Kristen Paech reports that many of the hurdles to moving to fee-for-service are rooted in fear, but most can be overcome if there’s sufficient desire.
Adopting a new business model is not a decision that should be taken lightly. It involves hours of planning – including defining the new value proposition – and extensive business modelling to justify to shareholders within the business that the firm will be better off as a result of the change. The practice principals must be sure that the new structure will increase the profitability and long-term sustainability of the business, and fundamentally, that it makes sense for the client.
Often the biggest fear any business has when implementing a change is a fear of failure; fear that the business’s revenues will fall rather than rise, fear that clients will not be accepting of the change and will choose to take their business elsewhere, or fear that staff will not embrace the new work environment. In the financial planning industry, there is a growing appetite for change in the way advice models are structured, particularly from new entrants to the market.
Research conducted by Professional Planner and Core Data-brand management has revealed younger planners, and those that have been advising for less than five years, are more likely to consider moving from commission-based remuneration to a fee-for service structure than older and more experienced planners. As the industry matures and succession plans are put in place, this should translate to a gradual shift towards fee-based advice, as new entrants to the market determine the service they want to deliver to clients and how they will charge for that.
Of the respondents aged 40 and below, 44.2 per cent said they were “likely” or “very likely” to consider moving to fee-for-service, while 33.8 per cent said they were “unlikely” or “very unlikely”. The remainder (22.1 per cent) were “indifferent”. Conversely, in the 61 and above age group, only 21.9 per cent were likely or very likely to consider the transition, 53.2 per cent were unlikely or very unlikely, while 25 per cent were indifferent. The research, which surveyed 342 planners from across the country, also found a direct correlation between resistance to change and time spent in the industry. {sidebar id=19}
Exactly half of the planners who have spent less than five years in the industry were likely or very likely to move to a fee-for-service footing, compared to only 31.8 per cent of planners who have spent more than 10 years as planners. Interestingly, there was a vast difference between planners’ perceptions of the short- and long term future direction of the industry (see graph 1). While only 5.6 per cent believe that pure fee-for-service – defined as hourly rate or fixed fee only – is the way the industry is headed in the short term, more than half (52.9 per cent) believe it is the future direction of the industry in the long term.
Furthermore, although 68.7 per cent believe a “mix of upfront commission and ongoing trail” and “ongoing trail and/or management fee only” is the short-term outlook for the industry, only 44.4 per cent believe this to be the long-term outlook. But despite the budding following, there are some significant barriers holding back growth in fee-for-service, many of which are rooted in fear. When asked to identify what would prevent them from making the transition to fees, the top three concerns listed by respondents were, in order: cost/complexity, losing existing clients, and loss of income during the transition (see graph 2).
Nearly one quarter of respondents were concerned that it would be difficult to attract new clients under a fee-based model, and a minority – less than 10 per cent – either did not know where to start, or said their dealer group would not support the move. All of the dealer groups Professional Planner spoke to claim to offer assistance to planning firms within their network that wish to change their business model.
Axa Financial Planning and Charter Financial Planning offer a client value proposition (CVP) support program, which helps advisers establish an appropriate price for advice and review services which represents both value to the client, and worth to the business.
When asked what would motivate them to move to a fee-for-service structure, 43.9 per cent of planners said “self direction”, 36 per cent said “increased profitability” and 35.4 per cent answered “legislation mandating the change”. Paul Williams, national manager of Axa and Charter Financial Planning, says the financial benefits to practices which have undertaken the CVP program, which in many cases has included a transition to fee-for-service, have been huge. “Many in the industry are quite afraid of this transition [to fee-for-service],” he says.
“In our experience over the past 12 months, the average benefit to our practices who have undertaken the CVP program is a 16 per cent revenue increase, and an 18 per cent profitability increase. So we’re really positive about some of these changes where advisers are repositioning their offering to clients, many of whom traditionally have been purely commission-based.”
At Securitor, business development consultants help planners within the group to clearly articulate the value of the service they deliver to clients.
