Securing the survival of the independent advisor

Why it’s important for independent advice to remain independent

Many people recognise the value of truly independent financial advice. An advisor that is not tied to any specific product providers can offer a range of solutions from different sources and is more likely to be free from conflicts of interest.

However, surviving as a truly independent financial advisor is not easy. The costs of regulatory compliance and administration are high, and one has to take on a fair amount of personal risk.

This is why a large number of advisors are opting to sell their businesses and client books to corporate entities and have the security of giving advice on the company’s licence. The costs and administrative burden are significantly reduced, and with a company standing behind the advice being given, the advisor carries much less risk in their personal capacity.

It is however worth asking if this is what’s best for the industry. Would the public be best served if all advisors were linked in some way to third party product providers? And would advisors themselves be as highly valued if the public didn’t have the choice as to what kind of advisor they would prefer to deal with?

These are questions that independent financial advisors are having to face, and many of them have come to the conclusion that it is extremely important that their independence is preserved. Over 150 of them have already signed up to join the newly-established South African Independent Financial Advisors Association (SAIFAA), which will launch next month as a body that promotes the value of independent advice and the critical role that truly independent advisors play in delivering it.

“There are around 5 000 financial advisors in South Africa that can be defined as independent,” says Derek Smorenburg, one of the association’s founders. “But who is speaking on their behalf? Who is representing them to the media and the public?”

Since membership of other industry bodies like the Financial Planning Institute (FPI) and the Financial Intermediaries Association of South Africa (FIA) is not limited to independent advisors, they can’t represent this specific group. And in the current environment, it seems important that there is an entity particularly focused on their interests.

“Independent financial advisors are the true vanguards of the financial product consumers in the country, as they can keep the product providers ‘honest’,” says Kagisho Mahura, one of SAIFAA’s founding executive members. “They have no conflicts of interest. SAIFAA allows these advisors to have a coordinated response to financial consumer-related issues such as expensive, non-performing or complex products.”

He believes that SAIFAA will increase competition between product providers as it represents a critical distribution force. Financial services companies will have to pay attention to what it says and ultimately this should lead to better prices and service for consumers.

The body will also be at the forefront of industry issues like compliance costs, and legislation that impacts on advisor incomes or introduces unnecessary complexity.

“At the moment, advocacy at regulatory level does not focus adequately on the challenges faced by independent financial advisors,” says Mahura. “SAIFAA will bring on the ground experience to the regulator who tends to rely more on UK and Australian experiences to shape local regulations.”

Importantly, a big part of the organisation’s focus will be on improving the skills and knowledge of its members.

“Any client should be asking how experienced, how knowledgeable and how professional their advisor is,” says Smorenburg. “If they have a qualification from the FPI, and particularly a CFP, that is a step in the right direction. But from next month they can also ask whether their advisor is a member of SAIFAA, which is going to enhance their education and professionalism.”

Smorenburg accepts that just being a member of SAIFAA does not guarantee that the advisor will offer a better quality service, but the body will offer a forum for its members to develop their offering. This includes providing education on trends and new products in the industry, promoting the importance of issues like conducting proper due diligence on product providers, and developing skills in issues like risk profiling.

Critically, Smorenburg also recognises that the only way to guarantee the survival of independent financial advisors is to ensure that they get better at running sustainable businesses.

“Almost every financial advisor that I have met is an excellent relationship manager,” says Smorenburg. “They are very good at interfacing with clients. But I don’t know what percentage of the 5 000 independent financial advisors in this country are good business people.”

The way that the industry is changing, particularly with the introduction of the Retail Distribution Review (RDR), surviving as an independent financial advisor will be dependent on having a good business model.

“If you are running an independent financial advice practice today it has to be structured on sound business principles,” Smorenburg says. “How professional are you? How well do you deal with your staff? What infrastructure and IT systems do you have in place?”

To a large extent the success of SAIFAA will depend on how well it is able to assist its members in this respect. Enhancing the quality of advice they offer is of course critical, but helping advisors to run good businesses is the only way to ensure that independent financial advisors will have a future.

Patrick Cairns | Moneyweb | 24 July 2017