In the first of a three-part series on future-proofing your business, Errol Woodbury and John Burton discussed transitioning to fee for service. Simon Hoyle reports
Errol Woodbury says the key to future- proofing a financial planning business is to become a price-maker, rather than being a price-taker, dependant on what third parties deign to pay a planner for his or her services.
Woodbury, the founder and principal adviser for Woodbury Financial Services, says the only way a planning firm can guarantee control of its own destiny it to be a price-maker – and that means charging fees for the services and advice it provides.
Woodbury says there’s a very significant difference “between being a price-maker and a price-taker”, and the impact that has on a planning business.
“A price-taker is somebody that just lets the product provider dictate how and why they get paid,” he says.
“In some cases it can be too high; in some cases it may not be enough – too high in terms of the advice and the service packages that they’re delivering to the client. But in some cases, I’ve seen a lot of advisers over my years where they’re not getting paid enough as a commission. Because, being a price-taker, it’s being dictated by a product provider.
“We’d rather be a price-maker, and that is, that we can come in and dictate, if you like, our value proposition, our service, and the fee to the client; and let’s create that fee based around value and based around the time and effort and the value- add that we’re providing for that client. So [we’re a] price-maker, as opposed to price-taker.”
Woodbury says a fee is “transparent, the client knows exactly what it is, it’s not hidden or complex, it’s not conflicted in any way”.
“It is about having an agreement with a client that states exactly how much the client will pay for a period of time, for a given range of services,” he says.
“It’s purely and simply a fee that the client can fully understand.”
John Burton, practice development manager for MLC Advice Solutions, says legislation has existed for some time setting out how financial planners must disclose to clients what they are paid, but there “have been plenty of ways to, I guess, cloud the issue from time to time when selling to clients”.
“And so we often hear some stories where the product provider has actually remunerated me to look after you as the client, rather than it being a clear-cut agreement between the client and the adviser for services and advice that they’ve received,” Burton says.
Woodbury says the worst reason to transition a financial planning business to fees is because the business is forced to by legislation or by the requirements of a professional code of conduct.
He says the best reason to do it is because it’s ultimately better for all stakeholders – owners, employees and clients.
“We just felt it was a more professional way to go. And as a business owner, I felt that it was also good for the business: I had more control and certainty about what I was getting paid. I could ensure that my costs were covered, and I could ensure that there was profitability built into my fee. No surprises. So I could ensure that, as a business and as an adviser, that we were getting paid exactly for what we felt we needed to in order to meet our business goals and objectives.
“Our business growth has continued in good years and not so good years. I mean, even the last couple of years, as a result of the financial crisis, our business growth was still in excess of 30 per cent. And I’m not saying that to brag. I’m simply saying that it’s great to be starting to see the rewards of this transition. So from a business perspective, there’s no question it’s a sound move.”
Woodbury says a broader benefit of more planning businesses moving to fee for service is that it will improve the industry’s standing and strengthen its claims to professionalism. “When you sort of read in the paper and hear all the things that are taking place, there’s still remnants, or there’s still evidence, that the industry still has a bit of sales culture. And I don’t think the commission helps in that perspective. And I’m not saying people are unethical. [I want to] make it quite clear … I’m not talking about if you take commission that you’re unethical or you’re not doing the right thing by the client, or you’re not professional, or any of those sorts of things. I’m simply saying, like it or not, the consumers are not happy about it, and they’re wanting to see a change. They’re wanting to see us move to a profession, which would therefore mean we need to price as a professional would, also.”
Burton says the external environment is put- ting pressure on financial planning firms to rethink their client relationships, and how they charge for services and advice.
“We’ve got an inquiry into our industry [Ripoll], we’ve got a couple of reviews in super [Cooper] and tax [Henry],” he says.
“So there’s a fair bit of focus on how we’re remunerated at the moment. So that’s certainly playing a part. And people are wanting to know what the next steps are, or how to actually start to begin that journey.
“Control is certainly a huge [reason], I think. Now, we’ve seen third party product providers obviously dictating what advisers are being paid. And I think advisers such as Errol have wanted to make sure that they’re in control of what they receive as remuneration. I think it’s far more professional. When you do charge a fee, you then have a responsibility to make sure that you actually deliver to the client, and I think that’s developing advisers into delivering better advice, and ultimately that will drive a better relationship with their clients.”