Neil Younger, head of Securitor, says the dealer group adopts the philosophy that how the advice is paid for – whether via product in the form of commission, or by invoice – is not such an issue, but there must be a correlation between the service delivered to clients and the remuneration that’s paid to the planner.
“Any change that involves either the price or the method of charging clients that comes into place necessitates some of the more difficult discussions with clients, because you have to restate the value piece,” he says.
“The work we do with [advisers] through programs such as Business Torque is to help them to clearly articulate the value of the service they deliver to their clients.”
Younger says the challenge with advice is that it is often infrequent, and intangible.
“When you put those two factors together, demonstrating the value over the short term is challenging because the value is demonstrated over the longer term,” he says.
“The work we do through Business Torque is to get them to translate that long-term intangible value into something more recognisable in the short term.”
Demonstrating the value of advice to the end consumer is a concept the planning industry has grappled with for many years.
According to Williams, effective communication is the key to a successful transition to fee-based advice.
“In terms of transitioning the client to a potentially new service and price, and even commission to fee-for-service, in our experience, we find that the ability to communicate this is usually the largest barrier,” he says.
“We help the principals and the advisers to build their frame of communication. We help them to establish how they can clearly articulate to the client what the benefits are for the advice they’re providing; what the price is, and then how the payment mechanism works.”
Younger says there are two components to demonstrating the value of advice: what is the service proposition that you deliver to clients; and what is the accrued value over time?
“[Advisers] need to be able to demonstrate that value on a case-by-case basis outside of the service proposition,” he says.
“Most planners focus on: what is my service proposition; how many times do I see my clients per year; how many times do I communicate; what type of information will I send [clients] electronically? That’s only one part of it; the rest is demonstrating value in all of those interactions and reminding clients of the value of the advice in the short term that’s captured in the long term.
“We help advisers with that messaging to create a true value proposition, and we help them to feel comfortable about how they set pricing appropriately around that. We don’t believe the solution for everybody is an hourly time charge in a fee-for-service sense, because there’s value demonstrated beyond how much physical time [advisers] provide to this.” MLC is one of the most vocal advocates of fee-for-service advice, with more than 50 per cent of its businesses now billing clients on this basis.
All Godfrey Pembroke practices transitioned to fee-for-advice on investment business for new clients from October 1, 2006, and a large number of Garvan Financial Planning, Apogee and MLC Financial Planning business have also converted.
Greg Miller, general manager, MLC Advice Solutions, agrees communication is vital, but says ensuring all the components of the business are ready to make the transition should be the first step for practices keen to pull the commission plug.
“There’s no point saying one day ‘I’m going to change the charging structure overnight’ without thinking about everything else that goes on in the business,” he explains.
“Ultimately it’s about the value proposition that you’re going to put on the table for your client, and what pricing is linked to the value proposition. That’s the heart of the transition to fee-for-advice.”
Miller says the foundations underlying the overarching goal to transition to fees might seem basic, but must be considered as part of the process. These include the client engagement process; whether the business is on track to deliver customers a good and similar experience every time they deal with the firm; what the business’s financials will look like now and in 10 years’ time; what the customer value proposition will be; what processes are needed to deliver the proposition; what people are needed, and how they need to be trained.
“The real issue here is you’re moving to the client paying for the advice and for the valuable service, not the product paying [for] it,” Miller says.
“So whilst some advisers might say ‘I do that with a client, I just choose to take my revenue in a different way’, when you go to a fee-for-advice model you’re explicit about saying ‘you’re paying me for advice and I’m not going to take anything out of the product’.
“Our view is [that] that changes the nature of the discussion; we think it’s a positive change, but it’s one that you need to think about having and being able to put that in place. Each year you need to be able to show the client what you’re getting paid and what you’re doing for them.”
The client engagement process will vary depending on the individual clients, and customer segments, as might the value proposition.
According to Younger, this could lead to a different charging structure for different customer segments, depending on the service being provided.
Practices that want to transition to fee-for-service should undertake a “segmentation analysis”, he says, to determine the advice needs of the various clients in the business.
“Some [clients] are more willing to pay for higher levels of advice than others, so you need to look at the existing financial arrangements that are employed in the practice to date,” he explains.
