The corporate regulator, the Australian Securities and Investments Commission (ASIC), has launched a new website today, in which it suggests consumers should avoid paying asset-based fees for financial advice.
The new website, www.moneysmart.gov.au, includes a section on investing and financial advice. Under the heading “Choosing an adviser”, the website urges consumers to check the fees that they will pay for advice.
“Traditionally most advisers have also been paid commissions on financial products you buy,” it says.
“In the end this comes out of your pocket as your investment balance is reduced by the amount of the adviser’s fee. Often the adviser may earn more from a particular product, which may influence them to recommend something that is of greater benefit to them than it is to you.
“These potential biases are known as conflicts of interest. The Commonwealth Government has announced changes to the way advisers will be paid from 2012. It proposes phasing out commissions.
“In the interim you may be offered advice on a commission basis or on a fee-for-service basis. In our opinion, the fee-for-service model is generally a better way to pay for advice. It reduces the chance that the adviser’s recommendation will be biased. A ‘flat dollar’ fee, rather than a ‘percentage of assets’ fee, will give you more certainty and reduce conflicts of interest. It is better if the adviser does not have an incentive to recommend that you invest larger amounts of money.”
The website also provides guidance to consumers on determining whether they need advice in the first place, getting started with a financial adviser, and working with a financial adviser. It also includes links to the Financial Planning Association of Australia’s and CPA Australia’s “find an adviser” services.
ASIC has produced a consumer booklet, entitled Getting Advice.
Moneysmart.gov.au is part of the Government’s National Financial Literacy Strategy, also unveiled yesterday.
Under the new FSR regime the financial planners seemed to be targeted as unsavory characters who rip people off. ASIC weights in and has next to no idea how to fix the problems of getting unbias advice. The problem is very simple to fix. Tell the four banks and AMP to take all the up front commissions and trailing commissions off their products. AMP already doing that, finally. Financial planners do not invent product and hence did not invent commission. Flat fees say something about the way advice is given. Sounds like someone who wishes not to get a pay cut if their clients portfolios fall in value??? Is that another conflict?
Surely, most planners would charge a lower % on a higher amount placed to reflect the amount of work involved regardless of the client’s investment, plus a component for the greater risk involved on such larger placements.
Frankly, my clients do not appear to have the slightest reservation about the (to them) esoteric issue of our payment methodology, whether by fees or commissions via a dealer group or otherwise. If they agree to pay a certain amount, it’s simply a matter of convenience for them.
This whole issue of fees vs commissions is a red herring drawn by our ‘industry’ (sorry guys, we’re simply not yet a profession)which has successfully ‘blind-sided’ the regulators, by diverting their attention from the more fundamental and (to clients) substantial issue of conflicted advice, given by so-called advisers in their cause of institutional product marketing.
Maybe we should all become public servants and get paid an hourly rate with office costs,facilities and training provided by the government. That way there will be no costs for us to meet, the investor will have no fees or commission to pay and we can retire on a government pension.
One of ASIC’s legislated roles is to promote confident and informed participation by investors and consumers in the financial system. If they have a view that asset based fees will more likely lead to conflicted advice (which they obviously do)then then surely they are required to present that view to the public. Most of the the discussion presented here against ASIC’s view
amounts to no more than whinging about ASIC overstepping their mark. Even if this is the case they are not about to change tack on this issue anytime soon. And the reason is that their basic assertion that these types of fees are generally more likely to produce conflicted advice is true. It really is that simple.
What is a flat-fee model? ie is it an hourly rate or do we just agree on an amount each year regardless of how much work is undertaken?
eg.1 If its an hourly fee, am i not incentivated to bill as many hours as i can, reducing efficiency in the business along the way as well. Dare i say it, like the legal profession….
eg.2 if we agree a flat fee each year, am i then not incentivated to ensure I do as little work as possible to justify the fee, as I already know what it will be?
