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Establishing the need for financial advice

| Practice Management

Over the past six decades, we have witnessed the global retirement market transition towards a defined contribution-dominated system whereby members have to accumulate their own assets, and the employer not guaranteeing any pension but rather retirees having to use their accumulated savings to purchase an annuity that would provide income during retirement. The regulator and industry stakeholders have concentrated all their efforts solely on one part of investors’ retirement journey – the accumulation of retirement savings, but less so on ensuring financial security and confidence when members exit, or even more distressingly, after the payment of benefits to beneficiaries in the event of a member’s death.

We have over the years seen and welcomed structural reform that has recognised and addressed the needs of the individual within the savings ecosystem:

  • The Standard on Living Annuities issued by the Association for Savings and Investment South Africa (ASISA);
  • Regulation 28 of the Pension Funds Act, which aims to mitigate the investment risk at a member level as opposed to the Prudential Investment Guidelines; and
  • The Default Regulations of the Pension Funds Act.

However, there is still scope for further improvements given that guidance and advice are institutionally focused through benefit consultancy services, whereas individual financial advice remains an ancillary service to the retirement fund industry as it falls outside of the typical fund governance realm.

Interestingly, this year’s Sanlam Benchmark™ Survey paints a picture depicting a substantial need for an increased focus on providing individual guidance and advice. For starters, where there are infrequent engagements, there is a general lack of confidence in terms of knowledge of financial products and services such as retirement benefits and investments compared to salary/payslip and banking products. Respondents who were confident or very confident about their knowledge in terms of retirement benefits, investments, income tax and tax-efficient investments ranged between 5% and 11%.

Benchmark Survey 2022

Surprisingly, for those respondents who engaged with their retirement benefits, the channel that came in only second to the fund’s website or mobile application in terms of accessing information on their benefits was, collectively, self-appointed and/or fund-appointed financial advisers _ showcasing that this service is not only needed, but also aligned with the objectives of the retirement fund stakeholders.

Selecting a potential financial advisory service provider

Financial advisory and intermediary services are defined in the Financial Advisory and Intermediary Services Act of 2002 (FAIS Act) as the provision of recommendations, guidance or proposals in respect of the purchase of a financial product. The Retail Distribution Review goes further by making a distinction between the types of advisers:

  • Independent advisers (who are free from product supplier influence and have adequate choice
    among suppliers);
  • Tied advisers (who are obligated through contractual agreements, ownership or other relationships,
  • to provide a specific product supplier’s products only); and
    Multi-tied advisers (who fall in between the independent and tied advisers).

If trustees and employers seek to employ the services of a financial adviser, it is important to understand
some of the key elements that define a high-quality, professional financial advisory service provider.

Advice process and scope of services

Advice processes may differ vastly across financial advisers, but the industry standard 6-Step Financial Planning Process is the benchmark process that was publicly promoted by the Institute of Advanced Financial Planners in 1983. Today, this is the de facto advice process being applied by most financial advisers. For the specific life stages of a client such as post-retirement planning, this process may have a key focus on the envisaged lifestyle, working back the risk required to immunise the client from the future cash-flow requirements, the risk capacities and tolerance to determine the correct investment and product strategies.

The scope of financial advisory services can differ greatly depending on the level of investment and complexity of the client’s needs. However, as a basic requirement, trustees and employers can look to get the following services at the very least:

  • Creating a holistic financial plan;
  • Budgeting;
  • Advising members on the default annuitisation and preservation strategies;
  • Analysing the possibility of continuations of risk benefits;
  • Conducting some form of estate planning, e.g. drafting a will; and
  • A tax assessment of the various options available to a member or employee.

This is in line with the responses given in the Sanlam Benchmark™ Survey when participants were asked
about the options they would be interested in if an employer provided holistic financial solutions.

Advice operations and systems

The compliance requirements for advice services are non-trivial due to the fact that any recommendation, however insignificant, could have dire consequences for the client’s future. In addition, the protection of a client’s personal and financial information is required by law and it is therefore important that trustees and employers have peace of mind that each adviser servicing their members and employers acts in compliance with the Financial Intelligence Centre Act (FICA) of 2001, the FAIS Act, and the Protection of Personal Information Act (POPIA).

Quality, professionalism and fair pricing

Assessing the quality of services provided is difficult and not unique to financial planning services. Although tenets such as responsiveness, reliability, tangibility and client testimonies are useful to assess the quality of the services provided, without reputable insights and demonstrable improvements in member or employee outcomes, the assessment of quality will remain subjective.

A big drive from the Retail Distribution Review of 2014 was to enhance the professionalism of the financial advisory sector, which included setting the bar for and enforcing licensing and registration requirements, professional training and competence requirements, proper management of conflict of interest, and treating customers fairly and acting in their best interest.

Another significant consideration is the pricing of services. Financial advisory services providers typically apply one or two types of charges: (i) initial fees – which are fees typically charged to recoup costs incurred in the planning phase, where the product doesn’t require yearly reviews, and (ii) ongoing fees – which are typically fees charged as a percentage of the assets under advice to cover both the upfront analysis and continued reviews.

Footprint and multilingualism

All of the above will be futile in terms of improving the financial confidence of members if there isn’t sufficient capacity within the financial advisory business to service each and every member or employee in the manner of their choosing, i.e. mode of communication – online vs. face-to-face, preferred language, etc.

Governing financial advisory services providers

Adherence to service level agreements

As with any service provider appointed to the fund or employer, the financial adviser is bound by a service level agreement (SLA) that captures the scope of services required, roles and responsibilities, disclosure of fees for the services provided and provisions for recourse on non-delivery or negligence.

Satisfactory compliance adherence

Although financial advisory and intermediary services are a part of the regulatory framework, trustees
and employers may not automatically be required to demonstrate competence in this field. An analysis of a sufficient sample of Records of Advice or official reports from a compliance officer may, however, give much-needed insights.


We have established from the responses of the survey that there is a need for financial advisory services. The questions that remain are: (i) appropriateness of the service provider, and (ii) ensuring delivery of financial advisory services. In terms of appropriateness, we have unpacked issues such as the advice process, the quality of advice and footprint as key. Secondly, we have highlighted possible components of an SLA that will ensure delivery of desired services and compliance adherence.

Click here to download the Sanlam Benchmark 2022 Survey


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