“You need to understand who gets what and for what, so what expectations have been created for those clients traditionally and whether they can be maintained in a new pricing structure or need to be adjusted.
“It’s quite a lengthy diagnostic process that needs to be undertaken around that segmentation piece. So first you redefine what the service is, then you determine what segments you currently have and how they fit into the new model, and then you look to manage through the discrepancies or those that suddenly don’t fit quite as easily as they did in the past.”
The client engagement process should also determine how the advisers will deal with clients in the first stages of the transition, and what conversations they need to have on an ongoing basis, Miller adds.
Following that, practice owners need to decide whether they will transition both new and existing clients to the new model, or keep some legacy clients on the book.
More than a third of respondents (35.4 per cent) to Professional Planner’s survey cited losing existing clients as one of the things that would stop them from moving to fee-for-service.
Younger says the majority of advisers choose to employ the new model across the whole business, which means accepting that not all clients will be willing to continue under the new structure.
“If [advisers] want to employ this new model, then they will grow using that new model, so for consistency purposes, if people aren’t going to fit that model, then they’re better off in some circumstances not retaining those clients, or introducing them to someone else that wants to continue to deliver the service that was delivered in the past,” he explains.
“That’s a challenge for some planning businesses to get their head around, that my business might be better by not continuing the journey with some clients. Our experience is most clients, when they understand what they get through the change, are pretty accepting of that, but there will always be some who aren’t.”
John Doyle, national sales manager at FSP, says planners should give themselves some “lead time” to condition their clients that there will be a change in the pricing model, so the clients have time to get their heads around it.
“You determine a program of advising clients that from a particular point in time – it might be a certain review date – the structure will change,” he says.
“It wouldn’t happen overnight. In our dealership it’s generally been phased in, so you may run with a commission/fee-basis for a period of time, until such time that you phase out the commission.”
Doyle says the new pricing structure must be “sold” to clients, and that in itself takes time.
“It’s another ‘sale’ that has to be made to sell to clients that they are no worse off, and perhaps they may be better off,” he says.
“What you find is that clients become quite comfortable on a certain model, whereas they don’t have to actually put their hand in their pocket to pay fees, or draw on their CMT [cash management trust] to pay fees, and they’re happy with the fees coming out of either the premium, in the event of a risk sale, or out of the investment funds, in the event of a wealth sale. It’s a decision they have to make as to whether or not they’re happy to perhaps write cheques for advice, when they previously didn’t have to, and some people may not like that.”
Education is also vital, Miller says, so that the adviser and staff inside the business are aware of the support processes required to contact clients, collect fees and hold one-on-one discussions with clients on an ongoing basis to agree on both fees and method of payment.
While there is a lot of time involved in setting the foundations for the change, Miller does not believe there are any large additional costs for the business when making the transition to fees.
“Most of the businesses already have large components of what’s required inside their business anyway; it’s more about how they streamline them from dealing with the client all the way through to the back office,” he says.
In fact, Miller says MLC has not seen upfront cost raised as an issue by practices transitioning to fee-for-advice, but rather the effect it will have on the business’s future cash flow and valuation.
“In relation to their cash flow, we’ve seen most advisers not go backwards at all in their cash flow, and most have grown,” he says.
“Part of the reason for that growth is the client straight away realises what the adviser is going to do, how the adviser is going to get paid and feels comfortable with that approach. Therefore they will pay the fee that’s appropriate for their own situation, and they’ll be quite happy to do so because they see the value, and they like the transparency of operating in that environment.”
He adds: “The other part is not just cash flow, but what does it do [to] the valuation of your business? We argue quite strongly that the value of any business is only based on the likelihood of the future returns of the business, and so if the client is paying the fee and therefore providing the revenue to your business, and not the product supplier, then you have absolute control over whether the revenue will continue in your business.
“The control and self-direction from the adviser means they have a greater say over their revenue in- flow because they’re charging the client directly, and they are not waiting to receive a commission from a product supplier who can change that at any point in time. Therefore, they are in control of revenue flows, and if you’re in control of your revenue flows you have a much greater chance of getting a higher business value over time.”
