What does the future hold?

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Financial Planning

What does the future hold?

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 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

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3

John F. Kennedy

“Change is the law of life. And those

who look only to the past or present

are certain to miss the future.”

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 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

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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

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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

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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.

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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.

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What could happen in SA?

FSB Intermediary Remuneration review •Objectives

•Background

•Definition of Intermediary Services •Remuneration: Investment Products •Remuneration: Risk Products

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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.

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FSB Intermediary Remuneration review: Background

Long history of debate –

• National Treasury Discussion Paper on Contractual

Savings in the Life Insurance Industry, 2006 -

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.

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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.

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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.

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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 “in-house” 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

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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.

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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

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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.

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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.

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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.

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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)

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 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)

Opportunities

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Advice is for all life stages

22

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Events that most People think they won’t experience

Living your retirement Critical illness

Long-Term Disability

Planning for retirement

Receiving an inheritance

Losing a loved one

Getting divorced

Getting your first job

Caring for a loved one

Opening an account

Having a baby Getting married

Buying a car Starting a business

Losing a job

Buying your first home

Dealing with tax changes

Planning for your estate

Ne

tW

orth

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Adviser Charging – an example

Design the

proposition _{of advice process}Identify stages What charging _method

Pricing based on Revenue needs • Holistic • Generalist • Specialist • 1st_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

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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

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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

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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

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What should FPs be doing? (Cont)

 Manage costs

 Comply with all Regulations

 Consider the para-planner model - build a back-office team

 Succession Planning  Measure your success

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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

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What’s your mindset going to be?

 Resist and fight change?

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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

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What does the future hold?

Financial Planning