Look – carefully – before you leap

Fee-for-service is fast becoming the new marketing weasel word in our industry. Similar to terms such as “holistic” and “wealth manager”, the majority of our industry product providers are working hard to spin the term to disguise their product flogging intentions.

Fee-for-service means different things to different people, but in the minds of most marketing departments within the industry’s fund managers and product manufacturers, its role is to differentiate. A new set of clothes for the old and very common practice of pricing services based upon the quantity of product sold.

Like most weasel words, the devil is in the detail.

Take the common scenario where an investor places a lump sum with a “fee-for-service” financial planner. Most fee-for-service planners claim that they rebate any commissions paid from product manufacturers, but then proceed to calculate their fee based upon the size of the assets being placed. The fact that the client pays directly to the planner rather than the planner being paid by the product/ fund manufacturer doesn’t alter the very basic fact that the price paid has been calculated NOT upon the service to be provided but the quantity of ASSETS to be managed.

How is that fee-for-service? Isn’t that just good old investment product-based pricing?

Say a client called Jim invests $300,000 with a so-called fee-for-service adviser. Say Jim is then charged a $3000 fee (1 per cent fee) each year for service. Say another client, called Neville, with the same planning firm, invests $400,000. Say Neville pays an annual service fee each year of $4000.

Jim calls the planning firm all the time. Neville never rings. Do you think the firm charges Jim more than Neville for its service? I doubt it.

Say Jim and Neville are both retirees and Neville puts another $400,000 into this portfolio three years after his initial investment.

Do you think Neville is actually getting another $4000 worth of extra services EVERY YEAR? I doubt it.

Do you think that Neville knows the discrepancy in his payments compared to Jim’s? I doubt it.

Do you think that Neville is subsidising Jim? You bet!

Take the scenario five years forward for both Jim and Neville. Both of their retirement strategies are pretty much bedded down for them by now. Do you think they are getting value by continuing to pay a fee-for-service charge of approximately $3000 and $8000 each, respectively (assuming funds remain constant for the benefit of this example)? I doubt it.

Say there is a third client, Ted, who has a real need for impartial financial advice but doesn’t have any money to invest immediately. Would most “fee-for- service” advisers work with Ted on an ongoing basis? I doubt it. (In fact, most would wonder how you would justify charging Ted an ongoing fee every year when there are no assets to invest.)

Most fee-for-service advisers are really still fee-for- product advisers.

How do you tell the difference?

If advisers are pricing their fees based upon the quantity of product, they should be called fee-forproduct. The distinction about paying the adviser directly or being paid by the product manufacturer misses the point. The point is, giving clients a transparent dollar price for the range of services that will be provided, NOT based primarily upon the quantity of product sold.

Don’t confuse this with how services are priced versus how fees are collected. That’s a topic for another article.

True fee-for-service advisers have well-developed pricing principles that cater for each of these, and many other, vastly different ranges of services required. But they are in the minority of self labelled fee-for-service advisers. We would predict that less than 20 per cent of fee-for-service advisers have the expertise to charge for their service NOT based upon the products provided but the jobs provided.

We should remind readers that we at Strategic Consulting & Training DO NOT advocate hourly rates, but job rates.

Our predictions for the out-workings of the current price debate:

1. True advisers will have to broaden their range of services beyond investments to make the necessary profits to fund their growth;

2. True advisers will generate their profits in future because of their customer management expertise in solving the complex financial issues being faced by their clients in their chosen select markets – it will be hard to make money being an “investment-only” planner;

3. The product institutions will perfect their “scalable advice” models, which will result in a solid product-based approach for the whole chain of investment demand – the new worker just out of school, through to the large-sum investor. The institutionally-owned, salary-based employee planners will compliantly and efficiently provide a product-based approach for those clients who don’t believe their financial issues are sufficiently complex to justify paying an advice retainer.

The term “fee-for-service” needs re-definition to bring greater transparency to consumers and to deliver “true” fee-for-service providers the differentiator they deserve for having the courage and processes to price beyond products.

