Page 80 - MC14326 all pages

76 | The South African Insurance Industry Survey 2016
Easy to access, and promising to cut the middle man
out in what is traditionally a grudge purchase, added
to tight economic conditions, clients are in danger of
not even realising what their needs are. A non-existing
comprehensive financial needs analysis and single needs
selling could result in dangerous shortfalls.
Added to this subjective assessment is the fact that
advisers are unwittingly competing against the newest
player in the market – the robo-adviser. Sounding slick and
sophisticated with a compelling futuristic title, the robo-
adviser is a sales process driven by an automated web
of decision trees. However, the robo-adviser is far more
than a financial calculator. The term robo-adviser implies
in itself that an element of advice would be retained in
the process but without the intervention of a traditional
(human) financial adviser. A robo-adviser, in its pure form,
provides a certain degree of advice, although on a more
limited basis, and such advice would assist a client in
making certain financial decisions. Attractive especially
when markets are performing well and returns are solid,
the model is likely to be favoured by the younger tech
dependant investors, enabling an anytime, anywhere
opportunity to transact.
Product suppliers need to carefully consider how they
distribute their products in the RDR world, and perhaps a
robo-advisor will assume the role off a sales enabler rather
than evolve into an additional distribution model. However,
to truly gain maximum benefit of the robo-adviser model,
clients need to understand that this model may simplify
the investing process, but is unlikely to be able to replace
the holistic advice given by the traditional financial adviser, RDR is well established in the UK, so it serves well
even if it does only lack the personal touch. By its very
nature, the scope of the robo-adviser is limited and
unlikely to usurp the financial adviser.
Building a sustainable practice
Brian Foster, founder of Brian Foster Coaching &
Consulting says, “The problem for advisers is that this
isn’t really a regulation problem, it’s a business model
problem.” RDR raises a key two-part question: how do we
persuade clients to pay for advice, and how do we make it
profitable? The opportunity to critically assess the current
operating model, provides the ideal occasion to determine
the success factors for a sustainable practice. This is
where the value proposition becomes critical: what are we
selling, who are we selling it to and at what price?
Cash flow matters
Moving from a commission-based model to a fee-based
model comes with its own set of complications and cash
flow is only one of them. Having that initial conversation
with a client can be awkward and requires a solid belief
in skill, professionalism and value proposition. A fee-
based model can have the upside of mitigating the risk
of commission claw backs and reducing the possibility
of clients not taking up the product recommended after
the time has been spent researching and completing the
financial needs analysis. Advisers who choose to embrace
this model sooner rather than later will be more likely to
transition successfully. A growing annuity income will
mean that their business will be more resilient to cash
flow problems as research shows that clients are more
likely to favour a fee model which charges on a per task
basis. It is estimated that cash flow challenges accounted
for as much as 11 percent of the reduction in financial
adviser numbers in the UK, post implementation of these
changes. More importantly for the adviser of the future,
the critical success factor lies in building a sustainable
practice with a solid value proposition and an appropriate
pricing model.
The advice gap
that we can draw some valuable lessons from their
experiences. First and foremost, we must remember that
in South Africa we have seen a more staggered evolution
of the financial advice market. Minimum standards of
professionalism are now widely accepted as the norm
in the industry and have already raised the bar, resulting
in more comprehensive financial planning and improved
advice to clients. This result aligns well with the Financial customers.
Services Board’s (FSB) stated intention to enhance
professionalism and improve customer outcomes.
However, professionalism and quality advice come at a
price, one which the South African customer is not used
to paying for. This could mean that a large portion of
customers are priced out of the market, as a result of a
reluctance to pay for advice. All while the same result can
supposedly be achieved by an online purchase, or the view
that in tough economic times financial advice is a grudge
purchase which can be pushed further down the list of
priorities. Either way, the potential result is an increasing
advice gap which could easily become a vacuum,
defeating the very intention of the RDR. The net effect
will only be seen when the client lifecycle runs its course:
the uninsurable middle-aged client who neglected to take
out critical illness, disability or life cover whilst young and
healthy, the client who faces retirement with insufficient
capital to meet his needs, or the dependants who are left
without provision on death of the breadwinner.
This very real threat begs the question: how do we enable
the mid-market to understand the nature and value of the
financial planning process? How do we ensure that the
advice models catering for their needs are both affordable,
appealing and profitable? How do product suppliers
market their products in an intermediated market that is
shrinking?
Many firms have adopted a wait and see approach to what
will actually be required by the RDR, however one thing is
clear: a clear change in business activities in the UK was
evident: a move from pushing a product into the market,
to a clearly defined focus on financial planning. Product
suppliers offering an effective financial planning platform to
the financial adviser recorded a successful transition with
product sales being an obvious next step.
After all, the very first desired outcome stated by the RDR
is its intent to support the delivery of suitable products
and provide fair access to suitable advice for financial