The argument in favour of asset based fee’s is that if nothing else its in the advisers interest to see the clients wealth increase, as it increases their fee as well. Its a positive ‘conflict’
Any fee model has the potential for ‘confilicts of interest’. ASICs preferred one suits their agenda. Simple as that.
Neil, I totally agree with your comments. And would like to add this; I am a fee based adviser and have been for many years, do I add a “Risk Premium” into my fees? You bet! If two clients presented one with $300k and the other with $400k the $400k client would be charged an extra amount based on the risk I take on i.e I have an additional $100k of risk in my advice. Commissions for some clients will be essential but as with all governments they will learn the hard way when the bulk of the population calls on the Government’s coffers to pay the cost of no advice. Shorten has a political agenda and quite frankly I wouldn’t buy a used car from him. But comments like that don’t help anyone. Let’s all have a rational debate, stop the mud slinging at each other and directly attack the encumbent governments “dumb and dummer policy”. There has to be another election and this will once again change the landscape until then just keep doing what you are doing but only if you believe your clients are getting good value, if you have doubts then maybe it is time to change but that is in your hands ladies and gentlemen.
1. The person you were responded to posited two clients who were identical in all respects except the portfolio size. Your response was that the bigger client is riskier. Explain to me how it follows that the bigger client should be charged more (and as we’re talking about a percentage, presumably an extra amount exactly in proportion to the extra FUM)?
Effort is the same, strategy is the same. It’s all the same, but the bigger client should be charged more. You insist that the supposed extra risk is a major input, but not the only one. Explain how that works.
2. A client goes to a $FUM adviser with a large mortgage, a perfectly adequate industry super fund which meets their requirements. They have complex needs including the usual problems with an undisciplined budget, crappy estate planning preparations, unrealistic goals and insufficient spending.
I know exactly how I can work out how to charge that client because I charge flat fees.
How could a % of assets adviser charge that client, without:
1) having an incentive to churn any products which don’t require churning
2) being biased against the debt repayment option
3. They’ve clearly taken on a new approach. Before they seldom spoke out against conflicts as such, they accepted that conflicts exist and merely required them to be disclosed. ASIC still require disclosure, but they’ve moved on to actually targeting conflicts of interest directly, and they’re being very high profile about it.
You can debate how much has changed in the actual enforcement, but clearly ASIC coming out and saying flat fees are better than percentages is a relatively new direction, which is why we’re arguing about it here.
4. How so? You said the adviser needs to be compensated for his own risk of being sued.
Is it not the case that you’re more likely to get into trouble recommending risky investments instead of low risk ones? All else being equal.
If so, an adviser pricing in risk would charge more if the client is taking on more risk. That’s what we’d be doing if we take the idea of advisers pricing in risk to its logical conclusion.
Thus it would make a lot more sense to create a pricing model which varies the percentage of FUM with risk profile.
I think that’s a bad idea, it would lead to advisers recommending riskier stuff to their clients, but it’s an idea based on your own assertion.
5. I calculate my fees based on the time it is likely to take and the complexity/knowledge/responsibility.
%FUM is far too crude a measure of those things so I don’t use it at all. I do however think back on 10 years of professional experience, recall what kind of issues I had with previous clients who had similar problems, try to estimate the number of hours it might take, mark it up with an hourly rate I consider appropriate, and quote accordingly.
Pricing a service is a complex business which can’t be easily explained in one paragraph in the comment section of a Professional Planner article, but suffice to say I’ve not found percentages of portfolios to be a reliable guide, so I don’t take them into account. At all.
6. My argument is that advisers charging asset based fees have no financial incentive to tell clients to focus on debt reduction, gives them no reason to do estate planning properly, or tax, or budgeting, or social security advice, or to keep investments where they are if they don’t need churning, etc.
I suspect that the lack of financial incentives to do those things are why we see so much:
a) advisers ignoring debt, selling investments instead.
b) estate planning given minimal generic treatment in financial plans, usually built right into the SOA template.
c) a lot of tax planning by advisers is product driven: MISs, structured products and negative gearing.
d) budgeting is glossed over as important somehow, but not important enough for many advisers to actually spend any time on! Financial plans may cheerily recommend a particular amount be saved into super, with little discussion of where that money will come from!
e) We still see lots of churning!