Fee-for-service is fast becoming the new marketing weasel word in our industry. Similar to terms such as “holistic” and “wealth manager”, the majority of our industry product providers are working hard to spin the term to disguise their product flogging intentions.

Fee-for-service means different things to different people, but in the minds of most marketing departments within the industry’s fund managers and product manufacturers, its role is to differentiate. A new set of clothes for the old and very common practice of pricing services based upon the quantity of product sold.

Like most weasel words, the devil is in the detail.

Take the common scenario where an investor places a lump sum with a “fee-for-service” financial planner. Most fee-for-service planners claim that they rebate any commissions paid from product manufacturers, but then proceed to calculate their fee based upon the size of the assets being placed. The fact that the client pays directly to the planner rather than the planner being paid by the product/ fund manufacturer doesn’t alter the very basic fact that the price paid has been calculated NOT upon the service to be provided but the quantity of ASSETS to be managed.

How is that fee-for-service? Isn’t that just good old investment product-based pricing?

Say a client called Jim invests $300,000 with a so-called fee-for-service adviser. Say Jim is then charged a $3000 fee (1 per cent fee) each year for service. Say another client, called Neville, with the same planning firm, invests $400,000. Say Neville pays an annual service fee each year of $4000.

Jim calls the planning firm all the time. Neville never rings. Do you think the firm charges Jim more than Neville for its service? I doubt it.

Say Jim and Neville are both retirees and Neville puts another $400,000 into this portfolio three years after his initial investment.

Do you think Neville is actually getting another $4000 worth of extra services EVERY YEAR? I doubt it.

Do you think that Neville knows the discrepancy in his payments compared to Jim’s? I doubt it.

Do you think that Neville is subsidising Jim? You bet!

Take the scenario five years forward for both Jim and Neville. Both of their retirement strategies are pretty much bedded down for them by now. Do you think they are getting value by continuing to pay a fee-for-service charge of approximately $3000 and $8000 each, respectively (assuming funds remain constant for the benefit of this example)? I doubt it.

Say there is a third client, Ted, who has a real need for impartial financial advice but doesn’t have any money to invest immediately. Would most “fee-for- service” advisers work with Ted on an ongoing basis? I doubt it. (In fact, most would wonder how you would justify charging Ted an ongoing fee every year when there are no assets to invest.)

Most fee-for-service advisers are really still fee-for- product advisers.

How do you tell the difference?

If advisers are pricing their fees based upon the quantity of product, they should be called fee-forproduct. The distinction about paying the adviser directly or being paid by the product manufacturer misses the point. The point is, giving clients a transparent dollar price for the range of services that will be provided, NOT based primarily upon the quantity of product sold.

Don’t confuse this with how services are priced versus how fees are collected. That’s a topic for another article.

True fee-for-service advisers have well-developed pricing principles that cater for each of these, and many other, vastly different ranges of services required. But they are in the minority of self labelled fee-for-service advisers. We would predict that less than 20 per cent of fee-for-service advisers have the expertise to charge for their service NOT based upon the products provided but the jobs provided.

We should remind readers that we at Strategic Consulting & Training DO NOT advocate hourly rates, but job rates.

Our predictions for the out-workings of the current price debate:

1. True advisers will have to broaden their range of services beyond investments to make the necessary profits to fund their growth;

2. True advisers will generate their profits in future because of their customer management expertise in solving the complex financial issues being faced by their clients in their chosen select markets – it will be hard to make money being an “investment-only” planner;

3. The product institutions will perfect their “scalable advice” models, which will result in a solid product-based approach for the whole chain of investment demand – the new worker just out of school, through to the large-sum investor. The institutionally-owned, salary-based employee planners will compliantly and efficiently provide a product-based approach for those clients who don’t believe their financial issues are sufficiently complex to justify paying an advice retainer.

The term “fee-for-service” needs re-definition to bring greater transparency to consumers and to deliver “true” fee-for-service providers the differentiator they deserve for having the courage and processes to price beyond products.