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Death of the Salesman: Financial Planning In South Africa

Warren Ingram CFP South AfricaBy Warren Ingram, CFP

Financial planning in South Africa is undergoing a dramatic and sustained transformation driven largely by legislation that has been implemented, in stages, since 2002. The result of this legislation is a financial planning industry that is becoming more advice-focussed and less product-driven. One of the most significant results of this new legislation was the protection provided to South Africans from the worst effects of the American Financial Crisis in 2008.

What is the State of Financial Planning in South Africa?

Based on our interaction with our industry colleagues from the USA, UK, Australia and Canada; it is fair to say that the best financial planners in South Africa are as good as their peers in the rest of the world. Our banking system is advanced and our regulatory environment is very consumer friendly. Sadly, our skills base in South Africa is limited which means that there is a big difference between the best planners and the rest of the industry. We are also grappling with many of the issues that are confronting other countries; with commission and best advice at the forefront of all industry discussions. The bulk of individuals in South Africa are sold products by large banks and life assurance companies whilst wealthy individuals are serviced by world class independent financial planning firms and private banks. Our direct market is well developed in the short term insurance industry but not in the mutual fund arena.

Whilst our investment industry is advanced, our life assurance industry still operates in the dark ages. A few life assurance companies are very dominant in South Africa and their products are massively expensive, opaque and often prejudicial to the end consumer. The complexity of these products makes it very difficult for advisors and consumers to understand and compare life assurance products.

Our access to useful information systems and internet-based financial planning tools is still limited however, local and international systems providers have improved their product offering in South Africa. Work still needs to be done in this arena as we remain behind the European and American industries. I believe that our status as late adopters will probably benefit the financial planning industry as we will benefit from the newest technologies and will not need to grapple with legacy issues.

Legislation

The most far-reaching piece of legislation to affect advisors was the Financial Advisory and Intermediary Services (FAIS) Act that was passed in 2002. This attempted to regulate the way that financial advice was provided to clients. The legislation created a code of conduct and outlined the minimum experience and education levels required by advisors in order to provide advice to clients. This legislation has been expanded over time and now requires all advisors to write exams in order to be deemed “fit and proper.” In addition to the FAIS Act, we also have the National Credit Act of 2005 and the Consumer Protection Act of 2008. The Credit Act was partially responsible for protecting South Africans from the reckless lending that laid the foundation for the Financial Crisis of 2008 which is why our banks are still amongst the most financially stable institutions in the world.

Impact on Financial Planners

There has been a significant shift in focus from product selling to the provision of advice. This has not prevented unscrupulous behaviour by some advisors but it has certainly given consumers some protection from the worst offenders. In addition, it created scope for advisors who want to migrate their businesses from a commission driven revenue model to a fee driven model. This has been massively positive for financial consumers as it is now very difficult for businesses to sell financial products without applying some thought to whether the product is appropriate to the needs of the consumer.

Sadly, the raft of new legislation has also increased our general regulatory compliance costs substantially and has made it very difficult for new financial planners to start their own firms. Smaller independent firms are starting to merge with other firms in a trend that is likely to result in the eradication of small financial planning businesses in South Africa. Unfortunately, the cost of advice has increased substantially which means the poorest people, who would benefit most from good financial advice, cannot afford it.

Fearful Regulators are Costing the Poor

Our regulators are good at creating legislation but they are not good at engaging with industry about constructive solutions for providing limited advice to the poor. Our regulators are fearful of creating a system of minimum advice that can be abused by unscrupulous practitioners. The consequence of this fear is that product providers and advisors are unwilling to offer limited advice at reduced costs to low income consumers for fear of contravening onerus regulatory requirements. This means that low-income financial consumers, who would benefit most, are often left to their own devices. Naturally, wealthy consumers can afford to pay for the best advice and are therefore probably the greatest beneficiaries of the new regulatory regime.

The Future is Bright

For ethical advisors who have embraced the need to provide the best advice to their clients, the future looks rosy. It is highly probable that new legislation regulating product providers (Treating Customers Fairly – TCF) will be implemented in the near future. This will impact the way product providers pay commission and might accelerate the drive to fee-only financial planning in South Africa. This will be hugely positive for professional advisors and consumers alike. With TCF and the potential abolishment of commission, it is likely that our industry will take another great leap forward.

2 comments to Death of the Salesman: Financial Planning In South Africa

  • Alec Riddle

    Hi Warren….an excellent piece, well done. We are priveleged to have you as the 2011 Financial Planner of the year. It is wonderful to see that your beliefs, your values and your actions are all aligned and that you are looking out for the interests of the consumer. All the best!

  • Dear Warren, is so nice to see how similar the situation is between South Africa and Brazil!
    Here we are also seen an industry evolution from product-driven to advice-focussed, and it started at the higher investors and still didn’t reach the base of the population. Thank you for your comments! Best from Brazil!

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