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How to Avoid Unethical Financial Advice

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“Financial advice,” as defined by our legislation, refers to recommendations from a registered financial services provider or their representative with the objective of selling a financial product. According to the Financial Advisory and Intermediary Services (FAIS) Act, it encompasses “any recommendation, guidance, or proposal of a financial nature furnished, by any means or medium, to a client or group of clients regarding the purchase or investment in any financial product.”

Since its introduction in 2002, the FAIS Act mandates that anyone offering financial products or services must be registered as a Financial Services Provider (FSP).

FSPs are required to adhere to the General Code of Conduct under the act, ensuring that:

  • Advice is factually correct, not misleading, and suitable for the client’s circumstances and needs.
  • Product terms and conditions are fully explained.
  • The adviser’s commission and remuneration are disclosed.
  • Conflicts of interest between adviser and client are minimized.

Advisers must also meet the act’s “fit and proper” requirements. According to Donald Dinnie in Norton Rose Fulbright’s “Financial Institutions Legal Snapshot” newsletter, a “fit and proper” person is defined by their integrity, competence, and financial soundness. Factors considered include honesty, integrity, reputation, financial soundness, solvency, competence, qualifications, and any criminal convictions or misconduct related to their business activities.

If a company or individual does not comply with these requirements, they can be reported to the Financial Sector Conduct Authority. Complaints against registered FSPs can be submitted to the Ombud for Financial Services Providers (FAIS Ombud).

Challenges with the Current Business Model

Despite the protections offered by the FAIS Act, the business model of major financial product providers has remained largely unchanged. Advisers within these networks are often highly incentivized to sell products, creating serious conflicts of interest. This model has led to unethical behavior, as evidenced by statistics from the Association for Savings and Investment South Africa (ASISA).

Efforts to address these issues, such as the Retail Distribution Review initiated by National Treasury around 2016, have stalled.

What to Look for in an Adviser

A new breed of advisers, known as financial planners, elevate financial advice to a professional level. Financial planners have postgraduate qualifications, offer a service akin to that of a family doctor or lawyer, and adhere to a professional code. The top financial planners in South Africa hold the internationally recognized Certified Financial Planner (CFP) designation and are members of the Financial Planning Institute of Southern Africa.

In a 2022 interview with Personal Finance, David Kop, former director of the FPI and co-founder of FI Consult, highlighted a key indicator of an adviser’s intentions: their focus on the client rather than the product.

“Financial planning is not about the product. The product is a tool a planner will use to help you meet your goals. If the adviser’s conversation is all about the product and not about you, that is a tell-tale sign that they are just trying to sell a product,” Kop explained.

“Financial products are essential, but effective financial planning starts with understanding your goals and dreams. The planner then applies their skills to help you achieve these goals. If your adviser’s approach is to understand your needs and goals first, you are on a genuine financial planning journey. Conversely, if the focus is on selling a product, you are in a product-sell environment,” Kop said.