Hi Travis,
I’d really be interested in your view on this.
Should fund managers charge a flat fee or a percentage based fee?
Are they doing the wrong thing using a percentage based fee?
A fund manager offers a pretty straightforward service, they’re doing only one thing: managing a pool of assets. Since the pool of assets is unitised, it seems fair to me that the ongoing costs be spread evenly among the units while charging transaction costs to those who run them up, as they do with buy/sell spreads and other transaction fees.
The retail/wholesale split is fair enough too, it’s an attempt, though a crude one, to split admin costs in a manner which is a little fairer. Small investors tend to make more admin, per dollar invested, than large investors.
Now if financial advisers are similarly offering a one dimensional service, offering ONLY portfolio management and most importantly that their main claim to fame was that they select high performing investments.
I’ve met very few advisers who are like that. The real litmus test I suppose would be how the adviser answers the question “why should I pay you money, my portfolio went backwards!”
Most advisers answer that with a response pointing out that the real value add of advice is in the strategy. They’ll mention the stack of tax the client saved because of what you told them to do with their super. They’ll remember how your asset protection advice has secured their family’s financial security against various hazards. They’ll remember when you told them how to structure grandma’s finances so she got more Age Pension or paid much less to the nursing home.
If that’s your answer, then charging for those sorts of things makes much more sense than percentage of FUM.
If you’re not that kind of adviser though, just an asset consultant, then arguably the best fee structure would be some kind of very low asset based fee (much lower than a typical financial plan) and a performance fee for your value add, and you’d need to answer the protesting client’s question with either a reference to longer term benchmarks or to simply admit that you’re not actually providing value and shouldn’t be paid. (I know, most will opt for the longer term benchmark!)
The big problem with asset based fees in the context of financial planning is that it represents a conflict of interest. I’ve already mentioned some of the big ones: aversion to debt reduction, a tendency to churn, an incentive to increase FUM by any means possible including gearing.
I’m not saying the correct strategy is always debt reduction, retaining the old product, and never gearing, I’m saying that a client has the added worry of wondering if the adviser has recommended their chosen strategy for good reasons, or because it means the adviser gets paid more.
Is there anyone here who would disagree with the general statement that in an ideal world advisers should be able to work as impartially as possible, not having incentives to do anything wrong by their clients?
If you wanted to argue that fund managers have a conflict of interest too, FUM gathering resulting in index-hugging strategies designed to retain FUM rather than deliver alpha, then we could have a discussion about that. I’m in favour of “high alpha” managers working for performance fees, whose products can be blended by advisers like me with low cost passive products according to the “core and satellite” paradigm.
But I don’t consider myself to be an expert in the ethical pricing of managed funds, nor the best way to deal with conflicts of interest in the fund management industry. It’s a related business, but it’s not my business.
My expertise is in financial planning, and for what it’s worth I’m staunchly in favour of letting advisers use their skills as impartially as possible. If getting rid of conflicts of interest cleans up this wonderful profession of ours by removing the incentive for bad advisers to do bad things, I support it.
I submit that advisers wailing about how uncommercial ASIC is with all of this new emphasis of theirs on conflict eradication in addition to conflict disclosure simply lack the imagination to conceive of how an honest financial planning business can be run.
Like it or not, the profession has evolved, and still is evolving, away from a sales profession and into something much more closely resembling a solicitor or tax accountant. Somehow or other, accountants and solicitors have managed to build thriving businesses without basing their fees on a percentage of their client’s net worth, or by volume bonuses, or flogging products from a related entity, and I think our profession is ready to do the same.