Nevertheless, there remain some hurdles – some practical, some mental – to overcome at the outset. “Whether you’re actually remunerated by commission at the moment or fees, everybody in our industry has to make sure that they’re actually delivering value,” Burton says.
“And if there’s any doubts around the value that you are delivering, then that will come across in your confidence when you’re dealing with your client, in the belief in your
fee, in the belief in your value. So whether that comes across in tone or body language, or anything like that, that’s when you might start to get some pushback from your client. So that value, and value for money, is absolutely the key, I think.
“It isn’t too difficult to start to change. Most people think that they have to actually increase their fee when they actually start to move to a fee for service. I don’t believe that’s the case. Even if you’re just actually going to charge the same fee that you have been receiving in commission, then that makes it an easy conversation for a client, and enables you to start almost immediately.
“If you’re delivering value to your clients, whether you’re commission or fee, then clients will be happy to pay. So I think that’s the absolute key. If you can overcome that belief in yourself that you’re delivering long- term value to your client, they will happily pay you a fee.”
Burton says that once the mental hurdles are overcome, there’s actually a fairly well-trodden path that businesses can follow.
“The first step is for that business to absolutely understand how they deliver value at the moment,” he says.
“So often it can be a full review of their client experience, their end-to- end client engagement process, how well they actually deliver as a business, the value that they’ve actually put on the table as their proposition.
“And often a good way to start to understand that is by getting the business to do a client survey, whether it’s your own survey or one of the providers that are out there. But to get good, honest feedback about where you’re actually adding value to your clients as a business, I think, is a brilliant starting point.
“I’ve tended to then run a value proposition workshop – so, to actually dig into making sure we’re clear about the proposition that you’re bringing to clients – and then you’ve got your business set up to make sure that they actually deliver to that value proposition. And that’s, I think, a crucial first step. There’s no point in going just to a fee for service or ad- vice, if you’re unclear about the value that you’re going to actually deliver to your clients.
“From that perspective, we then need to get into the pricing. It’s important that people actually do their homework around their business; so to understand costs, to understand what sort of profit margin they’re trying to achieve, to make sure that they’ve looked at some different pricing models that might actually work for them, and then, it’s then a case of planning the implementation of that and executing it.”
Woodbury tackled the transition by setting up what amounted to a new business – “NewCo” – for new clients, all of whom paid a fee for the services they received, from day one. Existing clients remained in “OldCo” and were moved onto a fee-paying footing over time.
“We created a business plan looking at where we wanted to be in the next one, three, five, seven, ten years, really,” he says.
“We put some of the clients in our client base in OldCo, because they represented the past. But we still thought we would come back to that. So initially we started with NewCo and we thought, well, what’s the value proposition for NewCo, what are the types of clients we want to go after? We looked at pricing those services, and then we went out marketing to those types of clients. So that was easily done. Any new clients, line in the sand, they got the NewCo value proposition, the NewCo pricing, which was fee for advice.
“The challenge is OldCo, the challenge is the existing client base, and that’s where I’m talking about this ‘journey’. It doesn’t happen overnight, as an ad would say, but it does happen. And we just took time. It’s part of our business plan that we just sat down each and every year at an annual review, assuming that
[Professional Planner readers] are doing annual reviews, and I imagine most advisers would be, even to pick up commissions. We would sit down and simply say to some existing clients, we talked about this new proposition, this new way of doing planning, that we’ve changed our proposition, we’ve changed our pricing; talked about what they were currently getting, what they were currently paying, and then converted them over. So we tried to convert existing clients.”
Woodbury says there was no fixed timetable, but there was definitely a plan for how to get as many existing clients as possible onto the new footing. And those that simply would not budge were moved along to another planning practice.
Inherent in the way Woodbury’s, and firms like it, charge is that there’s no such thing as a one-size-fits-all fee. Every client pays a fee based on the complexity of the issues that need to be addressed, the range of services they will need, and how long it’s likely to take to pull it all together. In theory, it means every client could pay a slightly different fee.
