There are ways to overcome a client’s reluctance to pay for your services, as Kristen Paech reports.
Have you ever asked your mates at a BBQ whether any adviser is being paid for the management of their superannuation fund? Probably not, but if you did, it might provide some insight into the current state of financial advice.
Brett Walker, director of FSI Consulting, has undertaken this little exercise before.
“People generally don’t know [the answer] and are sometimes quite surprised to know that someone is getting remunerated,” he says.
“I’m not saying that’s the end of the world, but until people are able to make an objective assessment of that, maybe we’re kidding ourselves about selling the value of advice.”
Walker’s findings prompted him to set up ValueCheck, an independent benchmarking service for consumers interested in better understanding what they are being asked to pay for advice.
‘Planners are constantly fighting an uphill battle to prove their mettle to the wider population’
In a nutshell, it’s a Statement of Advice (SOA) review service. People send him a copy of their SOA, pay him $275, and he reviews it and sends back a report detailing the services and costs, and provides a benchmark for them to compare it against.
In a perfect world, such a service would not be necessary. But the world of financial planning is far from perfect.
Planners are constantly fighting an uphill battle to prove their mettle to the incredulous wider population, the majority of which still fails to seek financial advice. Of the 16,000-odd planners operating in Australia, only a minority are sanctioned by the Australian Securities and Investments Commission (ASIC) for wrongdoing; however this – and the collapse of the companies they recommended to investors – is what makes the headlines. The conduct of a few is tainting the reputation of an entire industry.
It is not those that seek financial advice that need to be convinced of the merit in doing so.
A study by the Financial Planning Association (FPA) last year revealed 90 per cent of people who have used a financial planner have benefited from the experience, reporting greater peace of mind (66 per cent) and that they were looking forward to the prospect of a more comfortable retirement (62 per cent).
Furthermore, most advisers claim their clients don’t ask them to justify the fee they are charging, provided the pricing model and service is explained upfront.
The trouble is those people seeking advice represent only a handful of the Australian population.
“As a rule, once people are in the system and are using advice, they don’t seem to have a problem,” says Michael Rice, principal of Rice Warner Actuaries.
“The real issue is that the profession has a problem convincing the masses that advice is worthwhile. The stigma of life insurance from the past, where there were high upfront commissions and people who were basically product floggers; the industry movement, which tends to attack the advisers rather than the retail funds themselves; and the occasional bad news, for example those who were put into Westpoint and lost all their money; these things all taint the industry.”
So how can advisers explain the value proposition around financial advice to the sceptics and gain the credibility the industry so desperately requires?
The focus must shift from products to strategy. John Prowse, managing director of Pinnacle Financial Services Academy, says the problem with commissions is not a potential bias towards one product over another – it’s the fact that no product equals no commission.
Advisers must hone their focus on the areas where they can add most value for consumers: long term asset allocation, maximising superannuation savings and exploiting legislation to an individual’s advantage.
Grant Howe, managing director of Retireinvest Burnie and Devonport, says advisers must be able to demonstrate value on an ongoing basis by being true to their word and delivering the service they say they are going to.
“We always make our clients aware that it’s not just investment performance, it’s the entire relationship that counts,” he says.
“We’re not just investment advisers, we consider ourselves to be financial planners and we provide a holistic service to the client that’s suitable for their situation, so it’s not difficult for us to demonstrate value.”
Geoff Rogers, general manager of NAB Financial Planning, says the value becomes evident in the way the advice is dished out.
“It’s pretty easy to demonstrate the value of advice if you’re a good planner,” Rogers says.
“It’s all in the questioning, process and quality of advice that the client receives initially.”
Advisers must also stress the customer benefits of seeking advice on an ongoing basis. In recent years, innovation has instead focussed on adviser efficiency and platforms, which is largely a result of technological advancements.
Research carried out by Rice Warner on behalf of the FPA recently revealed the rewards to consumers from seeking advice far outweigh the costs of that advice.
