The sorts of rorts and distortions that are possible under the commission system undermine the FPA’s Value of Advice campaign and attract the unwanted attentions of regulators and the Government.
When a planner is paid for the products they sell, or for the volume of funds under management or funds under advice, then it devalues the actual advice provided. It’s saying to the client, how much they pay depends on how much they have to invest, not how good or appropriate your advice is.Ã‚Â
The value of you experience, expertise, knowledge and insight does not change depending who walks through the door. Clients with more complex financial situations require more complex solutions, and remuneration structures can and should reflect that.
I’ve already argued that few structures can accommodate different levels of complexity and expertise; I am not arguing for a one-size-fits-all approach. But I am arguing that the same advice given to two different clients should not be valued differently if the only differentiating factor is how much money those clients end up investing.
Other occupations face similar structural issues. Take real estate agents. Their income is determined by the value of the properties they sell. But why should the agent who sells a small, two-bedroom unit in a difficult location be thought of as less skilled than the agent who sells the $10 million home on one of the best streets in the city?
But I’m certain financial planners are not keen to be lumped into the same group as real estate agents (with good reason, too). There’s an opportunity to put such comparisons down, once and for all.
If you’re a planner that already operates on a true fee basis, you should be screaming it from the rooftops. It’s a characteristic that sets you apart. Charging a fee does not automatically make your advice superior; that’s why other efforts to raise standards of education, technical expertise and other professional issues are part of the overall debate.
But the client knows what they’re paying for, and how much, and your business lives or dies – as it should – according to the quality of your advice and service, not (necessarily) on your ability to attract higher net worth clients.
If you’re operating on a percentage-of-FUM or percentage-of-FUA model, you’ve taken a big step in the right direction, you should be wary: you may need to get ready to go that final yard.
But if you still operate on a commission-only basis, then you should be afraid – very afraid. You run the risk of becoming, if you have not already become, a pariah in your own industry.
If (or when?) the Government acts to clean out the industry’s shonks and cowboys, it’s you they’ll be coming after. By cleaning out the lowest and most problematic levels of the business, you run a very real risk of being swept away with them.
However it shakes out, if there’s some agreement on whether it’s the value of advice that clients should be paying for or whether it should be set according the volume of funds that clients have accumulated or invested, then we can deal with the real job – the job of focusing on the issues that really matter, on the activities where planners offer genuine value, and on the issues that go towards building true public trust and establishing fair-dinkum professional status.
Because as things stand, the Storm situation has handed regulators, media and the public a very large stick with which to beat the financial planning industry over the head. It’s given those members of the public who don’t trust financial planners every reason to believe their views were justified. And it’s frightened off some potential new clients.
So as I said last week, don’t imagine for one moment that you’re somehow sheltered from this storm, because you’re not.
But you can choose to become part of the solution.
This is the last of four blogs by Simon Hoyle on why Storm proves that the commission system is fatally flawed.
* Will the commission system attract the unwanted attention of regulators, and does it undermine the industry’s “Value Of Advice” campaign? Click on the comment button below to join the debate and share your views.