Switching from an assets under management (AUM) remuneration model to a fixed-fee retainer model has put Rob Pyne’s advisory business under tremendous pressure, so much so that he likens it to “swimming upstream”.
“It’s a harder road,” Pyne said on a panel at a Dimensional Fund Advisors seminar last week in Sydney. “You have to constantly prove your value on the basis of the fixed fee as opposed to one per cent on the assets.”
Pyne founded HPH Solutions in Perth in 2002, employing what he calls a “classic” AUM model for 12 months before transferring clients onto a fixed-fee model. Three quarters of their book – and all new clients – are now onto a fixed fee, with monthly retainer payments generally coming out of a credit card or bank account.
Pyne’s explanation of HPH’s remuneration model at the seminar drew a round of questions from the audience of advisers, and he refrained from sugar-coating the experience.
“We’ve certainly questioned it from time to time, because it is the tougher road,” he said.
There is “less of a margin” commercially, Pyne said, and far more pressure to demonstrate tangible evidence of the value being provided to clients.
“With a fixed fee it’s a bank account or credit card deduction, so it’s much more in their face all the time,” he added.
Speaking to Professional Planner, Pyne says the most intimidating part of the switch for advisers is “the transparency” of pricing and the accompanying ‘sticker shock’ of the annual fee.
“I don’t want to suggest that AUM is not transparent,” he says, “but if I said to you that you’ll pay me $6,000 per year, or one per cent of your $600,000 portfolio, those two things are not psychologically the same. You remember the $6,000 much more than the one per cent. That’s the real hurdle.”
What makes the switch even more terrifying, he continues, is that there is no right way to do it. “It’s a vexing question,” he says. “One thing I’ve learnt is that there is no ‘right’ fee.”
When HPH first switched to fixed fee, Pyne says they got it “horribly wrong”.
“We had a three-tiered model; the classic gold, silver and bronze. We gave clients a choice of which one they wanted and delivered a suite of services that gave them the option.”
Pyne says this led to clients inevitably choosing the middle option. “The classic bell curve scenario,” he laments.
“We don’t do that anymore, we learnt the hard way that it doesn’t reflect what the client’s needs are, they’re just making a judgement based on limited information.”
He explains that HPH now take a much more detailed look at the client’s circumstances.
“There’s a flat minimum service fee to get started,” he says, “and we apply additional pricing for entities on top of that, plus a small premium on the amount of money were managing under advice.”
‘Oh god, we’re going to get paid less…”
Despite the headwinds, Pyne says there are two key reasons why he instigated the switched to a fixed- fee service.
The primary driver, he explains, is they wanted a model that eliminated conflicts as effectively as possible.
“We did it because we like the separation of advice from where the money is,” he says.
“We didn’t want to have to move money from one point to another to get paid,” Pyne continues. “If the client wanted to pull out a load of money to buy a house for their mum, we didn’t want to have to think ‘oh god, we’re going to get paid less in the process’.”
The second reason Pyne identifies is that they wanted their revenue to be more predictable.
“We wanted to know that when we wake up on January 1st we’d know how much we’re going to get paid, regardless of markets,” he says.
Pyne says another benefit of switching models is that it has forced the business to develop new services for clients to actively demonstrate their value.
“There are things we are able to do now that we were never able to do in the past,” he says. “Super check-up reports, insurance check-up reports, wealth management and estate planning flow charts… things that can been delivered to a prospect or a client and actually give some tangible evidence for what they’re actually getting.”
While he says it wasn’t a primary motivator, Pyne believes that the switch to fixed-fee might put them ahead of impending regulatory changes to the way advisers make money. After Kenneth Hayne suggested in the royal commission final report that ongoing service agreements be signed annually, instead of every two years, Pyne agrees that more regulatory change may be on the horizon.
“It wasn’t why we did it originally,” he says, “but yes, I do think that’s the case.”