Thirdly, where a client has assets invested in managed funds on which an asset fee is being charged, and it is in that client’s interests to invest in cash or other assets on which such a fee cannot be charged, the resulting conflict of interest will influence the planner to consider maintaining the status quo in order to continue receiving asset fees.
And finally, asset fees cannot be charged in situations where, for example, a client wishes to use an inheritance, a bonus or a windfall to pay down a loan, or salary sacrifice cash into an employer-sponsored superannuation fund. In that situation, the planner may well be improperly influenced to advise against these strategies that are otherwise appropriate to a client’s circumstances.
In a recent comment in The Australian Financial Review (October 5, 2010), financial services industry consultant Jim Stackpool succinctly summarised the fatal flaw in the industry’s move to asset fees.
“It’s great that commissions are gone, but they are being replaced by a high fence in the form of asset fees, so the shift to fees could be seen as another marketing ploy to sell more product,” Stackpool said.
“There is no real connection between buying more product and advice.”
Industry consultant Sue Viskovic recently quoted John Strange, CFP. Strange recognised the conflict inherent in asset fees.
“We charge flat fees,” Strange said.
“In eight years we have never lost a client.
“We have experienced 40 per cent growth every year, except during the GFC when our growth dropped to 25 per cent (due to a temporary drop in new clients joining us).
“We are very clear about the fees we charge. We are paid by direct debit from our clients’ bank accounts or credit cards, never from their investments.”
The global financial crisis demonstrated the illogical nature of remunerating planners based on asset fees. The role of planners is not to predict the rises and falls of markets, but to offer independent strategic advice based on a wide range of considerations including asset allocation, taxation, structures, product assessment, debt, risk and estate planning. None of these considerations are related to the vagaries of markets. Therefore, charging asset fees based on percentages of amounts invested in certain products or funds under management is both illogical and corrupting of the independence of advice.
This logic was endorsed by financial planner, Kay Aarons BEc, CFP, who offered this wise advice: “Having charged fee for service for years now, I would say the biggest obstacle for most advisers is the self-belief that they are worth paying…first valuing yourself and then valuing the advice that you give. Once you understand that, then you can appropriately structure your fees…we have been charging flat fees for all of our new clients and we are just about to embark on a process to work through all of our existing clients who pay us asset-based fees and move them to a flat-fee model…the few clients who have not seen the value in our flat-fee model probably don’t see the value in what we provide. If we want to retain those clients, it is our challenge to communicate our value more effectively.”
The simple message here is that if we want to be treated as professionals, we must act like professionals, and we must do so unambiguously. Therefore, we must act without the reality or the perception that we might be influenced by remuneration-based conflicts of interest that are caused by the receipt of asset fees (in the same way that the bulk of the industry seems to have concluded with respect to commissions).
The supporters of asset fees can argue their case until “the cows come home”. They will never win. Unless we accept this fundamental truth and remove asset fees from the industry (together with their inherent conflicts), the public will not accept financial planners as true professionals. Quod erat demonstrandum.
Robert MC Brown is a chartered accountant with over thirty years’ experience in taxation, superannuation and financial planning. He is independent chairman of the ADF Financial Services Consumer Council and a member of the Government’s Financial Literacy Board.
