Julie Kearns says restructuring a planning firm isn’t about extracting fees from clients, but unlocking the
value of a business.

We purchased our business from a financial planner who was remunerated entirely from commissions, and over the past two years we have introduced a fee-for-advice system to all new and existing clients. Overall, we have not had many objections, but we have had to turn business away. Our fee-forservice model is based on the value of the advice we provide; that is, the strategy itself. Products essentially come second. Unfortunately, the drawback is that you can’t help everyone, because not everyone is able to pay the fee. So we have turned business away, and our predecessor would have thought this action ludicrous. However, we work in a profession where a significant amount of work goes into client needs analysis, research, and consideration of alternatives – and that’s before any recommendations have been made and implemented. Each time an industry super fund ad runs and sends the message that commissions are not paid to advisers within their products, they fail to mention that this means the client receives no financial advice, either. Most of the advice we provide is based around improving the accumulated wealth for retirement, but it is advice they would never have received had they not paid for it.

One of the lessons we have learned from the fee-for-advice model is that this model will in the long term benefit the adviser more than any commission because of the following:

• If you have plans to grow your business, or you need a funding arrangement to introduce a successor, banks that lend against the cashflow of a financial planning practice are more interested in fee-for-service agreements than any commission.

• Your remuneration becomes less tied to market volatility. In our business the global financial crisis shaved approximately 30 per cent off our previous year’s income overnight. A fee agreement better insulates your business from such volatility.

• The expectation of services offered and delivered is understood more clearly by both the adviser and the client.

I think we do need to give better understanding to those financial planners that have only ever known a commission-based remuneration system, because when you move to fee for service, you are not just changing the way in which fees are extracted, you are changing the whole dynamics of your business. Even if it is for the best, is it necessary for these advisers to do it? Or should it be up to the financial planners coming through all those succession plans?

The transition to fee for service requires a complete overhaul of your business if you want to do it right and confidently from the beginning. By migrating to a fee-for-service regime we were forced to make many changes, which at times seemed arduous, and doubts did challenge whether it was worth it. For us, it has been worth it, because we are young and can see the financial planning industry will look significantly different in the next 20 years. But if we were within the last five years of planning before retirement, I could see that we would be less enthusiastic about such a change. To make the transition we had to:

• Evaluate what our client value proposition was and communicate it to our staff. It sounds easy, but this was perhaps the hardest step, because the old methods were so engrained. The idea of charging not only for plans, but also for implementation and other work such as Centrelink investigations, research et cetera was hard to define. But we did find we had been doing a lot of this work for free, or at reduced cost. We then all had to become comfortable with it. If you are not confident in communicating the fees associated with your client value proposition, you will lose business. Clients won’t pay for something they don’t understand.

• Review the products we were using and determine which product model best suited our fee structure. Some products limit the adviser review fee that can be deducted, which limits your ability to use these vehicles if the client is not paying directly.

• Following on from the last point, we had to chuck out the habit of using individually managed portfolios (IMPs). When we looked at how much IMPs cost to run, we decided that the extra expense our clients would need to wear could not guarantee the higher portfolio returns needed to offset the cost. So we had to move to a multimanager approach, based on risk profile. As I had come from a research background this was hard to introduce at first, and we did experiment with model portfolios, but most clients showed no real interest in these when they would need to pay more for the model portfolio. Again, they were interested in paying for strategy advice.

• Get used to shorter client meetings to avoid giving away intellectual property, and to better determine those clients that were interested in paying for the service.

• Convert the second financial planner role to a practice manager role in an effort to keep a better handle on the costs associated with providing advice and the marketing of the business. This meant the remaining financial planner was now free to see clients more often. This reduced the administration workload on this planner and got him in front of more opportunities. Not necessarily tied to a transition to fee for service, but it definitely smoothed the way!

It’s not an easy transition from commission to adviser-review fee. Our predecessor was not unreasonable with the commissions he charged, and our fee-for-service arrangement in most cases arrives at the same costing. So you make the change from commission not for the method of extracting fees, but to make your business more valuable in the long run. In the future, and even now, businesses will not be valued on “buyer of last resort” multiples, but by the number of fee agreements you have signed, the stage of life of your clients, and the simplicity of running your business through clear, documented means. If a commission-based business was up for sale I would want to see if any fee-for-service agreements exist, the condition of the client files, results of their last internal/external compliance audit and to extract from the staff further information on their processes before we even looked at any multiples. You have to know what you are buying.

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