The financial press continues to be dominated by discussion of the Ripoll Inquiry and the Cooper Review of Superannuation. The commentary tends to be negative about the whole financial planning industry, even though the poor practices are not representative of average behaviour.
The focus in recent weeks continues to be on fees, with vigorous debate on questions such as:
- Whether advice fees should be taxdeductible;
- Whether ongoing asset-based fees for advice are a desirable alternative to trail commission;
- Whether advice fees should be ongoing or limited to (say) two years; and
- Whether it is possible to achieve the Government’s desire for overall superannuation fees to be less than 1 per cent of an account balance each year.
For superannuation business, the draft IFSA Superannuation Charter has suggested that member advice fees be specifically agreed with members both in terms of their amount and form. For example, these could be paid either as a dollar amount or as a percentage of funds under management. They could be charged either to the superannuation account or separately to the member. It is also proposed that the amount of plan service fees for corporate plans be disclosed.
Current fee structures
Against this background, it is interesting to consider the range of fee structures that apply across the market and to speculate about how these might evolve in response to both regulatory changes and competitive forces. The range of different fee structures adopted by product providers is well known to most market practitioners. The most common ones are:
- For investment products, contribution fees to cover the cost of the initial advice are usually identified in their own right, with the ability to “dial them down” where the adviser agrees to a reduced fee or commission.
- Ongoing advice fees are usually identified in the same way, but some products still combine advice and administration fees, so it is difficult for the client to see what they are paying for each service.
- Under most investment platform and superannuation products, fund manager fees and other investment costs, such as custody, are identified separately from administration fees, although there are some exceptions.
- In most cases, fund manager rebates, either retained by the product provider or passed on to the dealer group, are disclosed separately, usually as a maximum amount. Although this is often inevitable given that rebates vary by dealer group, it adds complexity to product disclosure, which can be confusing for clients.
Similar structures apply for investment platform products, superannuation products and separately managed accounts (SMAs). Overall fee structures are often complex and, even though they are fully disclosed to the individual client in the Statement of Advice, they still lead to significant confusion. It seems likely that the current focus on fees and charges will force changes so that complexity is reduced and transparency improved.
trends in fee structures
As demand increases for more detailed information, not only on the levels of fees and charges but also the services they are designed to cover, some current pricing structures will inevitably need to be reviewed. Clearly much will depend on the outcome of the current industry reviews; but the new and emerging trends might include the following:
- A shift from percentage fees to dollar fees for some services, such as product administration;
- Further transparency around the overall advice fees and fund manager rebates paid to the adviser/dealer group;
- A shift away from overall administration fees based on funds under management to transaction-based fees. We have already seen this occur for direct share transactions and some SMA fees; and
- Lower base investment management fees and higher performance-based fees – with the performance period stretched to periods of three to five years.
Technology may also enable smarter ways to disclose fees (and other product descriptions) to clients. Short form product disclosure statements and incorporation by reference are increasingly being used (for example, Plum reduced the size of its product disclosure statement (PDS) from 80 pages to 30 pages by making use of incorporation by reference). However, a more radical development may be a personalised PDS that highlights:
- The specific product features the client has selected during the advice process;
- The specific fees charged under their individual plan; and
- Only a simple list of other features that they may wish to use in the future, possibly with web access for further details. So, for example, details of the chosen investment option or options could be included, with details of other investment options being available only via the web.
Procurement versus advice
For adviser-sold business, perhaps the most contentious issue is whether the fees or commission charged for procuring business should be differentiated from those charged for providing advice. This is the argument put forward by many in the not-for-profit superannuation fund sector, for example. The difficulty in this debate is how to define procurement as opposed to advice. In reality, when an adviser is discussing investment and protection strategies with their clients, it is clearly difficult to define the point at which the conversation switches from understanding the clients’ needs and agreeing the investment and protection strategies that should be put in place to meet those needs, to deciding the optimal product or products to execute the strategy.
In any event, many would argue that this process is not, in fact, “procurement”. In situations where the adviser receives remuneration from the product provider, either by way of salary or commission, it can be difficult to divide those amounts between the two activities. Ultimately, these definitional difficulties would become less important if fees were to be disclosed on a dollar basis, irrespective of the services they were covering.
A ban on commissions would clearly have a significant impact on some dealer groups and advisers. The speed of impact would depend, amongst other things, on whether there were grandfathering arrangements relating to existing business. However, in the long term, the impacts on advice may not be as great as some fear. Depending on the detailed rules regarding permitted fee structures and, in particular, whether ongoing fees related to funds under management are permitted, the consequences may include the following:
• For institutionally owned dealer groups, the institution may provide greater funding to support infrastructure, systems, processes and research, leaving advisers to set advice fees at levels required only to cover their own time costs in interviewing clients, preparing statutory documents and providing advice;
• Where necessary, processes to ensure regular contact with clients and updated advice will be strengthened to ensure that ongoing advice fees are supported by thorough and documented client reviews. This merely extends the current practice for the majority of advisers to the rest of the market;
• There may be some consolidation of dealer groups and independent advisers who would then be able to leverage the services provided by the larger group, thus reducing back office costs and, in turn, reducing pressure on client fees. This trend has been underway for some years but may accelerate in the new environment;
• More dealer groups may develop their own platform products, administered by the current major providers, as a means of generating platform fee revenue;
• There may be a trend towards more institutionally aligned advisers moving to a basis of providing products only from that institution. Fees would be charged for advice in the normal way but the adviser would make clear to their client that they can only offer the products of their aligned institution. Once again, this business model is common across the market today but it may become more common in a “no commission” world;
• Advisers servicing small to medium sized employers may begin to focus on providing comprehensive financial advice on a fee basis to the proprietors and senior managers of the company concerned. However, they may provide advice on establishing default superannuation arrangements for non-management employees, for a fee, to the employer rather than seeking to provide advice to each individual employee. This is likely to be the area of the market where overall adviser remuneration could reduce significantly.
Whilst the banning of commissions would undoubtedly result in significant industry upheaval, it seems unlikely that the long-term viability of sound financial advice groups will be compromised.
Changing fee structures can be a costly and time-consuming exercise. However, this is likely to become an area of increasing focus by consumer groups as average account balances (and the significance of fees) grow, driven in particular by the maturing of the superannuation system. Product providers will adapt their pricing models and may begin to leverage technology much more significantly to ensure that fees are more closely aligned to services, disclosure is robust and complexity of disclosure is replaced with transparency. Although the outcomes of the current reviews of superannuation and financial products and adviser services are as yet unknown, adviser groups are likely to be able to adapt to a “no commission” world, albeit with some major structural changes. Institutions would also need to adapt their business models – but that will need to be the subject of another article.