Financial planning is still dominated by outdated charging methodologies which considerably disadvantage clients, according to Jim Stackpool, principal of Certainty Advice Group.
Stackpool identified the new model of financial planning practices, what he terms ‘generation four’ businesses, as those that make their money through advice and not products.
“We still have archaic means of charging for products in this country, where many clients are still disadvantaged,” he said, during a presentation delivered at the Best Practice Forum in Sydney last Thursday.
Stackpool believes the best firms create their value by delivering valuable advice which the client pays for in clearly identified dollar terms, by opting in on an annual basis.
“These firms are not the old firms that didn’t make money out of advice and had to make money by relying up on the quantity of product [sold]. They make money, and they make renewal money every year as clients come back.
Pushback against fees
He referred to the turmoil currently taking place among many life insurance advice businesses to outline some of the challenges generation four financial planning practices face.
“A common retort is that the commission structure of life insurance remuneration isn’t broken, so why change it.
“Prospect theory is another one, ‘why would I go for a $4,000 fee for this client, when they’re quite happy to give me, when it’s a sure bet, they’re going to pay me $3,000 a year [in commissions]?
Stackpool believes all practices have a level of fees they are comfortable with, but argues “the comfortability of your current fee level is keeping you in an activity cycle that’s like a treadmill on an ever increasing hill.”
He applies the concept of ‘learned helplessness’ to financial planning practices, in relation to the difficulty some planners have in clearly articulating their value proposition.
“We don’t believe that our advice [fee] of $5,000 a year for five minutes of advice is actually worthwhile. So the question I continually get…is ‘what have you got to do for $5,000 a year?’
“Just turn up and be the professional that you need to be…making sure we’re doing a professional job is sometimes worth the $6,000 fee, but for those still stuck in generation one, two or three practices, their learned helplessness means ‘that’s a path I could never take and you must be ripping them off,’” Stackpool said.
The intangibility of financial advice adds to the difficulty of this. “Every professional sells the intangible, sells something that can’t be taken away in the back of a ute and tied down. Every professional must have a question, ‘am I actually worth the fee I charge,'” he said. He believes it is clients who give advisers their sense of worth.
From the coalface
Two practitioners provided their own perspectives on how they articulated value to clients.
“It’s hard to build financial advice that is based on engagement with the client, on fees not product sales, without having a big base of revenue behind you…it’s been tough but it’s been incredibly rewarding,” said Colin Benvenuto, founder and director, Emerge Financial.
The fees charged by his practice and its team of planners are calculated based on the number of staff, what resources are required to service clients, staff salaries, earnings and costs.
Before his fee structure was clearly implemented, Benvenuto said he looked at two or three clients that represented different categories or segments. “I was staggered to find we were just clearly undercharging.”
“So we talked to some of these clients, had a rediscovery interview with them about their outcomes and re-priced the advice.
“We have ranges that we work between, different segments, a bottom-up kind of methodology,” he said.
Another adviser, Scott Farmer, managing director of Bravium, related the example of a client that took around six months to get on board.
In the midst of the process, the client went to another adviser and paid for a Statement of Advice to be created. He then came back to Farmer and asked for his opinion.
According to Farmer, Bravium’s fees were significantly higher, around $25,000, which the client suggested was around double those quoted by the other planner.
He responded by saying: “I can already tell you what’s going to be in that document…the way they’re structuring this fee is based on the amount of product sold. Ours is not like that.
According to Farmer, the client ultimately signed with Bravium: “In the end, he decided to come onboard, and is now probably our biggest fan.”
