Why I love FAIS
By Tamara Jacobsen: Director- Applied Learning Academy
The provisions of the Financial Advisory and Intermediary Services Act, 2002 (FAIS) have been in place for more than a decade now. Financial advisors, planners, consultants and agents who deal with insurance, medical schemes and/or investment products must comply with the provisions of the Act, including completing a Regulatory Exam.
Instead of treating FAIS and its provisions like the enemy, let me share some examples of my industry experiences on how business was conducted before FAIS. FAIS provisions are in place to protect against the practices mentioned in each of the examples.
I started my financial services career in the actuarial services section in the 1980’s. Before computers, calculations were processed in our department, including commission calculations. Most of the new investment policies (endowments) that landed on my desk had a 26 year term. Why? Because the maximum commission payable on an endowment policy at that time was a policy with a 26 year term. In my later life as a financial planner, I never had grounds to recommend an investment policy with a term longer than 20 years.
Before FAIS, anyone could become an advisor. One of the life insurance companies I worked for routinely employed second hand car salesmen and ex estate agents as the focus was entirely on selling and these people knew how to sell. Out of jail? No problem – here was a job where one only had to sell. Having a criminal record meant that other positions were not possible and so the sales agency managers knew that a person with a criminal record would be extra motivated to make sales.
There were a limited number of truly professional advisors and a formal needs analysis was unheard of. Product knowledge was poor and full disclosures were rare because of it. When I became an employee benefits broker consultant in 1991, my manager spent half a day with me on the company’s products, and I was sent on a five-day selling course. I had applied for the position because it came with a car but when I went out to sell, I had only a vague idea of the employee benefits products or industry. I dealt with a group of brokers (advisors) as well as directly with clients and prospective clients. In my second month, I was nearly fired because I told a prospective client that we did not offer provident funds. The deal was lost because the company did in fact offer these but it was not on my one pager product information summary. With this level of knowledge, there was no way in the early days that I could really advise clients on benefit structures and other important information.
In 1993, the insurance company for which I worked offered an overseas trip to Greece and Turkey for any broker/advisor who placed business above a specific target with our company. The planned trip was to include a dedicated travel agent, visits to historical sites and a cruise through the Mediterranean Islands. Luxury accommodation and most meals were to be covered as well as entertainment like belly dancers. The brokers/advisors used to check the annual insurer trips to determine which was the most attractive. Then they actively sought to place business according to their targeted trip and let me tell you that our Greece and Turkey trip was popular. I saw brokers throwing away quotes from our competitors even though our rates, service and benefits were not the best.
Some years later I was appointed as an employee benefits consultant by a large brokerage. We dealt directly with Boards of Trustees of pension and provident funds. As the brokerage owned an investment management business, we were told to recommend their investment manager’s portfolios. At the time, few of the portfolios had performed well over time. Also, a number of the portfolios were set up through a multi-manager arrangement, resulting in higher than average fees. We did not have to disclose our relationship, even though it was clearly a conflict of interest. We did not have to disclose anything about the fees either, even though this resulted in lower net investment amounts being allocated towards retirement for members.
Before tabling an annual administration fee increase, I would be quizzed by the director in charge of our section about the education and knowledge levels of the Board of Trustees. If they had limited financial knowledge, a higher fee had to be tabled. If the Board objected, the director would take out his calculator and pretend to conduct calculations, and offer a discount on the proposed fee. The Board would then accept the lower amount with a sigh of relief. They missed the point that as fees were based on a percentage of the payroll, we already had a fee increase as the payroll had increased. On one of the funds, the payroll had increased by 9% year on year with inflation at that time being lower. A 5% fee increase was tabled, and reduced to 3%, which was accepted by the Board. That’s a whopping 12% increase year on year!
As a result of these and other unsavoury practices, I left the corporate world to start my own brokerage. I would often deal with clients who had existing policies. It was heart breaking how much mis-selling had taken place. One of my clients had been paying towards a policy for a 10 year period. She had requested an investment policy that was to provide for a child’s tertiary education. Unfortunately, the policy she had been sold was a life insurance policy with no investment. She was devastated that after all these years, not a cent had been saved up. As a result, there was no money to provide for her child’s tertiary education.
Through these experiences, I recognised the need for better education of advisors and embraced the opportunity to become involved in training. Training older advisors was challenging at times, especially when the FAIS qualification requirements were implemented. One of the groups argued vehemently with me about my description of the asset classes. Some thought that shares and equities were different asset classes and some thought that bonds were some sort of packaged home loans. The average years of selling experience for this particular group was 30 years. They furnished advice on investments throughout that time and still had little understanding of the investment market, economics and asset classes.
Through these examples, I hope that you recognise why things had to change, and how important it is for advisors to meet professional and ethical standards. I agree that the questioning style in the FAIS Regulatory exams is awful, which is the reason why we at Applied Learning have created as many resources as possible to help advisors and key individuals to complete the regulatory exams successfully. Click on the following link to learn more about this: http://www.appliedlearning.co.za/regulatory.php
Personally, I love FAIS. Its intentions are noble, albeit burdensome to implement. I have seen a massive, positive difference in the financial services industry. Not only does the Act protect clients, including us when we are the client, but the provisions also create opportunities to build longer term relationships with clients. When the provisions are applied within the business, it also helps to protect the business and its representatives. FAIS should be your friend, not your enemy.
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