementation of the Retail Distribution Review (RDR) will see the financial services industry in South Africa change. RDR proposes “substantive reforms to the regulatory framework for financial advice and for distribution of financial products to customers,” highlighted the Financial Service Board (FSB).
But how does this impact you and what will it mean for the financial sector in South Africa? Justmoney spoke to Avishal Seeth, branch head of Simeka (Member of Sanlam Group) Gauteng at the Sanlam Benchmark Symposium for 2017.
[Justmoney] What does RDR mean for South Africa’s financial industry?
[Avishal Seeth] It’s definitely going to complicate things from an institutional perspective. For a lot of the providers it’s going to complicate the manner in which they provide their services because a lot of providers may skirt between the independent and non-independent stance.
As long as you are part of a product house you will be considered non-independent going forward. If you are not part of a product house, then you are seen as totally independent, those are people that are not related to commercial sponsors of an umbrella fund. They are totally independent, they can look at the entire market and provide that entire market to the clients. If you are linked to a product house, then you will either be tied as an agent to sell that product house’s products only, or you may be registered as a financial advisor subject to meeting certain criteria. Such financial advisors may offer the entire market to clients but may not refer to themselves as independent. There will also be difficultly in terms of revenue sharing between product houses and agents or advisors recommending their products. All of those kind of things will come to the fore and because of that there will be loss of revenue for some of the consulting firms.
[JM] How will RDR affect financial advisors and the number of advisors in the market?
[AS] On the individual advisory space, it’s very different to the corporate advisory space. What you have is there are some advisors who are tied to an insurer, for example it is just a Liberty advisor or an Old Mutual advisor.
I can’t be an expert on the individual side unfortunately, individual advisors could also be tied or not to a product supplier. My view is that pressure on traditional income models will put a strain on broker practices and probably lead to consolidation of smaller businesses in the industry.
[JM] How does RDR impact the clients?
[AS] From the client perspective I don’t think much will change but one would expect better outcomes for members due to limitation on charging structures and improved transparency. What the client needs to be aware of is to make sure that they are making use of their entire universe. It could be that if they are with a product supplier agent that’s tied to a product house, that they may not get the full universal options in terms of the best solution, the most appropriate solution for them. That’s something that the client needs to be aware of if they are using a product supplier agent. If they are using a non-tied or independent advisor, then they should get the best of the entire universe and get all the options available to them.
From a client perspective it is just about diligence and being aware of what this actually means.
[JM] What is the correlation between RDR and TCF (treating customers fairly)?
[AS] I think they are trying to force the correlation through the regulation. For me, if you are a competent consultant or advisor, then you need to worry about outcomes first of all. Unfortunately the remuneration structures have been such that you are encouraged to sign up as much as possible, without necessarily looking at all of the available options in terms of signing up that new umbrella fund client or whatever you are signing up.
They are definitely trying to promote TCF through all the other legislation that they are pushing through, with RDR being one of those.
[JM] How do you help clients make the best choices for their needs when they already have an idea about the products that they want?
[AS] From an individual perspective again it’s about just being as diligent as possible. Remember, when you as an individual go out and purchase a financial product you are basically forced to trust that advisor that you are speaking to at that point in time.
The industry and the products available are very complex, and for the layman they are never going to understand all the complexities around it and there are very few individuals who will read through an entire contract when they sign it. If you just look at a cell phone contract as an example.
It’s about educating individuals to always keep at top of mind that whatever their advisor is telling them, should be for their best benefit and it shouldn’t be a remuneration opportunity for that advisor. I call it the perverse incentive where advisors are incentivised sell products based on the amount of commission they will receive. That’s a trap that a lot of advisors fall into unfortunately.
From a consumer perspective it’s about education and it’s the industry’s responsibility to educate consumers as far as possible to make sure that they are aware of the risks that they are taking.
[JM] Technology is encroaching on our everyday lives’ with younger people turning to it as a solution and a means to carry out daily activities. What is the potential impact of technology on RDR and financial services sector?
[AS] Technology is going to be the biggest differentiator going forward in terms of accessibility to information and accessibility to products online. Younger people are showing this inclination towards making decisions based on information on digital platforms only. A lot of younger people don’t actually require that human interaction in order to make a decision. ‘Google knows everything’, that’s the perception at the moment, and it’s a dangerous road to go down because there’s a lot of misinformation available as well. But for those product providers that are able to create a good digital platform that has a lot of information, that’s able to guide individuals through a financial needs analysis and say ‘these are your options’, then they are going to do well. There are a few of those already.
[JM] How could financial services providers change as millennials become a larger portion of the client base as they focus more on digital interaction rather than face-to-face interaction?
[AS] My view is that at the moment millennials may be the largest portion of the working population, but they are definitely not the generation with the money available to invest. Maybe at a later stage, over the next 15 years, then definitely the millennials will become the saving portion of the population and generation Y will be the younger guys with discretionary savings. But because millennials now are so in tune with technology and the phone is the first thing they look at in the morning and the last thing they look at, at night, it would be a shortcoming for any product provider not to use technology in their total product offering. Whether it be used at on-boarding or after on-boarding for members to access the information on the products they have purchased, I think it’s going to be essential. But not just for millennials, there are other generations that have shown that they want to use technology as well.
[JM] Do you see Sanlam expanding its digital and technological footprint?
[AS] Yes, not just Sanlam, all of the insurers will have to expand on the technology. They have to embrace technology. Understand that it is not the total solution, but if you don’t have it, then you are going to be left behind.