Travis, I agree with where you are heading on a lot of issues but also disagree with some. Interesting reading though, good debate! Can you please comment on Ange’s comment below (No. 20) especially in relation to the 2 examples, as I find these to be real problems also in the flat fee world. In my case I like to charge flat strategic advice fees based on quotes for complexity and (my perception of) value add. Plus for those clients who ask me to also manage their portfolio (lots of SMSF, some of whom manage their own so no portfolio management required)I charge a smaller (than usual) FUM fee for this in addition to flat strategic. Can you please comment on this and also expand on the rationale you use to come up with pricing your flat fee advice. Also, with the regulation being as tough as it is in terms of the cost of actually producing SoA’s and getting timely advice to clients, in your opinion, will smaller clients be priced out of the market? What would your average flat advice fee be for a comprehensive financial plan? Sorry, there is a lot of questions there!
Typically, flat fee advisers charge a pre-agreed amount which the client consented to in advance. It’s based on hourly rates loosely because when setting fees the adviser needs to work out how much time it takes to do things and what their costs are and therefore how much they need to charge, but that’s a calculation done by the adviser in his own time.
The problem of what services are being supplied for a flat fee (the “if an adviser’s remuneration is fixed, he’ll do the least possible for that money” problem) is solved easily enough with service agreements.
The adviser states, in writing, the nature and amount of the services provided. Advisers doing this may have several service packages which the client can choose from, offering varying numbers of meetings, review reports, random questions answered etc. If the adviser does what he’s contracted to do, there is no problem with the adviser doing too little.
This has enormous business advantages too, clients are far more efficiently priced and more business becomes profitable.
I imagine that the majority of people carrying on about how uncommercial this flat fee stuff is are simply not very sophisticated at running their businesses. Percentage of assets is relatively simple to administer in that it gives you just one knob to turn when setting pricing policy.
On the other hand it has severe business disadvantages, including among other things having one’s profits decimated every time there is a downturn.
The keywords for fixed fee advisers are business stability and growth! We don’t have enormously volatile cash flows, our income is determined by the quality of our client relationships and the work we do, not the volatility of the stock market.
To the client I usually quote a flat amount which, depending on the service, is anything from $660 to many thousands. A couple of my reps specialise in servicing high touch business and professional clients, and they have them on annual retainers in the tens of thousands.
So from the experience of my firm, there is nothing unbusinesslike about flat fees. There is a learning curve for those starting on this path, but it’s worth the effort.
Travis, I notice this pertinent question (copied below) was not answered by the defendants of the % fee model like Neil:
2. A client goes to a $FUM adviser with a large mortgage, a perfectly adequate industry super fund which meets their requirements. They have complex needs including the usual problems with an undisciplined budget, crappy estate planning preparations, unrealistic goals and insufficient spending.
I know exactly how I can work out how to charge that client because I charge flat fees.
How could a % of assets adviser charge that client, without:
1) having an incentive to churn any products which don’t require churning
2) being biased against the debt repayment option
Very important question.
In a nutshell, and to agree with Travis, % based fees:
1. Incentivise advisers to recommend products and assets upon which they can charge that fee, irrespective of whether said product is in the best interests of the clients.
2. Discourage advice to pay down debt or contribute to other super funds than those upon which the % fee can be charged.
3. Discourage advisers from servicing young professional clients with small investible asset bases but a complex range of strategic issues.
4. Discourages advisers from recommending clients sell assets upon which fees are charged to go to cash.
How many other occupations, services or even taxes also charge a % fee ??
Lets start in the financial world and see if all these will also be regulated: Fund Managers, Admin / Wrap Services, Stock Brokers, Investment Bankers, to name just a few. Outside Finance, Real Estate Agents for both sales and rentals, Lawyers for conveyancing and Estates, Architects,etc.
Can the government justify the 15% tax i pay on my super contributions, i would prefer to negotiate a seperate fee with them as i dont feel the % fee is justified. Nor is it justified on my income tax or may rates for my house.
Now once all these examples and the many others that charge a % fee for work are regulated against it, then i will accept ASIC telling me what i can and can’t charge or how.