In Phase 2 and 3, advice-fees only (no commission) on single premium investments and recurring premium investments will become effective, as will the introduction of new commission caps and reduced upfront commissions on risk products. The key is to start making incremental business changes now to mitigate cash flow and business sustainability risks in the long term.
Intermediaries who provide professional services and place clients’ needs at the core of their financial planning processes can thrive in this new world. However, to do so requires some forward thinking, planning and action. Being equipped for this transition is not an endeavour any advice practice can achieve overnight. The biggest risk any intermediary can take is leaving it too late.
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There are a few practical steps intermediaries can take in the countdown to implementation of Phase 2 of RDR:
1. Understand your cash requirements
Evaluate how much cash you need for your current business expenses including rent, salaries, tax and so on. This will help you to understand how much income you need on a monthly basis.
2. Calculate a month-to-month income
Work out current earnings from all income streams. If the RDR-compliant portion of your income already covers your cash requirements, and is likely to do so sustainably, then you’re already on the right track.
3. Build your cash reserves and opportunities for monthly income
-Some intermediaries are opting to take their commissions upfront for now to start building up a cash buffer. This cash buffer may assist with initial cash flow issues as you start building your fee-based income stream.
-Alternatively – but perhaps more challenging at current commission rates – you could also to start building your book on recurring income, thus reducing your upfront component and increasing the recurring (ongoing) component.
-For long-term insurance products such as risk business, and for recurring savings vehicles like endowments, it is possible to continue earning a commission until the implementation of RDR Phase 3, albeit a smaller portion, to contribute to monthly cash flow requirements.
-You could increase your month-to-month fee-based income by building your client base and strategically starting to introduce a fees-for-service model where appropriate.
4. Build a compelling proposition clients will find valuable enough to pay for
Be crystal clear on the value you offer, and your unique selling points that differentiate you from your competitors. While RDR makes your ability to charge for things wider, and provides freedom to negotiate things with clients, the client needs to understand the value you bring.
Try and get a sense of what your competitors are offering and charging to ensure your costs are competitive and your proposition is equally favourable, or better. Also remember that while RDR is one factor impacting the industry, the world in general is changing. Single needs can easily be catered to digitally and clients are likely to look to robo-advice for simple one-dimensional purchases. This leaves a gap for intermediaries to focus on providing holistic financial advice, a scenario in which the quality of advice far surpasses the ability to offer products, particularly when it comes to complex problems.
5. Think about how best to deal with clients
It may be worth starting to acclimatise clients to the idea of paying a fee for the services you offer, if you haven’t done so already. The relationship remains critically important, but there are additional considerations and nuances when dealing with clients paying fees. Firstly, how will you negotiate with clients and agree on fees? And how will you ensure that both your interests and that of your clients are protected? You will need to have a legal agreement in place that reflects what is being paid, for what, and how often – which is a critical part of your interaction with clients, particularly if any disputes arise. Then, how will you invoice clients and collect? When intermediaries become responsible for invoicing and collecting fees (when not facilitated by an insurer), systems and processes need to be put into place within advisory practices to cater for this.
There are, of course, additional considerations. Dealing with any transition requires a thorough understanding of the implications and actions required, and in this case the best place to start is by reading the RDR paper and applying the requirements to your business. Importantly, getting your cash flow game plan in place, setting the right price for your advice and making your value proposition clear, means you are better able to capitalise on all the earning potential RDR brings.