It has been 14 years since Personal Finance fired the first shots in the drawn-out battle to stop the abhorrent practice of financial services companies incentivising so-called financial advisers by offering them luxury, free trips abroad. To qualify for the trips, the advisers had to sell a targeted amount of the companies' products.
The consequence was that many unscrupulous advisers simply switched you between products in order to meet the target set by the company that was offering the luxury trip on which the advisers wanted to go the following year.
Neither the advisers nor the financial services companies gave a damn about the risks to which they exposed you in the process - all that mattered was that cruise in the Caribbean or that ski trip to Klosters, Switzerland, where royalty hangs out.
And even where industry agreements existed, such as in the life assurance industry, to prevent these trips, ways were found to duck and dive. Sanlam, for example, set up a separate company to provide the trips. It was closed down after it was exposed by Personal Finance.
The good news is that the battle has now mostly been won.
On Monday, the Financial Services Board (FSB) published amendments to the General Code of Conduct that forms part of the Financial Advisory and Intermediary Services (FAIS) Act and in terms of which financial services providers must be licensed and behave properly. The amendments deal with conflicts of interest.
In a nutshell, the amendments ban the incentive trips and even make it difficult for financial advisers to accept things such as tickets to the soccer World Cup. The last World Cup saw plane-loads of advisers being taken to Germany.
From now on, financial services companies will virtually be restricted to taking intermediaries to one lunch a year at an upmarket restaurant. This is because the amendments limit intermediaries to receiving an "immaterial financial interest" of R1 000 from any product provider and its associated companies in any year.
In effect, the FSB has told the industry and intermediaries that they may only pay and receive commissions and fees as allowed for contractually and in terms of the law.
And devious schemes to by-pass the regulations, such as that used by Sanlam or providing the perverse incentives to intermediaries' relatives, are not allowed either.
Failure to observe the new regulations can result in the loss of a licence to operate as a financial services provider.
But the FSB is going to have to keep a close check on things.
An example: the life industry, which in the 1990s suddenly had to compete with companies that were selling unit trust-based investments and that did not have to abide by the commission regulations, decided that the education of intermediaries was a way around the no-incentives hurdle.
Initially, life companies allowed paid-for trips that were limited to South Africa and the now defunct Bantustans (the latter were important because Sun City was in Bophuthatswana). Then the industry body extended the borders to all of Southern Africa, which, by definition, included Mauritius. From what I hear, some of these "educational" trips involved an hour or so of lectures before they rapidly dissolved into drunken debauchery.
The education of intermediaries is essential in a rapidly changing financial environment. And to be fair, many companies do deal with education responsibly. For these reasons, the amendments to the code of conduct allow for bona fide educational events, but paying for intermediaries' accommodation and flights is not permitted.
And educational conferences must be open to all intermediaries. They cannot be limited to a few chosen intermediaries who have met sales targets.
The regulations force all parties to avoid conflicts of interest and to implement a policy on how to deal with conflicts of interest. And if it has not been possible to avoid a conflict of interest, the conflict must be disclosed to you, the customer, if it affects you in any way.
All this is very good news. Combined with the proposed Treat Customers Fairly regulation that is now under discussion, the amended regulations should make it far more difficult for the financial services industry to hoodwink us with poor products and inappropriate advice.
While on the issue of advice, it is important that the vast majority of people receive financial advice on an on-going basis.
Very few of us can calculate how much life assurance we need to take out to provide for our dependants in the event of death, how much income replacement we need should we become disabled, how much we need to save for retirement, or what products we should use.
The problem is whether or not we can be sure of the advice we receive. The FAIS Act, which now includes provisions on how service providers must manage conflicts of interest, definitely helps, but it does not solve all the problems.
Some financial advisers are still selling high-risk property syndication schemes to pensioners rather than telling them to invest in RSA Retail Bonds. Retail bonds are one of the safest income-generating products around and they currently pay 9.25 percent a year for a fixed-rate five-year investment.
The same applies to the sale of high-cost, inflexible, penalty-carrying life assurance products instead of people being told about low-cost exchange traded funds (ETFs).
The reason is simple: commissions! Property syndications pay commissions of six percent plus. RSA Retail Bonds pay no commission. Life assurance products pay upfront 50 percent of the commissions on premiums you may pay 20 years from now (contributing to poor investment returns).
If commissions were not paid, you would be advised to consider those excellent retail bonds (which you can buy from the Post Office or your local Pick n Pay) and ETFs.
But you may argue that without commissions, your financial adviser would starve.
No, the solution is rather to pay a negotiated fee. Look at it this way: when you seek advice from a doctor or a lawyer, you pay a fee. Your doctor is not necessarily incentivised to sell you anything if you are well (although it seems that some doctors receive kickbacks from private hospitals to hospitalise you), but you still pay a fee.
The same should apply to financial advice. Currently, most advisers are incentivised to sell you something in order to make a living, and, to make it worse, the commission is based on a percentage of your assets or the value of the product.
There is a growing bunch of mainly well-qualified and scrupulous financial advisers who are prepared to work on an hourly fee basis without receiving commissions.
In Britain, commissions will be banned in the financial services industry by 2012. Financial advice will be on a fee-only basis - and the FSB tells me that similar plans are afoot here. But you do not have to wait for this to happen in South Africa. You should already be insisting on paying only a fee for advice. That way you are sure to be told about investments such as ETFs and RSA Retail Bonds.
Unbiased advice from a skilled adviser is worth a lot, so expect to pay a fair amount. You are very likely to receive value for your money. It is absolutely essential that you negotiate a rand per hour fee and not one based on a percentage of your assets. With a percentage, you may well be taken to the cleaners.
Professional advisers have Certified Financial Planner (CFP) accreditation from the Financial Planning Institute. They not only have to write tough examinations, but they also have to abide by a strict code of conduct. You can find a CFP-accredited adviser in your area by going to the website www.fpi.co.za
Incidentally, you should simply steer clear of property syndications. There are better and safer ways to invest in property. Over the past 12 months, three property syndication companies have gone belly-up - following a "distinguished" track record that stretches back to Masterbond and the Owen Wiggins Trust.