The proposed abolition of volume-based payments has the potential to radically reshape planning practices. Simon Hoyle reports that the likely changes will ultimately be for the best.
Bernie Ripoll’s review of financial products and services made no explicit mention of volume bonuses. But the banning of volume-based payments is a natural extension of Ripoll’s recommendations. Ripoll recommended banning payments from product manufacturers to clients; the Minister for Superannuation, Financial Services and Corporate Law, Chris Bowen, has extended the idea to explicitly outlaw “any form of volumebased payments” – including to dealer groups or licensees.
The Government has in its sights any planning practice or dealer group that relies on volume-based payments from platforms and/or products for a significant part of its income. Bowen says volume-based payments, of any kind, do not foster the kind of behaviour the Government and the public expect of planners. If the Ripoll and Bowen reforms go through, volume-based payments will be gone from July 1, 2012. For some groups that have had the volume cranked up to 11 in recent years, the sudden silence could leave a gaping hole in their revenue.
“For some groups, in simple terms, it will reduce their revenue,” says Arun Abey, executive chairman of ipac Securities and head of strategy for AXA Asia Pacific.
“They can do one of two things: they can go with reduced revenue and cut their costs and services accordingly; or they can go back to the client.”
Abey says that assuming the provider of the volume bonus reduces its cost to reflect the fact that a volume bonus is no longer allowed, the net cost to the client of using the product or platform should not change. But the adviser may need to renegotiate their fee with the client to make up a shortfall in revenue that would otherwise have flowed from the platform or product.
“Advisers are going to have to rethink their value proposition,” Abey says.
“They’re going to have to make up the revenue loss. This will have an impact on some advisers’ practices, but not all. “For some groups it will be significant, and it’s the larger dealer groups for which this is going to be a large issue – or not necessarily the dealer group, but the members of it.”
Abey says the question is: “How can an adviser compensate for the potential loss of revenue?” “It’s by refining their value proposition,” he says.
“Let’s take that one step further. If you look back over the 15 to 20 years that we’ve been speaking, in many areas the industry has changed. In many ways the professionalism of the industry is better; in many ways the technical standards of the industry are better.
“But there are still too many advisers whose value proposition focuses too narrowly on technical stuff – especially tax – and also on selling an investment proposition.” Abey says ipac and AXA have conducted due diligence on a number of potential acquisitions over many years, and he has seen “zero evidence that advisers have added value in that dimension”.
“In a rampant bull market you can still get away with…what I would call a flawed value proposition; the central value proposition of too many advisers – around an investment proposition – is flawed,” Abey says.
“And these regulatory changes are happening in a bear market, not a bull market.
“Some advisers are providing more broadlybased value propositions, and these advisers will be able to, or have a good chance of passing on what they [lose in volume bonuses] in the form of additional fees from their clients.”
Abey says if clients are asked to pay more for a service – and what’s more, pay it directly to the planner – they’re likely to be far more critical of the service they’ve received. If a planner has made an implied or explicit investment promise, and that promise has been broken, there may be trouble.
“If [the client] looks at this, and they see their investment return has been zero – the adviser may have been doing a good job, but investment markets are investment markets – then the client is going to resist that,” Abey says.
“The market for what always was, but is now more evidently, a hollow value proposition can be strong [in a bull market], but in a bear market it’s going to end in tears.
“The old door is closed; the door to the hollow value proposition is closed. But for the current generation of advisers, there’s this other door. Rather than staring at the closed door, they have to work out how to open this new door, and work out how to go out with a value proposition that’s not focused on investment.”
The managing director of Business Health, Jim Stackpool, says it’s likely to be the more established “old-and-bold” financial planning practices that run most foul of the volume payments ban, and face the biggest task adjusting. But they also stand to reap significant benefits by getting it right, and by beginning to converse with clients in terms that clients can more easily understand.
Stackpool says clients no longer want to be sold products; they want to be sold outcomes, or results. And by pitching their services the right way, advisers can tap into a potentially rich revenue stream. Pitching it the right way means talking to clients in the right language – telling them how much advisory services are going to cost in dollar terms, not in percentages; and certainly not in percentages that can change over time without the client knowing.
Stackpool says that even though practices and dealer groups have no choice but to adapt, the changes will ultimately lead to a stronger, more trusted and more professional industry. But it’s going to require a change in how these businesses’ principals think. It means pricing services on the value to the client. Too many businesses still link price to product, and to volume.
“I think they are using product as a fundamental factor to price [their service], rather than value as a factor to price,” Stackpool says.
He argues that fees should be based on the value of the service to the client.
“If I’m getting some fees from [a platform or product], and that’s part of my overall fee, provided I have not priced on that…that is just cream, and I’m taking that while I can get it,” he says.
“But it’s the client’s money.
“The client will not pay extra unless they see extra value, and unless you can articulate that extra value very clearly, with a more comprehensive value proposition, they’re not going to pay it.
“If you do not have the skills to articulate that proposition, you’re not going to be anywhere in the ballpark in terms of getting that extra money.”
Stackpool says a well-structured advisory business, with a clear and comprehensive value proposition, should be aiming for profit to equal about 40 per cent of revenue.
“You know the cost of running your business [and] you know your cost base, and you want to be able to sell [your services] at a mark-up,” he says.
Sue Viskovic, managing director of Elixir Consulting, says it can take three to six months to redefine a value proposition and to work out an appropriate fee level to cover the cost of delivery. And it can take much longer than that to get every client’s acceptance and approval of a new fee structure, even assuming every client gets a review once a year. What to do with so-called “dormant” clients is another issue entirely. Viskovic says any planning business should be able to meet (or beat) the July 2012 deadline if it has already accepted the need for change, and “if they are on to it now”.
“It will take them three to six months to formulate, depending on where they are on the journey – and to pull it all together can take 12 months,” Viskovic says.
Progressive dealer groups will help their advisers get there as quickly and easily as possible.
“It’s going to be extremely challenging for many of them, but it’s potentially the best thing that can happen to them,” Viskovic says.
“When advice practices are forced to price what they are going to do, they have to go back first and look at what they do, and how they do it.
“As much as I understand the fear, and that people are annoyed that they are being told what to do, for an individual planner it’s a great thing, because they are going to have a better business for it.”
Viskovic says it’s possible that a planning business will strengthen its relationships with clients and become more profitable, and that financial planning will improve its standing as an occupation in the community.
Tony Graham, head of Macquarie Adviser Services, says it’s relatively simple for wrap providers to accommodate the proposed Bowen changes by “netting off ” the cost to clients – in other words, to reduce the cost to clients by cutting out the rebate paid to the adviser (which may or may not have been rebated back to the client). But he agrees the loss of volume rebates will present challenges for how some planners relate to clients.
“We net the price off at the individual client level, so the client gets a cheaper price,” Graham says.
“Half of our client base already does that now. “In our case, it’s more that we can just switch on the netting process.”
The ultimate cost to the consumer might not change much, Graham says.
“The pie is the same size; it’s putting a different label on it,” he says.
“Then it’s how do you explain that value to the client? There’s some challenges there.
“Regardless of volume bonuses going, they are probably going to have to charge more for advice.
“The simple answer is you need to go back and demonstrate the value of advice, and what you are doing. If you’re dealing with a client where you have not been very active in their reviews you almost need to treat them as a new client again.”