3. Slide 3
Why?
• Retail investors subject to complex charging
• Retail investors not understanding that they are paying for advice
• Mis-selling
• Low training requirements
Aims to achieve:
• Better professional advice standards (exams)
• Improved consumer understanding of different types of advice
• Improved transparency by moving away from commission to adviser charging
through fees (reduces conflicts)
Background to Retail Distribution Review (RDR)
4. Slide 4
No more initial or trail commission paid by product providers on new products:
• Advisers will need to set their own charges in agreement with the clients
• Product providers may offer facilities for the adviser charge to be deducted from the
investment
• Firms to provide clear, concise disclosure documents
• Banning of taking commission from a discretionary manager when such manager is
recommended
Adviser charging N/A to advice relating to business sold prior to 1st January 2013:
• Product advisers will be able to continue paying on-going trail commission on legacy
business until 6 April 2016
• Personal recommendations made on top-ups and increases – new adviser charges apply
• Cash rebates by product providers to platforms banned from April 2014 including legacy
business
RDR: ADVISER CHARGING - UK
5. Slide 5
There are 55 proposals covering three main areas:
• Types of services provided by intermediaries – an activity based approach in categorizing
theses services
› The customer must know who they are dealing with
• Types of relationships that may exist between product providers and intermediaries
› Also addresses the responsibility of product providers for advice and intermediary/outsourced
services provided
• Types of remuneration that may be earned by those intermediaries for their services
rendered
› Total disclosure
› Conflict of interest
RETAIL DISTRIBUTION REVIEW
6. Slide 6
• Customers
› Know who they are dealing with
› Know what they are paying for
› Greater say in the process
• Advisers
› PSA vs RFA
› Limits on who may sell what
› Equivalence of reward
• Product Providers
› Greater accountability for who is selling their product
› Greater accountability for what is sold
› Monitoring that the advice is correct
RETAIL DISTRIBUTION REVIEW IN SA
7. Slide 7
Agenda
• Where are we now? An update on RDR Phase 1
• Future RDR Phases - An update on the following themes:
› Adviser categorisation and forms of advice
› Investments
› Risk insurance (long-term & short-term)
› Sales execution and other intermediary services
› The low income market
› Consumer Education
8. Slide 8
FAIS instruments addressing aspects of RDR
Published for comment early 2017
• FAIS General Code
› Enhanced definition of “replacement” – including RA and annuity transfers (product
supplier commission prohibited)
› Possibly strengthened conflict of interest requirements as between FSPs and their
representatives
• FAIS Fit & Proper requirements
› Competency standards for automated advice and execution of sales (including selling
with a script)
› Product knowledge competency requirements
• FAIS Regulations:
› Advisers may not act as representatives of more than one juristic intermediary
(adviser firm) (in respect of the same product classes)
9. Slide 9
Two-tier adviser categorisation
• There will be two main categories of financial adviser:
› Product supplier agent (PSA): Not licensed in own right, authorised to provide advice
on a product supplier’s licence
› Registered financial adviser (RFA): A firm or individual (sole proprietor) licensed to
provide advice – not a product supplier
› The provisional titles PSA and RFA will be consumer tested
› No individual adviser or firm may operate in both capacities
• Timing: Phase 3
10. Slide 10
Strict approach to “gap filling”
• A PSA may provide advice only on products issued by the product supplier with which it
has the agency relationship (“home” supplier) – plus products issued by other product
suppliers in the same financial services group as the home supplier (“group” to be defined)
• The definition of “representative” will however allow representatives to continue rendering
services in respect of existing policies of another insurer entered into in terms of a
previously permitted agreement, subject to certain time limits, but not to enter into new
policies.
• Includes investment products distributed through a LISP (administrative FSP) within the
group
• No “gap filling” will be permitted – other than a possible exception for fixed interest
annuities where the only product differentiator is the annuity rate.