Woodbury is adamant that it’s no-one’s business except the business owners’ how much a firm charges for its services – and that includes how much profit margin is built into the fee.
“I don’t think that anybody, government or an industry body, or anyone for that matter, should be dictating how much we charge,” he says.
“My view is that [they should] let the individual practices work it out.
“This is the big one, this is why I’m a big advocate of fee for advice, because my fear isn’t so much that advisers are overcompensated by getting commission; my fear is that maybe a lot of them are out there doing a pretty good job, a very professional job and they’re not getting paid enough. And it devalues what we do as a profession, really.
“So the fee-for-advice model is that you build in your profit, build in your PI [professional indemnity], build in the value-that-you-provide factor – that’s what we call it, the value in dealing with us; there’s a factor that’s built into that, because we’re quite confident and we’ve been able to demonstrate value over many years; we’re quite confident we can add value for clients.
Burton says that having an individual practice set its own fees will not diminish its ability to compete. What will affect its competitiveness, however, is whether it can first articulate and then deliver on a service proposition.
“I think it’s about being absolutely crystal clear about what clients are getting for their money, and if you can be absolutely crystal clear and you can back it up by delivering some high quality advice and service, you won’t have a problem,” he says.
“When you’re communicating it to clients, I think honesty is probably the best policy; and if you’ve been delivering some value for money, even if you’re working on a commission basis, then it shouldn’t be too hard to actually change to a fee, and it’s a pretty clear conversation: ‘Look, I’m wanting to change the relationship that we have, in terms of moving away from being remunerated by third party providers, to having a relationship that’s a commercial relationship with you; I’m going to provide you with high quality advice and service and I’d like that remuneration to come back to me in the form of a fee.’
“And I think for the most part, clients will appreciate your honesty and appreciate that – I think they’d rather have that relationship. It’s far more professional from their perspective.”
An argument routinely trotted out in opposition to a fee-based approach to planning is that clients with relatively modest financial resources can’t afford to pay a fee. They won’t accept a change in how they pay for advice; nor will new clients in a similar financial position seek out planning services. Burton doesn’t accept either argument.
“If a client has been paying even $50 in com- mission over the year, it’s been coming from their product,” he says. “[If ] I was the adviser, and I wanted to keep the same revenue that I’ve always earned, and that client came in, and I said, ‘Look, I’m moving to a fee basis; I’m going to charge you the same as what’s been coming out of your ac- count, which is $50.’ If they’ve been aware of that, then I don’t think there’s any issues there at all.
“Certainly from our work in practice development, I don’t think there’s any restrictions around attracting new clients. I think that’s more a function of business and marketing plans.
“And, in fact, the number of advisers…who have moved to a far more fee basis…it’s no coincidence that those businesses are actually growing quicker than the businesses that are purely com- mission. They tend to attract more clients because of that.”
Woodbury says simple services can be delivered, profitably, to clients with simple needs.
“Some clients are not complex, so therefore the costs are not going to be necessarily as great; other clients are, take a lot of time, ring you up once a week, or [there’s] a lot of complexity in your advice – once you know that, you can work out with an Excel spreadsheet how you calculate a [fee].
“I want to make it clear, too, to those that are pushing the fee-for-service basis, but want it to go down the time basis, that it’s not about time. Time’s part of it, but it’s a combination of time, value, costs, and profitability. All that needs to be built into the model.
“And look, let’s face it, psychologically, people will only pay when they think they’re getting value for money. You don’t need a BMW to drive across Sydney; you can certainly do it with a Nissan Micra, but people go and still buy BMWs and Mercedes Benzes, don’t they? They buy it not to drive across the city; they buy it for a whole lot of different reasons. And I think we’re talking about a similar thing here; in terms of if it’s valuable, and you can communicate that clearly to clients, then people will buy that price.”
Burton says this approach eliminates cross- subsidies within a planning business, too. The nice, fat profits from high-net-worth clients, or clients with complex needs, are not eaten up by the time and effort it takes to pay attention to less profit- able, or unprofitable, clients. Every client pays for what they get; the fee they pay has a profit margin built in.
Burton says the bigger risk facing planning firms in the current environment is not that they head off down the fee-for-service path and it fails, but that they don’t head down that path at all.
