What motivates a financial planner?

Last week in the mail I received a newsletter from a financial planner with whom I have had some regular dealings over the years. He is a qualified accountant, a CFP and a fine person. The purpose of the newsletter was to urge me not to panic in the face of market turmoil and to hold the line with my equity-based investments in my self-managed superannuation fund.

His newsletter quoted the authority and opinions of various fund managers and market “gurus” who were urging caution and warning against the desire to “cash-up” and cut my losses. These commentators felt sure that there had been an over-reaction in equity markets and that an upswing would surely follow (eventually).

My immediate reactions were a sense of reassurance, followed by cynicism. I know that this planner receives percentage-based remuneration on my growth investments and I’ve often contemplated just how that must colour the advice that he gives me in times of crisis.

So I decided to go to the trouble of writing to him in order to explain how I felt as a client and as a person who wants to trust him completely to act and advise me in my interests.

Here’s a slightly edited version of what I said:

“Many thanks for your reassuring newsletter concerning global markets.

This unfortunate and worrying situation gives me the opportunity to correspond with you about the work I’m doing in financial services reform.

As you know, I’m a strong supporter of fees for financial planners that are not locked into market movements. That is, flat fees, fixed fees, retainers or even hourly rates (your choice). The main point is that the fee scale should not be related to the sale of a product or the accumulation of funds under management, which commissions and percentage-based asset fees surely are.

There are both ethical and commercial reasons for my position on this. Even if you’re not completely convinced by the ethi- cal reason, please consider the commercial one. Their acceptance is inevitable if the financial planning industry is ever going to transition into a true profession. Indeed, it’s encouraging that so many industry leaders acknowledge this to be true (at least privately).

The ethical reason

The ethical reason is that accountants (being professionals) should not act with conflicts of interest, which they are quite clearly doing by receiving commissions and/ or percentage-based asset fees. This is fun- damental to our Code of Ethics (APES110) and is reflected in the proposed financial planning standard APES230. In the end, people won’t trust you (not completely) if you act with a conflict, and neither they should (because you’re only human).

Therefore, the reassuring message in your newsletter exhorting me to hold my nerve (not cash out) is a highly conflicted message. Of course, I would expect a fund manager to say that, because he’s selling a product; but I would expect my professional adviser to say it without the suspicion that his opinion is coloured by the finan- cial outcome for him.

It may well be great advice to hold my nerve, but can I trust a person who is telling me that, if that person’s commercial interests lie in doing so? Clearly not, and yet this newsletter implies that I should. What a great pity that well-qualified people of integrity (like many financial planners) should place themselves in a position where the public doesn’t (or shouldn’t) trust them.

That’s the thinking behind the timeless ethical principles concerning conflict avoidance by professional people (doctors, lawyers, accountants and even financial planners) and it’s why I’m strongly supporting the passage of the proposed standard APES230. And I’m hoping that if the accounting profession adopts the new standard, the rest of the industry will be forced to follow.

If they don’t follow, then they’ll be perceived as second-rank financial planners and the public will be quite justified in not trusting the independence of their advice.

The commercial reason

And then there is the commercial reason for getting rid of remuneration models that are locked into products and funds under management.

In the current market conditions, the income of a financial planner who is on a percentage-based remuneration model suf- fers badly, mostly through no fault of his own. So his fee income drops or (at best) flat-lines, just when his clients need him most to advise them dispassionately and independently.

How much better would it be for you as a person running a business if your income were to be predictable and even grow- ing in times of crisis? That is exactly what happened to flat-fee advisers during the last big correction, whilst their colleagues on

percentages suffered horribly and have continued to do so ever since.

THE SOLUTION

Therefore, I would urge you to think about transitioning to a true fee for service. It is both ethical and commercially sound. In fact, it’s a “no brainer”, which is a terrible cliché, but utterly appropriate in the circumstances.

As for the response that clients won’t pay a true fee for service, could that be because a valuable service is not being provided in the first place and that advisers are getting something for nothing (or at least a lot more than they deserve for what they do)? Those days are coming to a close.

The professional and commercial opportunities to benefit from enthusiastic embrace of true reform are immense, especially for well-qualified people like yourself whose cultural background lies in consult- ing, not product selling.”

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