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Current Issues Arguing Fee-For-Service Over Commissions
Written by Jordan Vaka Monday, 04 January 2010 13:29
It took about three months in planning to decide that the endless discussion about revenue and payment methods was tireless, counter-productive and damaging to the industry. In the time since, the argument has been 'settled' some three times, waged a further four times and dismissed, well, countless times.
We all know the issues. We all know the commercial reality. We all know how things are headed. So, you know what? I'm calling it:
The fees versus commissions debate is dead.
Kaput. Finished. Expired. Past due. Horizon-bound. Dead. Like a damned doornail.
And the best part? It was the wrong argument the whole time.
We all know commissions are trouble for the industry. We all know that fees are the unavoidable future for financial planning. The FPA and the government have ensured the death of commissions. Now we have the rise of percentage-based fees (surely just as insidious and damaging as commissions?) and fee-for-service.
But we're still fighting the wrong fight.
Arguing about how somebody is paid is only relevant when we're discussing conflicts of interest. This facet of the argument has been made - I'd be surprised to find that more than 2 in every 10 people you ask don't think planners get paid from product manufacturers. So let's trust clients to realise this and make an informed decision about their adviser.
Arguing about what somebody is paid is relevant to two parties, for two reasons. It's relevant for clients, because they need to know so they can make a reasoned decision about what their planner is being paid. And it's relevant for planners because, as business people, we need to know what we're getting paid and what the bottom line is. When it comes to that professional relationship, anybody else's opinion is redundant.
But arguing about why somebody is paid is far more relevant and, I would argue, critical to the long-term success of the financial planning industry. As an industry we need to get better at demonstrating, explaining and quantifying the benefits our clients get from working with us. We all know what we can do for our clients - but let's get on the front foot and explain that to the public.
The public knows what accountants do, they know what solicitors do, they know what doctors, dentists, physiotherapists, psychologists, bookkeepers, mortgage brokers and insurance brokers all do. So, until planners get out there and fight the commission-hating naysayers and self-interested lobby groups with the wonderful and extraordinary benefits of financial planning, we're doomed to a career of defending ourselves from increasingly pointless accusations.
In response to my post last week about the ISN and their attacks on planning, William Mills made the simple statement that he has no difficulty communicating their Client Value Proposition to clients.
In a world where we waste our time arguing about how we're paid, and what we're paid - how confident are you that, like William Mills, you can tell your clients why you're paid?
Comments (6)
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written by William Mills, January 09, 2010
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written by Mike Hancy, January 08, 2010
Trailing commissions are ideal for investors with small to medium account balances, especially if they are low to middle income workers. This because they simply do not have any spare money to pay for advice. They either pay from the fund or they get no advice or service. They will be the under-priviliged and disadvantaged. They will also be the majority!
It seem to me that the current state of affairs is being driven by GREED.
The Union fund managers want their lucritive payments from the Industry funds without providing advice and without informing investors where their money is invested.
The Government want access to the Industry funds to finance their infrastructure projects.
The 4 major Banks want control over all financial services, but especially high worth clients and will ditch small investors, or charge them disproportionate fees.
Large and medium sized financial adviser companies will only accept clients who provide income of $5000pa to them.
In essence there was little wrong with the system in Australia before the crash. The problems lay in 2 areas:-
1. The investor, being greedy, was attracted to promised high returns, without understanding the risks, nor even bothering to seek advice. More often than not, they would not be prepared to pay for advice because the wanted something for nothing.
2. The unscrupulous Fund managers who marketed risky, perhaps deceptive or even fraudulent schemes to these greedy financially-unsophisticated investors.
The majority of advisers did the right things, being guided by their dealer group, observed the rules and put theier clients first.
There were laws in place to look after clients interests.
Now small businesses are being put under stress because of inappropriate action to right the wrongs.
With up to 60 pages for a statement of advice to invest $10,000 or even less, for litle payment, why would an adviser bother?
Every investor has to start somewhere, but who will look after the starters?
If Industry funds are to be the answer, then history tells us that such funds do not serve working people well. All too frequently, as in other countries, as Governments acquire access, returns suffer. In some funds balances disappear as the Government miscalculates. Meanwhile the working superannuant is kept blissfully ignorant.
Is this becoming the Australian way! Just a thought!