“I think the biggest risk is not to do something in a lot of ways, because we’re seeing, obviously, increased focus on how we’re remunerated as an industry; we’ve got an inquiry and two reviews happening at the moment,” he says.
“I think there’ll be a fair bit of media attention based on those outcomes. And once again, the consumers will start to put a fine-tooth comb through what they’re actually paying, what’s going out of their products at the moment and going to an adviser. So I think the biggest risk is actually to do nothing. I think it’s important that you actually do your homework and start to work out a planof attack to make sure you can transition to a fee-for-service model as soon as possible.
“In terms of the transition, I think the biggest risk is if you’re not actually adding value. And for some advisers out there, they will need to get better at what they do to earn the same amount of money that they’ve earned perhaps in the past. So it’s important that they do that work around value, and around their pricing methodology, business model, and have a very good plan of attack before they actually embark on the transition.”
Woodbury says the transition that his business began more than a decade ago has undoubtedly paid off – in some ways that were not expected. No-one foresaw the global financial crisis (GFC), for example, yet Woodbury says his business continued to grow even as others were decimated (or worse).
“I’m sitting here today to say that in my experience [that] means that you can get greater control,” he says.
“You get greater control over what you do as an adviser, and the client has control as well.
“Being a price-maker is less ‘salesy’; therefore, you’re pricing on relationship and advice, not on product sales. It’s more transparent, and the rewards as an adviser are commensurate with the value-add, if you see what I mean, as opposed to being based on what you can sell or what product you can transact on. It’s a closer link to your value-add.
“And finally, I think it’s better for the business. As a business owner, no question that it’s attracted new clients.
“Rightly or wrongly, consumers are voting with their feet, and they’re coming to firms like us, saying, ‘Are you a fee-for-service firm? Are you a true fee-for-advice firm?’ So no question that it’s attracting clients, it’s given us certainty around our in- come, and we’re being able to lock in an annuity stream. Because that’s the other issue too, that advisers say that it depletes your value. But it doesn’t. There’s no reason why you can’t lock in an annuity stream with a service agreement or a terms of engagement letter, and a fee that the client’s going to pay for the next 12 months or the next three years or four years or whatever you want to do in your agreement. It’s definitely more valuable for business, no question about that at all.”
Woodbury says he has no doubt that his business is worth more today than it would have been if he’d stuck with the old way of charging for his services and advice.
“You talk to valuers at the moment. A lot of businesses, a lot of valuers are moving from a buyer of last resort – which is a multiple of ongoing revenue, and in that ongoing revenue is a lot of commission and trail – moving more to a model of EBITDA [earnings before interest, tax, depreciation and amortisation]. And that multiple can go anywhere from one to 10, can’t it? One to 12, or whatever.
“But that multiple is dictated by your value proposition, your service agreements, and the relationship you have with the client from a fee perspective.”
Burton says transitioning is a relatively straightforward process if it’s properly planned before execution.
“I think it’s absolutely crucial that advisers have a clear concept of what they deliver in terms of value to their clients,” he says.
“And for some out there, they might need to get better at what they
do to earn a similar amount of remuneration [to what] they’ve earned in the past from commission. For those that have been delivering value for money prior to now, then a change will be pretty easy for those firms. Be absolutely crystal clear on your pricing. Clients will pick up pretty quickly if they think that there’s something else going on. If you don’t sound confident in your fee, if you don’t have a reasonable basis for how it’s been calculated, if it’s not easy to collect, it’s not transparent, or they don’t feel it’s transparent, then they’re going to pick that up. So be absolutely crystal clear on the pricing. And,
I think, get help. Errol, I know, has used external consultants a lot.
“There’s going to be change in the industry. I don’t think anybody doubts that. I spoke to an adviser a couple of weeks ago, and when I said, ‘What’s the industry going to look like in three years’ time?’ he was categoric in saying, ‘We’re going to be fee only’. And, you know, he was a dyed-in-the-wool commissioned adviser, and yet was absolutely of the belief that the world was going to change.
“The question is then, well, when are you going to start? And I think that you can start to begin that work around your value proposition, around your pricing structure, and for new clients, as we’ve seen, I think you can start immediately with new clients.”