11. Slide 11
Strict approach to “gap filling” continued
• For any other “gaps” in the home supplier’s offering, referrals may be used
• FSB will consult further on allowing a PSA to act as PSA for another product supplier
operating in a product sector / line of business for which the home supplier / group is not
licensed, provided:
› All suppliers agree to the arrangement
› Each product supplier is separately accountable for advice by the PSA (acting as each
supplier’s agent) for advice on its own products
• Timing: Phase 3 (long-term insurance Proposal V in Phase 1)
12. Slide 12
Financial planning
• An individual adviser (RFA or PSA) may use the additional designation “financial planner” if
the adviser has met all requirements for such designation set by a professional body
recognised by SAQA and is a member in good standing of such association:
› Currently only the Financial Planning Institute and its CFP designation meet this
requirement, but it is open to other associations to apply to SAQA for the necessary
approvals
› Recognition of foreign equivalents will be considered, in consultation with SAQA and
professional bodies
› No clear case at this stage for applying the model to S-T insurance risk planning
• Timing: Phase 2 (will include conduct standards – not caps – for financial planning fees, in
consultation with FPI)
13. Slide 13
CATEGORISATION OF ADVISOR
Source: Masthead
Relationship/Status
Freedomfromcontrol
(lackofinfluence)
RFA
PSA
Choice
Financial Planner
(process not product)
14. Slide 14
Product supplier influence
• Principle:
› Advice provided by an RFA should not be influenced by any product supplier or other
third party
• Where legitimate business arrangements pose unavoidable risks of conflict, this must be
mitigated
• Examples (not a closed list) of risk mitigation include:
› Ownership relationships – close supervisory monitoring
› Outsourced services – limitations, efficiency, enhanced governance & oversight, fee
caps
› Production targets – prohibited for RFAs (with further work underway on standards for
contract terminations)
15. Slide 15
Product supplier responsibility
• Principles:
› Product suppliers and advisers share responsibility for customer outcomes
› Greater risk of product supplier influence over advice means increased levels of
product supplier responsibility
• What does this mean in practice?
› A greater degree of proactive product supplier monitoring of customer outcomes will
be required where ownership, outsourcing or other risks of influence exist
› Possibly less intensive, more reactive approach for fully arms’ length relationships
› Full product supplier accountability remains for PSAs
16. Slide 16
“Independent” advice
• No RFA firm or individual RFA adviser may describe itself or its advice as “independent”
unless:
› It has no direct or indirect ownership interest in any product supplier and no product
supplier has any such ownership interest in it
› It does not earn any direct or indirect remuneration from any product supplier other
than regulated commission (where applicable) – i.e no binder fees, no outsourcing
fees, no profit shares, no cell arrangements, no joint venture arrangements, etc.
› No other relationship exists with any product supplier or other third party that could
result in any product supplier influencing the advice provided.
17. Slide 17
“Low” (simplified) advice
• Feedback generally supported formal recognition of a “simplified” advice process. FSB
considering two options:
› No regulatory change, but publish regulatory guidance to clarify that the extent of
suitability analysis required is flexible depending on complexity of customer needs
› Formally defining and setting standards for a simplified advice process in specific
circumstances
• Challenge is not to undermine the quality of suitability analysis by creating inappropriate
loopholes
• Timing: Phase 2 or 3, depending on option selected
• New FAIS fit & proper requirements set standards for “automated advice” (robo-advice)
18. Slide 18
Juristic representatives
• FSB remain of the view that these structures are not desirable in RFA advice models
• FSB considering allowing PSAs to be structured as juristic entities. Possible conditions
could be:
› Rigorous product supplier oversight measures
› PSA to use product supplier branding and meet specific operational requirements
› Limiting or disallowing use of juristic PSAs if the entity is not part of the product
supplier’s group
• Reviewing circumstances in which JRs may be used in non-advice models
› Where allowed, these will be subject to strengthened operational requirements
› Timing: Phase 2
19. Slide 19
Investment platforms
• No changes proposed to initial RDR proposals, i.e:
› All rebates prohibited – “clean” pricing
› No remuneration for platform provider (LISP) other than platform fees paid by
customer
› Considering need to address some current practices that apparently circumvent RDR
proposals
• FSB will consult further on proposals regarding uniform pricing and equally prominent
display of all platform offerings, based on feedback
• Timing: Phase 2
20. Slide 20
M&G pricing for direct clients has not
changed post-RDR
The higher charges represent costs of
servicing
• However, may come under increasing
pressure on this
In reality, investors may find it cheaper to
invest direct vs. via an advised intermediary
• Potential increase in direct/execution-only
business?
