The Retail Distribution Review (RDR) was first released in 2015 for comment from the industry. One aspect of RDR that is of concern to Financial Advisors is the fact that their commission will be restructured.

Initially, RDR proposed the following in terms of commission:

  • Investments –  the advisors would no longer receive remuneration from the supplier but would need to negotiate a fee with the client. This fee can either be paid by the client or deducted from the investment and paid by the product provider.
  • Life or Risk Business – 50% of commission would be paid up front to the advisor and 50% of commission would be paid as and when. There will also be a review of commission rates.
  • Short term – additional fees over and above commission will no longer be allowed (in terms section 8(5) of the Short-term Insurance Act), and commission rates will be capped.
  • Replacements – advisors will not receive commission on replacements.
  • Advice Fee – financial advisors will be able to charge a fee for the advice that they give to clients.

In line with the above, what can you as a financial advisor do to prepare your business and your clients for a fee-based service?

Show to clients the value you offer

To charge client fees, it is imperative that your business has a value proposition. Clients need to understand what value your services offer to them before they will consider paying for your services. Your value proposition needs to describe your target market – who would you like your clients to be, the problems you solve for clients, and why you are distinctly better than your competitors. If you don’t know your service, then what are you charging for?

What do your clients value most about your business? If you don’t know what your clients find valuable, then how do you know if you are doing too much or too little for them? Are you comfortable that you are spending your time on those aspects that are of value to the client? In our industry, we are not just selling products but advising clients on their financial situation; it is this advice that clients are paying for. RDR allows one to charge an advice fee even if the client does not wish to implement your advice. In this way, you are remunerated for the hard work it takes to compile a full financial needs analysis.

Segment your client base

The Pareto Rule states that over 80 percent of a company’s profit is generated by only 20 percent of the client base. It is very important that you are aware of who your income is derived from, and ensuring that you are allocating your time in terms of serving clients appropriately. You do not want to spend hours serving a specific client if it is not of financial gain to your business.

Define your hourly rate

The next step is to be aware of what your hourly rate is. It is not possible to know what Rand amount to charge if you don’t know your hourly rate is? Do you know what the cost to deliver your services to clients is? Do you know what you need to be charging clients per hour to be a profitable business? What other expenses does the business incur that would need to be covered in your advice fee? What qualifications and experience do you have? Pricing is important in a practice, evaluating costs of service is directly linked to the value that clients place on your service.

The changes in legislation require that financial advisors remain in contact with clients and do annual reviews with clients. This means financial advisors will only be able to service a certain number of clients, as there are only a certain number of hours in a day. What will you do with the clients that you are no longer able to service? Do you have a succession plan in place for these clients?

Build lasting relationships

Most financial advisors agree that your relationship with your client is king. You need to understand your clients, their goals and dreams and the time in which they hope to achieve this. Are you able to assist your clients in obtaining these goals?

If you’re concern about the time constraints associated with RDR, we suggest having an obligation free conversation with one of our broker consultants to explore a partnership or succession planning between your practice and ours.

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