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written by Jordan, January 08, 2010
Fergus;
I completely agree with you about percentage-based fees. I find them a little worse than commissions in some ways - at least with commissions, the clients aren't directly out of pocket! But I really liked your point - 'focuses on funds invested (or risk sold) - because that's the biggest issue with %-fees. Nobody can ever answer me when I ask why somebody investing $200,000 should pay twice as much as somebody putting $100,000 in.
Bob, I think you're right about accountants - just like any industry there are some murky behaviours out there. But, still, when you mention tax, people invariably think 'accountant' - there's a much stronger task-role association. Is there one word that makes people think of financial planners? Can we sum up our work in one word? Do we want to?
George, thanks for your comment. Pricing still seems like a bit of a black art to me, with a lot of us sticking to the status quo of fees. I know Jim Stackpool has done some work in this space, but it's still really difficult. In my situation, I set a price for the SoA upfront, no investment fees and an annual ongoing service charge. Feel free to have a look at it on my site - www.tangramfinancial.com.au - and let me know what you think.
Thanks again everybody.
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written by Fergus Hardingham CFP, January 07, 2010
I would concur that what we do for our clients to earn the fees is very important - and that clients and the public at large need to be better educated on the value and benefit of seeking the services of a Financial Planner....
However how we are paid is just as important - a financial planner's main value proposition is assisting clients to achieve their financial and life-style objectives - hence why should the remuneration model be based on FUM / FUA (or level of premium)...as this form of remuneration focuses on funds invested (or risk sold) as opposed to assisting clients to satisfy their goals (including paying down debt / funding home purchases etc)...which will also include investment advice - but only as part of the client's overall financial plan.
Charging a flat fee...NOT % based... (possibly reviewed each year depending on the projected services / advice to be provided in the subsequent year etc) makes more sense - and allows the Planner to communicate to their clients their value proposition - and why they should pay the fee (regardless of what the fee is)...ie to buy services / advice that will assist them to achieve their goals / objectives etc.
Hence how we are paid is just as important AS why we are paid...it should be based on our value proposition and NOT on the level of FUM/FUA or risk products sold...
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written by Bob, January 07, 2010
Also the FPA have indicated their view (which will only apply to FPA members).What about the rest?
Does the public know exactly what Accountants do? I know some accountants that make more money from selling Agri products, Insurance and Investment and SMSF's,than from accountancy fees.
Yes we do debate the wrong stuff, for mine the only opinion that matters is my clients, after all they pay me.
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written by George Lawrence Chartered Accountant, January 07, 2010
Best regards
George Lawrence
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Our ratio of one adviser for every 100 clients ensures that we do not lose sight of what is important to us.
Our Value Proposition is very easy to understand, we operate a structured approch to grow our clients investments without undue risk on a Win Win basis.
We make sure every client is obtaining the maximum benefits from the system which includes restructuring mortgages, assistance in repaying mortgages, ensuring credit cards are cleared every month, growing superannuation via salary sacrifice even for our younger clients, providing appropriate Life TPD, Trauma and Income Protection cover with much of it funded via super, Estate Planning for all clients including wills, power of attorneys and guardianships. We also provide extensive accounting and taxation services plus legal services via a associated solicitor.
Flat fees are not appropriate because they DO NOT REWARD SUCCESS.
As our efforts provide our clients with more financial security by way of rising investments, then it is appropriate that we are rewarded with an increase in income. This is a WIN WIN situation.
Our clients have no problems with this concept as they see the alinement of their goal with our goal of achieving higher secure income.
If we lose any of their money then our income goes down and I call that that "shared pain". WE DONT LIKE LOSSES AND NEITHER DO OUR CLIENTS.
We place 40% of our clients funds in bank term deposits, and we hold a further 20% as an immediate cash reserve. We actively invest 40% of their funds into the market. This protects our capital base whilst at the same time our ASX trading provide solid acceptable returns to the portfolio.
For our clients the GFC was a non event as we recovered very quickly and moved back into profit within 9 months of the event. Our business is grown 30% over the last 12 months and we expect to double our business over the next 2 years.
We are unique and our style is very different from every other financial planner in Australia.
Due the lower ratio of adviser to clients we have the ability to talk to them on a regular basis. Most clients have some contact with us on a weekly basis and all clients have contact at least monthly.
We strongly believe that clients should have the right to turn off fees if they feel they are not being serviced by their financial adviser.
The real issue facing our profession is not fees, but the presentation of our services and why we should be paid at all........ A substantial part of our profession are just salesman focused on new business only and that is the problem.
Our focus is on "Service" and for both ourselves and our clients, fees are not an issue at all.
William Mills