The research, Value of Advice, examined eight case studies and found an aggregate of $1.7 million in financial value was unlocked by obtaining and acting on financial advice.
The FPA commissioned the actuarial firm to review the value of both obtaining financial advice and acting on recommendations from a financial planner. Rice Warner also reviewed the benefits of obtaining limited or single issue advice.
The cost of seeking advice ranged from $250 to $500 for basic advice, including budgets and debt repayment, and from $1500 to $20,000 for a full-service plan, including annual reviews, and providing services such as consolidation of superannuation accounts, investments, transition to retirement, life insurance and estate planning.
According to the FPA case studies, a young family building wealth paid less than $50,000 for financial advice and gained more than $300,000 in value, while a wealthier family in the accumulation phase paid approximately the same amount for advice and realised about $650,000 in value.
In quantifying the value of the advice, Rice Warner used a framework which defines the value created as the present value of the total increase in wealth over the client’s planning horizon.
The planning horizons ranged from four years to 30 years, and varied depending on the goals of the individual or family seeking the advice and the time horizon appropriate to achieving those goals.
At the launch of the research, FPA chief executive Jo-Anne Bloch said the components of advice which generated the most value for clients included financial education, maximising government support, budgeting, goal setting, life insurance, tax management, compounding returns and cash flow management.
Non-financial impacts such as avoidance of future costs, reduction of lifestyle instability and enhanced life opportunities, were also highly valued.
The research found limited advice adds lower absolute value than comprehensive holistic advice, yet provides good value for the time involved and the cost.
However it also highlighted the ineffectiveness of advice that is not reviewed on a regular basis.
“People will budget if [the advice] is reviewed annually, but if no one is there to review it they’ll probably lapse,” Rice says.
“It’s a bit like a personal trainer trying to get you to keep fit; if they pound on your door at 5am and get you to the beach you’ll go, but if they rely on you to go on your own, most people will sleep in. If people had regular or annual reviews of their advice – in the same way that they use accountants to get their tax done – it would be beneficial.”
Referrals are one indication of the extent to which advisers are valued, and most firms ask clients to complete satisfaction surveys, but planners say it is difficult to truly measure the ‘value’ of advice.
“Performance fees are normally related to investment returns, and that’s easier to monitor and manage, but as far as the quantitative value add for clients – whether that be trust, security or independence – I’m not sure how you put a measure on that,” says David Price, financial planner at Strategy First Financial Planning.
Virginia Dowd, managing director of Money Solutions, says the challenge for the industry is to align its business models to meet the needs of all consumers.
The advisory market has thus far struggled to capture the lower end of the market, producing offerings that are out of the financial reach of the average Australian.
“Changes in policy regarding superannuation are forcing the decision-making around retirement planning on people at a younger age, when they don’t have such high assets to participate in the advice process,” Dowd says.
“We should be looking at our business models to see how we can deliver lower-cost, affordable advice for everyone, not just high-net-worth individuals.”
Rice Warner’s research also examined whether advice can be delivered cost-effectively.
Rice says the cost of delivering advice is high due to the strict regulatory regime, the costs of running a business (including professional indemnity insurance), the high infrastructure costs of platforms, and the salaries of competent, experienced financial planners.
The research suggested there is a strong argument that the personal advice needs of the mass market are not being met because dealer groups are constrained, mainly by legislation, from developing more cost-effective operational models.
“A fear of ASIC has driven dealer group behaviour and while this protects people against fringe investments like Westpoint, the problem is it does add considerably to the total cost of delivering advice,” Rice says.
But Bloch believes people will be happy to pay for good advice from a competent planner.
“It’s the unnecessary costs that don’t give them greater protection or help them that they might question,” she says.
“There are certainly some costs that are valuable but there are others that have swung the pendulum too far in the other direction.”
Rice says a key question to resolve is whether an economically viable industry can be formed around providing personal advice to all those who need it.
“It seems counterintuitive to say: ‘I’m here to save you money, give me $2000’,” he says.
