Advisers urged to tear down the wall

Pink Floyd told audiences to tear down the wall in hit song The Trial and Ronald Reagan suggested Mikhail Gorbachev apply a similar course of action to the Berlin Wall. Krystyna Weston thinks its time financial advisers followed suit.

As I sat atop a tower on the Great Wall of China recently, I was drawn into contemplating the great walls that we as an industry have created – walls that keep out the very people we want in, things that can leave investors confused and questioning the industry.

It appears that just like The Great Wall, a series of walls joined together during the fourteenth century under China’s Ming Dynasty, we also have joined our walls and forces in creating a wall against the very investors who are our lifeblood.

A recent poll conducted by a major online newspaper asked the question, “Do you understand your superannuation?” Of the 4822 respondents, a staggering 49 per cent responded in the negative.

So what have we done as an industry to contribute to this statistic? We could blame the government for messing with the system and confusing the consumer with all the regulatory dos and do nots, however, I suspect that a large part of the answer resides within our own walls, walls that we alone have built over many decades.

It started with acronyms

Our industry is filled with jargon and TLAs (three letter acronyms) that are impossible to decipher, even by those of us who work in financial services. How then can we expect people to understand what they are buying and how they are being charged? We communicate all the things we legally must and yet our messages get lost in translation.

We have built our industry on a bedrock of asset-based fees and rebates rather than negotiated fees for service that represent a fair fee for the work being done. We have charged asset-based fees rather than flat fees – a fee structure that many in our community are beginning to dispute.

The 2011 Client Engagement and Behaviour Survey found that 75 per cent of clients with a financial adviser disputed the standard industry payment types of today. In fact their preference is a form of “success-based fee”, with 33 per cent of respondents preferring this method of payment.

Of those surveyed, 29 per cent of respondents preferred a flat annual fee, and 13 per cent an hourly rate. Why is it then that we as an industry continue to charge our clients in a manner contrary to their preference? Why build more walls that keep our clients out?

To the consumer our industry is filled with opaqueness rather than transparency, complexity rather than simplicity. The products we have built are far from simple and the detail is in the fine print. Rather than engaging people with messages they understand, we have created an industry that serves us first and the client second. Harsh words, you may say. Yes, but still the walls have no ears.

It’s time to change the way we do business, not because of FoFA or any regulatory pressure, but rather because we want to and need to. Because we recognise that if we don’t serve the needs of our clients first we will drive them forever to the other side of that Great Wall that we have built over successive generations in this industry.

A litany of sins

Sadly, financial planners have borne the brunt of industry criticism, however no part of the industry is without guilt. In many ways, financial planners have been dictated to by institutional owners with their own agendas and profit motives.

Decisions are often made with insufficient consideration to the client’s best interest, which is at odds with a financial planner’s fiduciary obligation. Unfortunately, too many stakeholders have placed their own needs above those of the customer, and people are already whispering the early words of Mongol rebellion.

Platforms too have played their role, charging fees based on a percentage of assets with absolutely no correlation to the actual work being done or the cost of delivering the service.

Fund managers are not innocent either, with just a few exceptions most charge asset-based fees rather another fee structure. I commend those managers who have introduced low or no asset-based fees and are deriving their incomes largely from performance-based fees. There is a call from segments of the industry, notably in the institutional space, to introduce flat fees for mandates, but those calls are falling on deaf ears.

The fear within

So why are we so afraid to charge people in a manner that they would like to be charged? Why do we persist in building fortifications and then, with the merest threat of those walls coming down, go into a mad frenzy of bricklaying, grouting and preservation?

Is it shareholder value destruction that we fear? Or, are we afraid to cannibalise margins by charging appropriate fees rather than incongruous ones? Could executive short term key performance indicators and bonuses be driving behaviour and a focus on volume rather than building business founded on an alignment of profits with long-term client value?

We have become addicted to behaviours that are in fact self-destructive. Many of us are in denial and are still holding onto old ways and outdated methods. We have ridden a very profitable wave for some time and now, as the industry is poised for major change, we hold on with the arrogance of an incumbent not wanting to change our ways, ever focused on preserving that Great Wall and keeping the Mongols of change at bay. Our challenge is to believe that the industry will go on and flourish – if only we are brave enough to put the client first.

At the conclusion of the Pink Floyd’s The Wall, the audience chant: “Tear down the wall, tear down the wall!” Now is the time to bring down the wall that is separating advisers and clients from being aligned in their needs, expectations and outcomes.

Krystyna Weston is a director of simpleWRAP, a flat fee-based platform in partnership with EQT, and a director of PortfolioConstruction Forum, which hosted a recent BRIC+ Study Tour of China.