Over the past year or so the financial planning industry has been positioning for significant reform and regulation around fees for financial advice, and Fin24 recently published an article on the Retail Distribution Review (RDR).
The first phase of RDR is expected to bring South Africa a step closer to making direct payment for financial advice a greater reality; creating a new financial advice scenario. And this stage is due to be implemented later this year.
RDR will, among other things, bring an end to commission earned by financial advisors on lump sum investments. It forms part of the Financial Services Board’s (FSB) framework that seeks to ensure fair outcomes to customers and tries to minimise potential conflicts between the interests of customers, product providers and advisors.
Essentially, fees will be charged for advice given in lieu of commission, which will be falling away. Since there is a current perception that financial advice is offered for free, RDR will require a new way of thinking.
Whilst the exact models for charging fees will vary, here are some perspectives on how it might look.
The RDR framework could include hourly-rate billing for the cost of financial advice given, just as a consultation with most other professionals would be charged. It could also take the form of a per-use billing structure, which is effectively a transactional cost for services. And then, in relation to investments, billing could be a fee that is linked as a percentage to the size of the investment.
Another significant paradigm shift, and a very encouraging one at that, is that the focus will be on the financial advice offered, and the ongoing value of having a trusted, knowledgeable, skilled and experienced financial advisor. This separates the value of the advisor, from the value of the product, which could bring more clarity to the final decision making process.
Charging fees for financial advice will also reinforce the value of a relationship that is built on mutual trust and respect in the advisor-client relationship. As the implementation draws closer, it is important for all of us to prepare for financial advice fees.
