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The Financial Services Industry Wants to Cut out the Middleman

By Almo Lubowski, CFP

In dealing with financial policy makers (and even regulators) in the recent past, and on the various aspects that will affect financial advice in the future, a definite trend has emerged: these aforementioned policy makers are adamant on dis-intermediation of the financial services industry and their focus is on eliminating advisors and planners. The commission earned in this space is seen as an unnecessary layer of costs. The policy makers seem to believe that the majority of consumers should be able to get themselves “off the shelf” products and not have to pay anybody a commission for that.

It is certainly true that financial advice has generally moved away from pure “order taking” by a so called advisor. Whilst there are certainly many products that should be available to the public directly, perhaps even all of them, this certainly does not negate the importance of good financial advice and planning, as good financial planning goes far beyond products, in my humble view.

Financial Policy Makers Have Got It Wrong 

There is a misconception by the South African policy makers and regulators specifically, that advisors and planners wish to have, and support, products that are complicated so that their (the advisor’s) relevance is maintained in the eyes of the consumer/client. It seems that many product providers are often driving this misconception in their engagements with policy makers. As professional advisors and planners, we know that our guidance and advice goes far beyond explaining the ins-and-outs of a product and I think many would agree that they would have no issues with a range of simple products that could be used to fill the needs that have been identified, after much planning and advice has taken place for a client.

The Real Role of Financial Planners 

Advisors and planners are much more than “order takers” these days. Financial advice and planning are skills that take into account the many circumstances in a client’s financial situation and entail much more than just product advice. A financial planner is often a financial coach whose only function could be as simple as assisting with tracking a client’s spending and ensuring that client manages his or her debt in the shorter to medium term before starting to use surplus money for investments.

As with anything in life, we as consumers can do many things on our own, and a client’s financial situation is often no different. Should we decide to lose weight and get in shape, we are able to join a gym and go on a diet all by ourselves, without any further assistance required. However, many of us realise after a while of “going it alone”, that it would be much easier and faster to get ourselves to that goal, with the help of a personal trainer. Whilst all the equipment is available in the gym for us to use, we soon realise that if we had someone to give us some hints and tips, not to mention truly motivate us on a daily, weekly or even on a monthly basis, we would have a much easier and successful journey to our weight and fitness goals.

Regulators Need to Shift their Mind Sets

The same applies to financial advice and planning. Policy makers will have to change their mind sets in order to effectively regulate the financial services industry. Their focus needs to shift away from looking to eradicate the good advisors and planners that already exist and assist their clients in real and tangible ways, and rather re-focus on the product providers who continually fail to create products in simpler and more understandable ways.

Fortunately there are some initiatives in South Africa that aren’t only focused on advisors and planners, but are also focusing on product providers. The South African formulation of the Treating Customers Fairly (TCF) regime is already taking some different directions from that which it did in the United Kingdom, being the first to implement the concept. In the UK there was almost purely a focus on financial advisors having to adhere and apply to TCF principles within their practices, whereas in South Africa it would seem there would be equal responsibility placed on advisors and product providers to treat customers fairly.

3 comments to The Financial Services Industry Wants to Cut out the Middleman

  • […] The Financial Services Industry Wants to Cut out the Middleman […]

  • Almo,

    The only way to simplify advice without denigrating fiduciary responsibility so it is safe, scalable, easy to execute and manage is through an expert authenticated prudent investment process (asset/liability study, investment policy, portfolio construction, monitoring and management) based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters.

    Of course it is incumbent on the free enterprise system to create large scale institutionalized support for fidiciary standing. Policy makers can only establish the requirement of fiduciary standing, it is beyond the capability of a regulator/policy maker to engage in commercially viable commerce.

    SCW

    The role of policy makers is to require fiduciary standing for brokers who are rendering advice. Competitive market forces will compete on the basis of the depth and breadth of counsel they empower their advisors to routinely deliver. Thus elevating the role and counsel of the advisor far beyond simply executing sale as a series of disjointed unrelated transactions where there is no mechanism in place to determine whether their recommendations added value or not.

  • Almo

    Hi Stephen
    I agree with your comments and if I understand you correctly then you are right that policy makers should only focus on a framework that ensures accountable fiduciary duty, but unfortunately in South Africa it seems they are going a bit beyond this.

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