Finding the right financial adviser can be a real mission and before you look for one, it’s important to understand the environment in which you’re looking.
In this article:
- Understand what the industry is and what it does
- Understand the ‘advice’ profession and what it does
- Understand what a financial advisor, financial planner or wealth manager is
- Understand how financial advisors are remunerated
- Understand the regulatory framework which we all operate in
- Understand that not everyone wants the same thing
The dictionary defines the word “industry” as:
“Economic activity concerned with the processing of raw materials and manufacture of goods in factories”
In financial services, life assurance companies and investment management companies create insurance and investment products. These companies do this to deliver certain results and, since they’re not charities, make a profit.
Generally speaking, most manufacturers don’t distribute their products directly, and in order to get these products into the hands of consumers (that’s a deliberate use of the word), the industry needs distribution. It uses the expression “distribution channels” to describe the various ways that products find their way into the hands of consumers, and you might come across a number of such channels.
- Licensed agents that work for big life assurance companies
- Independent brokers, financial advisers and planners operating under their own licences
- Banks (which often have common ownership with manufacturers)
- Direct to consumer internet based outlets
The industry is constantly trying to find better and more efficient ways to build and distribute products that meet the needs of consumers and result in profits. Whilst the ‘direct to consumer’ channel will probably become more common, the vast majority of financial services industry products are distributed via ‘intermediaries’.
In its quest to create and distribute useful products, we also have to endure too many products, over-complex products, and unnecessary products with ridiculous charging structures that regularly escape into the hands of consumers they’re not suitable for or weren’t intended to reach.
The dictionary defines the “profession” as:
“A paid occupation, especially one that involves prolonged training and a formal qualification“
There is a shift taking place to professionalise the role of the intermediary. But there are different versions of what being a professional means depending on who you speak to.
In recent times, we’ve seen a proliferation of labels used to describe intermediaries, including terms such as ‘financial adviser’, ‘financial consultant’ ,’financial planner’ or ‘wealth manager’ which are being used to describe intermediaries. For industry insiders, there is a difference in these labels but they usually don’t really tell consumers anything.
What’s also changing is the nature of what’s being delivered. Rather than a transactional ‘financial product sales’ relationship, many intermediaries are moving toward an ‘advice’ based relationship that isn’t seen as being purely about distributing products.
It’s also fair to say that a profession is where we might shift the language to describe the nature of the relationship from ‘consumers’ to customers or clients and, as part of the definition of professionalism, an important element is how professionals are paid.
The options are broadly:
Determined by the product manufacturer and the intermediary, charged and collected through the cost of the product to the consumer.
Assets under management (AUM)
Determined by the product manufacturer and the intermediary as a percentage of the amount of money invested, and collected from the investment funds in the product.
Determined and agreed between the professional and the client and paid by the client to the professional.
The sales commission system was created by the industry to compensate intermediaries for introducing consumers to their products. Intermediaries usually just accept whatever compensation amount is on offer, and different manufacturers often pay different amounts.
Sales commission is therefore part of the overall cost of manufacture and distribution of products and is included in the charging structure that consumers pay for the products they buy. In other words, consumers pay for the cost of distribution through the premiums and contributions they pay, but have no control over it, and very often have no idea that it exists, or how much they’re actually paying.
Originally, the commission model was constructed by the industry as an intermediary’s contractual entitlement to compensation for simply introducing a consumer, arranging the sale of the product and taking responsibility for any advice involved in justifying the suitability of the product sold.
Commission itself isn’t the problem. The problem is the way in which it is used in the industry to influence behaviour, as well as the complete disconnect between what intermediaries are paid and what consumers value. This is now being challenged.
The result of this situation is that many intermediaries are professionalizing their services, but the public still doesn’t really understand what they’re buying, or what they’re getting for what they pay. In many cases, people are paying a huge amount of money for really no value at all. On the other hand, many really good financial planners are delivering great value, but aren’t properly being paid for it.
There needs to be a better way for the public to understand and perceive value, and there needs to be a better way for those delivering value to get paid for it. One of the key elements in the dictionary definition of the word professional, is that the professional is engaged in a paid occupation, and this means the payment should be clear, transparent and made by the person receiving the professional service.
In South Africa, the regulator is called The Financial Services Conduct Authority (FSCA) and its job is to regulate the financial services industry, including all the various operators within it.
It’s really important to understand that in the context of intermediaries, the regulator only regulates “advice” in the sense that it involves the distribution or recommendation on a regulated financial product. This is important because if there is no regulated financial product involved, the regulatory bodies aren’t really involved.
This means that the financial services industry, most of the intermediaries (however they call themselves) and the regulator are all focused on the distribution of financial products, and the advice given to consumers of those products.
This space wouldn’t be complete without you. After all, the reason all these parties do what they do is for your benefit.
In this article I’m referring to you as a consumer, but I want to ask “Do you see yourself as a consumer of products? – Is that the conversation you value?”
There’s a huge amount more that financial professionals can offer, certainly more than advice on the difference between various products.
It seems to me that customers of the financial services industry want a range of different things and the key issues for the public are:
- Knowing what it is you’re looking for help with
- Understanding what the options are
- Trusting that the person you’re talking to is really delivering what you’re looking for
- Understanding what the cost is and deciding whether that’s valuable
What I hope I’ve achieved in this article is to objectively set out the framework within which the various parties operate inside this thing called the financial services industry.
It is my belief that the industry and the profession are two different things and that they should act separately, and yet in partnership, for the benefit of the public. Traditionally, that has been very difficult to achieve when one party has all the power, all the money and all the influence.
I doubt that the industry itself, or regulation, will really change very much. If there is to be a change for the benefit of consumers, customers and clients, I believe it must come from financial professionals choosing to operate differently, together with an educated public that understands how the system works, and actively chooses the way it wants to access help. DoshGuide provides a home for these financial professionals and clients looking for this change.