“The way our industry is structured with high compliance costs, is it possible to do a plan for under $1000 per year, and if so, would people pay that given it only costs $150 per year to get your tax done? There will probably be some intermediate ways of delivering not all of the advice but a cut-down version for cheaper.”
Initiatives in this area are already emerging. Recognising that a Rolls-Royce service is not suitable for most people, some of Australia’s largest banks are test-driving Holden Barinas.
In January, Westpac rolled out its $199 Super Health Check, a low cost advice solution designed to help those with investable assets of between $5000 and $100,000 to better understand and organise their super and retirement needs.
Just weeks earlier, BankWest announced plans to launch a new financial planning capability for retail customers via its branches from March 1.
The suite of investment and insurance products will be tailored to those with “simple advice requirements”, according to Ian Corfield, BankWest’s retail chief executive.
However Dowd argues more widespread change is needed.
For consumers to value advice, the industry must demonstrate that for every fee paid, the investor will make a return on that fee, she says.
The advisers who focus on the strategic aspects – those that are often unrelated to a product sale – are those who will successfully convince clients of their worth.
“We believe a fee-for-service model is the way to give value to the consumers,” Dowd says.
“We’re starting to focus our service delivery model on the consumer experience and what they’re gaining from the process, and not so much rewarding them [advisers] for the product they’re selling.”
For Money Solutions, shifting the focus to the consumer has meant developing IT systems and back-end processes that enable its advisers to increase productivity and efficiencies without compromising the quality of the financial plan.
In other words, there is less emphasis on the plan and more emphasis on delivering the customer experience.
“We’ve built a model that gives access to all Australians and we’ve been able to build scale and leverage by developing and delivering services through accessibility, by the phone and web, and unbundling the advice process so people are getting exactly what they’ve paid for,” Dowd says.
A growing number of advisers are launching successful fee-for-service models from scratch.
Strategy First has been up and running for two and a half years.
The business charges a combination of an hourly fee and a fixed agreed fee, and does not take a fee based on a percentage of assets. It also rebates brokerages and commissions on insurance products.
Price agrees there are hurdles for planners wanting to make the transition to a fee model, which Strategy First did not have to face.
But it might be worth the hassle; in his eyes the fee model his business has adopted creates a greater level of trust between client and adviser.
“It’s transparent and easy to understand and it strengthens the relationship,” Price says.
“[Clients] believe I’m more aligned with their needs as opposed to making decisions that are better for me financially.”
Hurdles include licensing restrictions, legacy issues and arguably the largest obstacle for both planner and client – the cultural change.
Shayne Dumbrell, authorised representative of The Salisbury Group and financial planner at Financial Fundamentals, sees this as the biggest sticking point.
“So many people have spoken about [the move to fee-for-service] but I don’t feel it’s a straight-forward, simple thing to do when the whole industry is set up around being paid by the institutions,” he says.
“I see it as a large cultural change and I don’t see any clear roadmaps.”
Dumbrell makes a valid point. When dealing with legacy clients, it’s not always easy to unwind all of the existing arrangements, particularly if the client doesn’t see the need for change.
But if there was a comprehensive roadmap showing planners how to move from entry fees and trailing commissions to fees, would he be prepared to make the transition?
“I would look at it but while the fees and commissions are there it’s just adding a level of complexity and I only see people around the industry calling for [the change],” Dumbrell says.
“I see the mechanism as being the issue – it’s the same fee, it’s just a method of payment. I would think that [a move to fee-for-service] would lead to having more people involved in following up fees and I can see that adding cost to my business.”
The issue of fees and commissions is a thorny one and evokes strong emotions and opinions from all corners of the financial planning sector.
Peter O’Toole, authorised representative of Godfrey Pembroke – which moved to a fee-for-service only model on investment advice for all new clients from October 1, 2006 – says he saw some resistance from clients when the transition to fees began in the early ’90s.
Godfrey Pembroke charges a fixed dollar fee for the initial advice, and an asset-based fee for ongoing services. The asset-based fee is a percentage of the portfolio, or a mix of flat dollar fees and a percentage of the portfolio fee, depending on the service level.
