My friend Sipho Nzimande sent me a piece about regulating financial service designations in South Africa. I follow the author, Kobus Kleyn, on LinkledIn and his material is thoughtful and helpful. This piece is no exception.
They have a somewhat larger problem than we do. They are looking to create designations for agents:
- tied to a single company,
- agents who have arrangements with several companies, and
- independent agents.
Any could affix “financial planner” to that label, subject to suitable qualifications.
The regulators seem to be missing an organizing principle. Regulation should improve the lot of people who use the product or service.
Form of service might mean something to regulators, but it is unlikely to be useful for clients. Clients and so regulators should be looking to agents for privacy, skill, competency, education and standards. The proposed labels add nothing to those. People have too little knowledge about the situation behind the labels. The labels will make superficiality look conclusive.
What is reality?
There are unquestionably fine agents who are contractually tied to a single company. There are also a few independent agents who act entirely from self-interest. How does a label serve client interests?
The issue appeals to regulators because it seems important and is unmeasurable. It is useful only for clients who know what the designations mean. Emphasis “mean.” Contractual links do not establish the idea of useful service for any client.
Designations say nothing about:
- capability to assess and deal with real questions,
- existence of a client-centric approach or
- ability to fit product to the observed purposes.
Labels will not help the tiny minority of clients who understand what they are doing. They already seek advice from those most able to deliver what they want. Labels won’t change that.
For the huge majority of clients who do not understand how the industry works, the labels add no value. Understanding what a person can expect is crucial and the labels provide no tools with which to assess that.
A single company provider may be completely competent, but have a narrower product shelf. How wide does the shelf need to be? There is but tiny variation in product among the large generalist providers. (I don’t know if that is true in South Africa) All insurance of a given type costs insurers the same. Packages may differ and if the premium is materially lower, something valuable is missing. All insurers have the same risk exposure, the same costs, and the same investment environment. Brilliant underwriting could reduce costs a little. Clever product design could reduce risk a lot, but then the client owns the risk the company chose not to take. Low price is not an analog for good value and few know it.
The best agents are identifiable based on a few characteristics:
- availability of adequate product,
- problem identification and computational skills,
- communication ability.
Anyone, in any category, could hold those skills, so labeling will add nothing to the client’s ability to make assessments or to get proper service. It could well harm their ability to make good decisions.
Regulators think they make the choices easier and better, but they cannot. Labels confuse people with a false idea of what is important. Anchoring is an important cognitive error in behavioural economics. Labels magnify it. Is independent better? Or not? Who can tell?
Agents of all flavours add to the problem because they under-inform their clients about their services. They spend little or no time on having clients understand the global process. Strategic financial literacy is never taught and many clients never come in contact with the idea. Agents must educate clients so they understand meaning. Those clients will value their advisors for what they are and do, not for the designations they may print on their business card.
The key to a successful financial relationship is not a label. It is a human connection with someone who can help overcome the missing parts of the client’s education. Someone who will be mentor, record-keeper, cheerleader and conscience on the long and winding path to financial success.
I would have better skills for selecting a handyman or a plumber than an advisor in these circumstances. Why? Because I know nothing about important aspects of the skill and would seek advice from others who have used such a service. I would find out how a tradesman discovers problems, what they do, how they do it, and how they charge. I can assess value from that. If tradespeople came with labels I might think I have enough evidence to proceed.
I would be wrong.
The article that was to appear today was on a somewhat related idea and is bumped to tomorrow. It adds more to the idea that clients are not presently able to make good decisions around this question.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772