Flat-fee structures outnumber asset-based remuneration models within Australian financial planning practices, according to research from Elixir Consulting.
The study was conducted in August this year, surveying a cross-section of almost 300 financial planning practices around the country. It found that around twice as many of those who responded charged a flat fee for service as opposed to an asset-based remuneration model.
“I found that really interesting, that there was a significant drop in the group of those charging asset fees,” says Sue Viskovic, managing director, Elixir Consulting.
“I know there was a significant increase in those using flat fees as opposed to asset-based. We also had a lot more people using what we would call a hybrid, where they charge a flat retainer and there is a percentage charged if they manage assets.
Now in its third iteration, the Elixir Consulting Adviser Pricing Models Research Report has been conducted since 2008, when few planners operated fee for service remuneration models.
Charging a flat fee for initial consultations is another trend that has begun to emerge, with around 6 per cent of those surveyed charging this.
While this year’s survey marked the first time this question was asked, Viskovic says they will also ask this in future versions, and expects it is increasing.
“One practice said yes they do, and they donate it to charity. And other than that, 16 out of 275 – so about 6 per cent – do this.”
Life insurance advice pricing structure
While life insurance was carved out from the ban on commissions that came into effect with the Future of Financial Advice (FoFA) legislation, the study also found a significant number of practices are rebating or refunding insurance commissions.
“We’re finding a lot more are starting to charge fees for insurance products…there are now around 11 percent that completely rebeate or refund any insurance commissions.
“It’s still obviously in the very embryonic stages, with people still figuring out how to do it effectively, but we’re definitely seeing a bit of a movement that way,” Viskovic says.
Young practices and pricing risk
The study asked respondents specific questions about their pricing model, the way they charge their clients and how much they charge, along with a number of different qualitative aspects.
“Is your business profitable? Are you happy with the pricing model? And we also got them to quote what they would charge for a few specific case studies of clients,” Viskovic explains.
She says this was particularly interesting in enabling Elixir to draw together some data around not only the effectiveness of pricing models, but also whether financial planners are happy with them.
“We found that businesses that are less than three years’ old are at risk in terms of the level of fees they charged. When we compared them to the rest, we found they were significantly less, most particularly in the area of ongoing advice.”
Viskovic believes this is often a result of newer practices being keen to get as many clients as possible on-board in the early stages. It is during this stage that many, regardless of their business, “are often despareate to get all the business they can”.
She sounds a warning for practices that do this, urging that they also need to be careful they are taking on the right clients, in areas where both parties are getting the most value.
Another element of this risk lies in the lower rate of business overheads for practices starting out versus those that are better established.
“They haven’t really established their full business, with no support staff or the infrastructure they might have later. They don’t have the cost base they will have when they grow into a small business,” Viskovic adds.
Because pricing structures can be hard to increase at a later stage if they are set too low from the start, those who do this “are likely to find it difficult in an ongoing basis,” she says.
The full research report, including comparisons and contrasts between trends identified in earlier versions of the study, is due to be released by the end of October 2014.