FUTURE IMPLICATIONS OF RDR – UK EXAMPLE
Investment
Management
Platform fee
(range 15-50)
Adviser fee
(range 50-100)
VAT
Advised - unbundled
225
(range 160-245)
75
30
100
20
Direct - bundled
Post-RDR pricing – direct vs unbundled advised
(example equity fund, bps)
150
21. Slide 21
Remuneration for advice
• Prohibition of commissions and shift to advice fees being phased in:
› Lump sum investment products – Phase 2
› Recurring payment investment products – Phase 3
• Remuneration for compulsory annuities:
› Considering an annuity purchase amount below which commission can still be paid (for all
compulsory annuity types)
› Exceptions for low income market recurring investments (not lump sums) will apply:
› To be informed by technical work, but likely to be based mainly on a simple contribution size
threshold.
22. Slide 22
FAIS Cat I and II licences
• Need to better clarify distinction between FAIS Category I and Category II licence criteria:
› Considering defining “investment management” as a specific licensed activity
› Will identify specific activities that comprise “true” investment management, rather
than current broad reference to a discretionary mandate
• Also considering need to address risks of conflict of interest when exercising discretion
› For e.g. where an investment manager uses a discretionary mandate to place
investments in portfolios it manages.
23. Slide 23
Outsourcing investment management to advisers
• FSB of the view that an RFA should not be able to earn advice fees for recommending any
product / portfolio that they also earn investment management fees on (directly or
indirectly)
• FSB considering whether / when an adviser could be regarded as a “PSA” of an
investment manager (i.e the investment manager would have similar resonsibilties to a
product supplier in such cases)
26. Slide 26
UK RDR impacts observed:
Reduction in total number of advisors
IFA’s move to Restricted
Advisors shift client target upwards (HNW)
Middle and lower market unadvised…going online (or nowhere?)
New online players (and winners) like Hargreaves Lansdown
Vertically integrated businesses like St James’ Place
Corporatisation of financial planning businesses
“Institutionalizing” their advice (LifeCo Tied Agencies, bank brokerages, PSG, Adviceworx, etc.)
Categorisation and accreditation of advisors
Approved Fund Lists & limit categories of advisors to groups of funds, products
Outsource decision to committees, specialists, DFM’s, FoF’s, etc. (“in-house” or external?)
Investment decision makers: reduction in number and increase in sophistication
Vertical integration: bulking up assets; direct flows to own solutions to capture AM margin
How are advisors changing their businesses?
27. Slide 27
From sales people to business people
Converting their businesses to fee income only
Build annuity stream; therefore value in their business
Consolidations, acquisition of books, bulk negotiation, etc.
Eventual exit plan (to monetize their biggest asset: future income stream)
Some will go through initial “income dip” when move from upfront to trail only
Fully disclosed world – need to shift the focus form price to value…big challenge
Specialization (e.g. investments only); limiting the number of LISPs being used
Growing successful investment practice
HNW clients want/need different things
Intergenerational wealth management … fiduciary services, trusts, etc.
Protection of capital (in hard currency terms)
Externalising (sovereign risk)
Customisation (e.g. tailored portfolios)
Lending / leverage
Typically large exposure to direct property
How are advisors changing their businesses?
28. Slide 28
Financial impacts
Rebates disappear – financial impact; e.g. R100m-R150m p.a. on major LISPs
Reduction in explicit fees: 75bps to 20bps
Obvious responses:
Forced investors in technology enhancements
Automation of processes to reduce costs; increase control
Have to push other parts of the pie (increase passive investment options; own AM solutions)
Consolidation? …”buy” advisors rather than LISPs
Vertical integration & widening of services / margin
Margin: advice, platform, product, fund, asset management
Direct flows to own solutions:
Internal AM, Multi-manager, cash solutions, etc.
Capture client from corporate to retail (umbrella to individual)
Risk: short term & long term
Wealth management services (incl. private client portfolios, fiduciary services)
Practice management services (lock in advisors)
How are LISPs going to survive RDR?