“There’s natural inertia for change, for something that’s working for [advisers] now and is working for clients as well,” O’Toole says.
“Sometimes clients say if it’s costing the same they don’t want to change. It takes a bit of time as you make the change with existing clients, which we have done, but we still had a few who didn’t want to change and didn’t see any reason to change.”
Proponents of the status quo argue “if it ain’t broke, don’t fix it”. Indeed this is the viewpoint of Noel Whittaker, executive director of Whittaker McNaught.
“People like their fees to come out of their investments, so I think the system we have now is a pretty good one,” he told the FPA conference in November.
“The image problem is in the eyes of the press and many members of the FPA.”
But the fact that 72 per cent of Australians have no access to a financial adviser (according to a survey by BankWest in September last year) would appear to indicate that the perception problem goes beyond the media and the growing faction of fee-based advisers.
There is a real need for a fundamental re-think of the means by which advice is provided if the industry wants to improve professionalism, transparency and disclosure, and make advice more affordable.
O’Toole believes the “fees and commissions” debate is somewhat of a distraction.
“I know of plenty of good financial planners who work on a commission basis,” he says.
“The problem with commission is it can be more easily misused than fees but I’ve seen plenty of bad fee-based advice over the years as well. The issue is more to do with transparency and simplicity for clients.”
So how can advisers improve simplicity? The FPA has made giant leaps in this direction, publishing a dramatically thinner simplified Statement of Advice (SOA) in November that is just eight pages long.
The FPA will be consumer-testing the SOA and looking for widespread industry support and support from ASIC.
In the UK, the financial planning industry is grappling with similar issues and has taken a bold stance in a bid to simplify the advisory process and raise standards of professionalism.
As part of its retail distribution review set up in 2006 to look at problems in the market for retail investment products, the Financial Services Authority (FSA) has proposed dividing the advisory market in two.
Under the two-tier model of “professional financial planning and advisory services” and “primary advice”, advice would be segmented according to the services supplied.
Dan Waters, FSA director of retail policy, said the graded segmentation would include fully-fledged financial planners offering complex portfolio advice, typically to the higher end of the market, and advisers operating at a more transactional level for consumers who have more focussed and possibly less comprehensive portfolio requirements.
After a lengthy consultation period, an interim paper is due to be published in April, with full implementation plans in October.
The Australian government has toyed with similar ideas. Last year, a proposal was touted that would allow product providers to distribute products without advice, on the basis that they were only giving advice on the products they manufacture.
The FPA is making a concerted effort to raise the bar of professionalism, conduct and accountability among financial planners with the introduction of a three-pronged professionalism framework last November.
The association has raised its entry, education and experience requirements as it endeavours to raise consumer confidence.
O’Toole believes advisers will become more valued as the industry matures and evolves and some of the creases around the current structure of the business are ironed out.
“I have been working in financial planning for more than 26 years and if you look at the progression of the industry over that period it has improved enormously,” says O’Toole.
“That trend is accelerating [but] you can’t bring about massive change in a short period of time. There are more advisers operating on a fee basis that aren’t tied to particular products, but it needs more time, and I don’t think [the industry] can change faster than it has been.”
HOW PLANNERS CAN PROVE THEIR WORTH
Planner checklist
Full disclosure – the planner must thoroughly explain to the client up front the service they will be receiving and the fee basis on which the advice will be provided
Strategy, not products – the focus should be on the value added through the strategic aspects of the plan, rather than product recommendation
Delivery of service – the planner must deliver on an ongoing basis the service that they say they will deliver in the initial interview phase
Client control – clients must retain control over how they pay for advice and the right to stop paying for that advice if they don’t believe they’re getting value from it
Quality – the quality and appropriateness of advice are evident in the tax savings for the client, investment performance, and the overall impact the implementation of the financial plan has on the client’s financial situation
Monitoring and reviews – monitoring of the investment performance and regular reviews of the initial advice give clients peace of mind that the advice continues to be relevant, or will be adapted if necessary
