I’ve been a financial planner for 21 years and have always considered my advice to be independent and taken pride in this. I recently had reason to delve into the importance of independence for financial planners and me personally. Our company has been approached by a private equity company that is buying financial services companies and already owns two asset management businesses. We have been assured that should we join them we could maintain our independence and keep giving the best advice to our clients with no pressure to include any group products. Before I get into my story, I’ll give some background starting with the legal position.
Independence under the FAIS General Code of Conduct for Authorised FSPs and Representatives of 2003 (as amended) hinges on three criteria:
- Ownership (with focus on significant owner)
- Remuneration
- Types of relationships
To describe oneself as independent, we may not:
- Be a significant owner (15% or more) of any product supplier or associate whose products we render financial services for.
- Be significantly owned (15% or more) by any product supplier or associate whose products we render financial services for.
- Receive or be eligible for any financial interest from a product supplier whose products we render financial services for, unless it is reasonably commensurate with services rendered, it may not be a double payment for that service and it should not give rise to any actual or potential conflicts between client and advisor interest. If there is any actual or potential conflict of interest it must be effectively mitigated. Finally, it should not impede the delivery of fair outcomes to clients.
- Have any other relationship with a product supplier whose products we render financial services for where that relationship gives rise to a material conflict of interest.
For most planners, ownership and incentives are top of mind. There was a time not so long ago when practices were joining networks and franchises and receiving large joining bonuses.
Our role as advisors and planners is to provide the best advice to our clients
Client policies and investments were being churned each time the advisor received a new joining bonus. Fortunately, that has now ended, but as a generalisation, tied advisors usually receive better incentives and rewards than independent advisors.
What about non-financial incentives? It’s a known fact that product providers provide significantly better client service to tied advisors than that offered to independents who only service existing clients. We receive shocking service from those providers’ call centres and have no dedicated consultant or management attention when escalating problems. This lack of service is the withholding of a reward to non-supporting advisors who are trying to service the clients of those product providers. I hope the COFI Act will address this through the client service responsibilities it places on product providers.
The UK went through its Retail Distribution Review (RDR) process over a decade ago, and its rapidly implemented legislation saw a quick decline in the number of independent advisors. The cost of providing advice became prohibitive for smaller practices. To stay in business many became tied agents.
South African advisors are also weighing up the ever-increasing compliance costs, regulatory requirements and time lost costs against the convenience of outsourcing this and becoming tied agents.
There is a spectrum of independence, with completely tied agents who are largely dictated to by the companies they work for, following rigid advice processes with scripts and approved product and fund lists on the one end of the spectrum. In the middle are the independent companies that have selected one or two providers to work with, in the interests of keeping administration and reporting simple, but still being able to offer a range of funds and investment solutions. On the other end of the spectrum are the independent advice firms that have contracts with most local and many international companies, and that are constantly evaluating new entrants and always amending their product and service offerings. These advisors can take on existing clients with a broad range of products and providers, and service those contracts wherever they may be without the client incurring penalties to move the funds or policies.
Our role as advisors and planners is to provide the best advice to our clients. Most product houses have certain areas of excellence, some products that underperform and some gaps in their suite of solutions, and tied agents are compelled to recommend from this range – their best advice is limited.
Being independent carries additional costs – both in rands and time spent. The cost of regulation increases at a fast pace, and this requires increasing management attention in smaller businesses. Accreditation across a broad range of product providers is very onerous each year. Poor service from many call centres demands more internal administration resources to follow up and fix the many mistakes that affect positive client outcomes. Succession is also more difficult in an independent practice.
To my mind, the benefits of independence outweigh those costs. In this ever-changing technology era, new product providers are bringing out self-service products at very low cost. Investment products are always being launched as new trends emerge – think ESG, crypto, infrastructure projects, new structured products, hedge funds – the list is endless, and independence enables us to consider them all – not all are worthy of investment!
And now back to my personal story. I realised that my attachment to “independence” could be an ego issue. I view independence as superior to being tied (or hybrid or multi-tied or any of the other titles that have been put forward). I’ve had the opportunity to think long and hard about the company we are building, the interests of all our staff, and most importantly the interests of our clients who have been loyal to me and our company. Is my ego holding our company back or are there valid reasons for maintaining our independence? The sale of some or our shareholding would have given us an always welcome cash injection into our business to source more talent and fast-track growth.
In closing, the offering company went so far as to say that although we would not be “legally” independent, we could advise our clients that
we were “ethically” independent. We have a duty of care to our clients and to uphold our ethics as individuals and as a company, and I realised I see things in black and white – there is no grey. The only grey is the grey hairs on my head, and these have been earned after 30 years in the financial services arena. I know from my many years of corporate, when the leadership changes the rules often change too. A corporate promise today may not be binding in future, and moving companies and our clients is a distraction best avoided.
As a company, we will continue to enter discussions with interested parties to see if we can find common ground. I believe there are many advantages through synergy, but independence is worth fighting for.
