Prepared to pay for advice?

There has been a lot of talk recently about the Retail Distribution Review, which aims to provide transparency around financial advice and products.

This week, at a round table discussion on the review hosted by Liberty, Johan Minnie, head of sales, distribution & bancassurance at Liberty, said while questions were being asked about whether the industry was ready for the Retail Distribution Review, the real question to ask was if clients were ready for it. With transparency in fees comes the awareness that advice is something you must pay for.

As Minnie explained, the cost of advice is currently built into the commission, which does not separate the cost of advice from the cost of the product. Experience in other jurisdictions that have introduced fee transparency has shown that when customers realise they are paying R5 000 for advice, they don’t see the value of something they thought they used to get for free.

“Yet they will go and buy the latest cellphone or spend that on a car each month. The question is whether clients are ready for the Retail Distribution Review,” he said.

A case in point is a story I heard from a financial adviser. She met with a woman who had been widowed and needed advice on how to invest the proceeds of her husband’s life policy to provide her with an income. This requires some high-level planning around cash flow analysis, potential returns and risks, as well as an understanding of the woman’s financial needs.

The planner works on an advice fee as recommended under the Retail Distribution Review and charges for a full financial plan, but waives all upfront fees.

The widow declined the service. A few months later, the financial planner discovered that the widow had invested the entire amount in a single fund through a fund manager who made a total upfront commission of R30 000.

A rudimentary needs analysis had been done – just enough to tick the box.

Because the widow was not prepared to pay upfront and separately for advice, she paid through her nose in a commission structure.

When it comes to transparency, clients need to understand the value of advice, but they also need to feel that the products and services offered to them are relevant to their needs.

Panellist Gerald Mwandiambira, financial planner and acting head of the SA Savings Institute, believes that at the heart of financial planning is the fact that it requires people to delay gratification, and that is a challenge in a world where everything is about having something now.

That is worsened by the fact that many individuals, especially in the emerging market, do not see financial products as actually having a benefit because the products do not cater to their needs.

“At this stage, a funeral policy is the only product that is seen to meet a person’s key need.

I hope that the Retail Distribution Review leads to a new generation of products that understands the current landscape, such as the need to provide for extended family.

Clients need to know what they are getting and that it is worth it. We have a market that wants to create wealth, but do we as providers really have the solutions? Can we create more than funeral policies?” he asked.

And then there is the role of basic financial literacy.

While the Retail Distribution Review does make provision for providing simple, cost-effective solutions for lower-income earners, in most cases what clients really need is basic financial education.

The reality is that the financial industry is facing a shrinking market.

The more debt people have and the greater their financial stress due to lack of financial education, the less they have to invest and save.

But this advice costs an adviser time.

David Kop, head of advocacy and consumer affairs for the Financial Planning Institute of Southern Africa, believes that the financial planning profession should be giving back to the people it serves by providing pro bono work and not charging for financial education.

“We need to give information out for free and uplift the entire nation. This will enable the industry to create its own future clients,” he said. 

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