Towards RDR : perceptions of the South African market of fee-based financial advice

Abstract

The Retail Distribution Review (RDR) is a reactive response to poor consumer outcomes and market misconduct, despite the significant progress achieved through the Financial Advisory and Intermediary Services (FAIS) Act in raising industry professionalism, improving disclosure to consumers and mitigating certain conflicts of interest. It sets out 55 proposals to be implemented in a phased manner over the next several years in line with the “Twin Peaks” protocol. International implementations of RDR in the United Kingdom (UK) and Australia have indicated important lessons for South Africa. However, given the difference in economic context between these countries and South Africa, it is important to gauge the response of the market. Thus, this study aimed to explore the perceptions of both consumers and Financial Service Providers (FSPs) around fee-based advisory models in preparation for RDR. This study employed an inductive research methodology where no hypotheses were proposed. This method was selected due to there being little empirical research on this topic in South Africa. Qualitative data was collected through telephonic interviews with two sample population groups; an FSP population to ascertain their readiness for and perceptions of RDR and a consumer population to determine their expectations of services in the financial advisory sector and their willingness to pay for advice. Results indicated that despite market speculation, many consumers are willing to pay for advice, under the right circumstance and for the right price. However, this does not mean that the market will not see an “advice gap” where many other consumers will resort to self-researching financial advice. FSPs, while expressing concern and unpreparedness for RDR, have been debating over their service adaptations for RDR. A number of fee-based solutions were explored with the most preferable option proposed by the study being an on-going management fee. Additionally, a number of proposals were provided for FSPs to consider when adapting service offerings in line with RDR. While this research has a long way to go in preparing the market for RDR, this study provides a foundation from which banks and FSPs can begin considering gaps and opportunities in preparation for RDR, and regulatory bodies, such as the FSB, can ensure the RDR is implemented uniquely for the South African market.