The Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) was promulgated in 2002 and one of its intended outcomes was to regulate the rendering of certain financial advisory and intermediary services to clients. This came in the wake of local and international incidents of investment fraud such as Enron’s collapse in 2001 and Bernie Madoff’s Pyramid scheme of 2008, all coinciding with a global recession in the same year. The investment, insurance, and finance world, as it has been many times before, needed to recalibrate its moral compass.        

Part of the new act was the establishment of a national regulator, at the time referred to as the Financial Services Board (FSB) and which has since been renamed the Financial Services Conduct Authority (FSCA). The legislator’s main objective, in respect of the insurance sector, was to hold intermediaries, insurers, and financial advisors accountable for the investment advice they presented to their clients, in order to prevent the sale of products (at lucrative commissions) at premiums clients can’t afford.              

The FAIS act, although challenging, brought about a new approach to the rendering of financial advisory services. The traditional advisor-model of selling policies made way for a new client-advisor relationship which evolves around behavioural coaching, clearly defined wealth management and financial planning, all within an honest and personal relationship with the client. Essentially the new model proposed a fee-based model, where the advisor receives monthly payments instead of large up-front commissions, as one would expect from a purely commission-based model.              

It is now almost twenty years since the promulgation of this ground-breaking act, and the industry sees continuous reform and amendments being made to improve the client-advisor relationship. As much as this is celebrated, and as much as many insurers are now being held accountable for their actions, it is far from perfect and new products and remunerative models are being tested and proposed. But what does all of this essentially mean for the client?              

At its most fundamental basic, new relationship goals and responsibilities have been assigned to the advisor, and the client is the direct beneficiary of these changes. Relationship clearly outweighs the days of poor performing products presented on lively spreadsheets. But how has the change impacted the services rendered by the advisor, and how do they benefit the client?        

Below are five value propositions, or areas of service, proposed by some influencers such as the Vanguard Advisor’s Alpha[1] concept, on how advisors can add more consistent value through financial planning, behavioural coaching, and guidance. 

MARKET VOLATILITY

Advisors often base their value proposition on delivering better returns for the client, but relative to what? In most cases one can give a one-dimensional answer and say better than the market. But a more appropriate answer would be to say, a better return than the client would have generated on their own without the advice from a financial advisor. This is a good example where, through education and support, the advisor possesses the ability to inform and caution the client against undisciplined and emotional decision making, and that far outweighs claims of simply being able to beat the market.              

Outperforming the market consistently is not only exceedingly rare, but it also depends largely on factors beyond the control of the advisor. If the anticipated performance of a range of products or funds fall short of the client’s expectations, the client may very well decide to walk away, based on this non-performance, and will have no further vested interest in the product, or see the need to keep the specific intermediaries involved. 

CUSTODIANSHIP

Charlie Munger once said, “The big money is not in the buying or selling, but in the waiting”. Left to their own devices investors can get carried away by flashy presentations and inflated numbers about beating the markets. What follows in most cases is un-contested thinking and decision making. Besides the obvious efforts to attract new investors, the ever-present emotional drivers of fear and greed, create hopes and dreams of unmatched returns in no time, rather than proposing rationality and long-term gains.        

A custodian is defined as a person entrusted with guarding or maintaining a property, money, or assets. It becomes clear that, once we put the advisor’s investment capabilities aside, the true value of the advisor lies in the experiences and custodianship which the individual brings to the relationship.              

Like a personal trainer, the newly defined relationship between client and advisor, the advisor acts as a behavioural coach and assists the client to work through emotive investment decisions and provides the necessary support and reasoning to make the best investment decisions by balancing all the pros and cons in such a decision. Like a true caretaker, the advisor brings much needed clear thinking while considering the repercussions and making sure that the best proposed outcome is achieved.   

COMPILATION OF AN INVESTMENT STRATEGY

The advisor focused on relationship is uniquely positioned to obtain a clear understanding of the client’s current goals, overall concerns, familial composition (current and planned), future and long-term dreams and ideals (bucket-list items) through inquiring dialogue and intimate discussions.        

The relationship-focused advisor, considering the intimate details shared by the client, will in turn compile a long-term investment and short-term continuation strategy, which will guide and determine the best types of products, investment options and asset classes for the client. This is referred to as a bottoms-up orientated investment approach.              

In contrast a top-down philosophy, simply lists top performing products and funds (for example) and bundle them together, based on historical and projected performance figures. Once these products don’t achieve the projected returns, the advisor ends up having to defend investment volatility and performance, instead of being able to place the client’s goals and ideals and the center of the discussion and standing as a conscious reminder, to the client, of the intended end-game and investment plan. 

COMMITMENT AND SERVICE DELIVERY

There exists a relationship commitment[2] between the advisor and the client. If both parties wish for the relationship to last, it will require maximum effort to maintain it. If both parties are committed, it means the relationship is well worth working on, and it promotes the longevity thereof.       

The critical success factors in a relationship commitment are consistency and tenacity. The quality of the relationship will lead to good cooperation, if trust and commitment work in unison, and will create the space required for successful relationship management – place where mutual conversation and the sharing of thoughts can take place.        

One specific way of showing this commitment and building the trust-relationship is by rendering good quality service, which is defined by two elements, namely technical quality (what is being rendered), and functional quality (how it is rendered). In essence it comprises all elements that define the quality of the interaction between the client and the advisor.   

TAXATION STRATEGIES 

The financial advisory relationship, all things being equal, is not a short-term relationship. It spans many years that can lead well into retirement including the eventual passing of a client or one of the core family members. Where there are retirement, death or disability benefits which need to be paid out, there will also be complex tax implications and will be another major consideration for many clients.        

This then underscores another area where the advisor’s involvement can be of incalculable value since the advisor is skilled in effective and beneficial tax structuring and management of a portfolio. The advisor needs to ensure that investor returns are not eroded and will apply tax conscious financial planning and tax-efficient portfolio construction, to ensure proportionately larger benefits being paid out to the client. Other financial experts and professionals are often part of the consultative process to ensure all legislative actions are adhered to and correct. 

CLOSING COMMENTS

The legislator should be lauded for having identified the need for change and for successfully changing the client-advisor relationship by means of the improvements made in the insurance industry, ongoing monitoring of legislation, studying world events and by placing greater accountability on investment specialists. All of this has been done to the benefit of consumers to keep financial services free from corruption and to protect client’s hard-earned money.        

The new name of the personal advisory and financial planning world is partnership; that making good financial investment decisions is a matter of understanding the markets and being educated in several important investment principles, products, and services.       

You have the right to know what is going on in your investment portfolio and you deserve a financial advisor that values such a relationship more than spreadsheets. With the possibility of remunerating advisors on a spread commission basis over a period, instead of all commissions paid up front, it becomes easy to consider an advisor as a financial and investment expert and the bond with clients can truly be called a relationship. 

 [1] https://personal.vanguard.com/pdf/ISGAA.pdf 

 [2] https://www.researchgate.net/publication/233565767_Insurance_advisor-client_relationships_An_assessment_of_quality_and_duration