29. Slide 29
• We already focus on the higher end of the IFA and Corporate market
• 85% of our platform business comes from the big 4 already
• Helping this group survive successfully will be the major challenge:
› Initial accreditation
› Ongoing assessment
› Suitability of advice?
THE CHALLENGE FOR PRUDENTIAL
30. Slide 30
RETAIL DISTRIBUTION REVIEW
What does it mean for advisers?
Must agree upfront
fee structure with
all clients
Advisers have to
categorise
themselves as
‘PSA’ or ‘RFA’
Potential threat to
the value of their
business
Increased scrutiny
on advice and their
choice of
platform(s)
31. Slide 31
Major ongoing shift
of existing assets
to “clean” share
classes
Potential shrink in
the adviser
universe (and
consolidation)
Increase of tied
advisers could
reduce exposure of
Prudential funds
Transparency leads
to pricing pressure
RETAIL DISTRIBUTION REVIEW
What does it mean for fund management groups like Prudential?
Reduction in
number of decision
makers and
increasing
sophistication
32. Slide 32
• Create an excellent client proposition
• Engage your clients in a way that suits them
• Change your sales process to an advice process
› Know your client intimately
› Set lifestyle goals for clients
› Undertake due diligence on recommendations
• Focus on business profitability
› Need to know how much business needs to generate profit
› Segmenting client base will determine level of service that clients will be offered - this will
influence profitability of each client
› Segment on complexity of clients circumstance
› Willingness or ability to pay fees
› Clients own knowledge or sophistication of products
GUIDELINES FOR EMBRACING RDR
34. DISCLOSURE STATEMENT
Collective Investment Schemes (unit trusts) are generally medium-to long-term investments. Past
performance is not necessarily a guide to future investment performance. Unit trust prices are calculated
on a net asset value basis. This means the price is the total net market value of all assets of the unit trust
fund divided by the total number of units of the fund. Any market movements – for example in share
prices, bond prices, money market prices or currency fluctuations - relevant to the underlying assets of the
fund may cause the value of the underlying assets to go up or down. As a result, the price of your units
may go up or down. Unit trusts are traded at the ruling forward price of the day, meaning that transactions
are processed during the day before you or the Manager know what the price at the end of the day will be.
The price and therefore the number of units involved in the transaction are only known on the following
day.
The unit trust fund may borrow up to 10% of the fund value, and it may also lend any scrip (proof of
ownership of an investment instrument) that it holds to earn additional income. A Prudential unit trust fund
may consist of different fund classes that are subject to different fees and charges. The Manager will pay
your financial adviser a standard ongoing adviser fee, which is included in the overall costs of the fund. A
Collective Investment Schemes (CIS) summary with all fees and maximum initial and ongoing adviser fees
is available on our website. The Manager may, at its discretion, close your chosen unit trust fund to new
investors and to additional investments by existing investors to make sure that it is managed in
accordance with its mandate. It may also stop your existing debit order investment. The Manager makes
no guarantees as to the capital invested in the fund or the returns of the fund. Excessive withdrawals from
the fund may place the fund under liquidity pressure and, in such circumstances; a process of ring fencing
withdrawal instructions and managed pay outs over time may be followed. A Fund of funds may only
invest in other unit trusts (sub-funds) and assets in liquid form. Sub-funds may levy their own charges that
could result in a higher fee structure for these funds. Foreign securities including foreign CIS funds may be
included in unit trusts. As a result, those unit trusts may face material risks. The volatility of the fund may
be higher and the liquidity of the underlying securities may be restricted due to relative market sizes and
market conditions. The fund’s ability to settle securities and to repatriate investment income, capital or the
proceeds of sales of securities may be adversely affected for multiple reasons including market conditions,
macro-economic and political circumstances. Further, the return on the security may be affected
(positively or negatively) by the difference in tax regimes between the domestic and foreign tax
jurisdictions. The availability of market information and information on any underlying sub-funds may be
delayed.
Full terms and conditions are available at http://prudential.co.za/terms-and-conditions, or on request. For
any further information, please visit www.prudential.co.za.
