Most adviser remuneration models are outdated and conflicted, argues Jim Stackpool, who says advisers are failing to address clients’ ongoing needs in their contracts.
Stackpool, who is managing director of licensee Certainty Advice Group in Manly, says advisers should abandon the traditional assets under management-based remuneration model, which is typically about 1 per cent of AUM.
“You can’t justify it,” he says. “You’ve got to get off the 1 per cent.”
Stackpool is a proponent of advice being charged to clients on a yearly basis, according to the value that the adviser brings for the period. His model incorporates yearly negotiations that start with a discussion around what the client requires and move to an agreement on an appropriate fee for that 12 months.
“We sit down with our client every year and ask what value means for them,” Stackpool says. “We may not need to touch the investments this year, we may not need to change the cash flow or the underwriting either, if that’s all in order.”
While looking for a better product or strategy is “part of the deal”, he explains, wholesale changes are “not often” made. If advisers are largely maintaining the status quo, he asserts, they shouldn’t be entitled to 1 per cent of that client’s assets. Why charge like an investment adviser if that is not your core offering?
“We get clients off the 1 per cent charge because that’s not an advice proposition, that’s an investment proposition,” he says. “We tell clients every year, ‘OK, for us to work with you this year, it’s going to cost you about 1000 bucks. There are no other fees or other charges; it could be $1000, $10,000 or $40,000 [for example]. And we price 40 of these every week.”
Fees under scrutiny
The way advisers charge their clients has come under the microscope lately, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry looking at a range of issues, including grandfathered commissions, fees-for-no-service and conflicted remuneration.
Commissioner Kenneth Hayne took particular interest in advisers that charges fees for little or no service and will probably address the issue directly in his final report.
Global Adviser Alpha’s David Haintz took an in-depth look at remuneration models in this article for Professional Planner, and concluded that “more advice businesses will move towards a flexible fixed-fee structure aligned directly with each client’s level of complexity, service needs and expectations”.
Haintz even quoted Charles Darwin, saying: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”
Client for now, not for life
Stackpool says Certainty Advice group has 80 advisers under its umbrella, with an average age of 37. He says that while he respects the older generation of “rockstar” advisers, his group will not be building a fortune off AUM models and what he believes is conflicted remuneration.
“They’ve got a career ahead of them that’s so different from that,” he says.
He rails against the ‘client for life’ concept, calling it “crap” and a “product analogy”. He says clients regularly try to haggle down fees and often decide the price doesn’t match the value. Certainty’s average client sticks around “five, six, maybe seven years”, he says, which is fine by him.
“I just want a client for as long as they think I’m adding value to them,” he says. “It’s not this dynamic of getting your hooks into the client, it’s about adding consistent value to them.”
Stackpool says the choice to charge a negotiable, changeable annual fee “comes down to fundamentals”.
“How can you look after a client’s life when your remuneration models are based on them holding onto some kind of asset, when it wouldn’t be in your best interests to tell them to sell down those assets to by a property for their kids?” he asks.