Imagine if advisers could predict exactly when a client or prospect needed advice on a specific matter. Imagine if they could magically call or appear in their inbox at that moment. Johnny on the spot. Not only would they have a highly motivated client with a problem, they’d have the solution. Would the client value that advice? Yes. Would they be willing to pay handsomely for it? Definitely.
This scenario poses the questions: What if advisers only provided and charged for advice on an as-needs basis?
What if they only provided one piece of advice in Year 1, no advice in Year 2 and three pieces of advice in Year 3? Could this be classified as an ongoing relationship?
You bet and an extremely valuable one at that.
While this type of relationship may not meet the definition of “subscription” – the industry’s latest buzzword – it has the power to yield strong returns.
But in order to turn this scenario into a reality, advisers need three things: great relationships, confidence and data. They can learn a lot from other professional services firms.
Professionals bill their clients regularly for the work they do and their clients pay.
They pay because they have complex, pressing needs that they can’t meet themselves.
It’s a straight-up, timely value exchange.
Yet the advice industry’s fearful reaction to draft legislation requiring explicit client approval for advice fees to be deducted from accounts annually suggests that advisers think some clients may not pay or renew.
The ongoing fee model needs a rethink.
To me, the industry’s resistance to annual fee contracts is akin to a sailor running south on the deck of a ship travelling north at 40 knots. No matter how fast that sailor is running, he or she will still end up north (and exhausted). Similarly, advisers need to accept that ongoing advice fees are close to expiry, due to changing demographics, consumer preferences and professional standards.
As an investor and business partner in over 60 professional services firms including a number of accounting firms, it is clear that Australians have increasingly complex needs and they’re prepared to pay a reasonable price for good advice.
Tax, superannuation, lending, social security and survival in general is complex stuff and it’s only getting harder.
People need advice but they don’t necessarily need it on tap. They need it when they need it.
This argument is supported by changing demographics and work patterns, not to mention increasing economic uncertainty, meaning that paid full-time employment, job security and regular superannuation contributions are a pipe dream for the majority.
Many people, particularly younger people, have never – and will never – have a full-time job. Part-time and casual work; freelancing, consulting and contracting (often involuntary) is becoming the norm.
According to global jobs website, Indeed, 60 per cent of hospitality workers and more than half of retail jobs are part-time.
In fact, in every industry, except finance and real estate, businesses are relying more on part-time workers, according to the Australian Bureau of Statistics (ABS).
Across almost every industry from stockbroking to journalism to manufacturing, people are being forced to reinvent themselves and accept insecure work. Digital disruption, regulation and progress in general demands it.
Demographic change also demands it.
According to McCrindle Research, Australians aged 65 years or over currently represent around 15 per cent of the country’s population, or 3.8 million people, and that figure is expected to hit 5.2 million the next five years.
By 2055, it is estimated that there’ll be only 2.5 workers per retiree, down from 4.5 workers per retiree in 2015.
This poses a significant challenge for advice firms (and the government).
For the average advisory firm, retirees and pre-retirees represent the bulk of their client base.
As the baby boomers adjust their lifestyle and spending to reflect their new stage in life, how many will continue prioritizing ongoing advice fees?
Retirees may need an ongoing advice relationship, but do they need to pay an ongoing subscription for advice?
In the same way, people typically only see their solicitor when they need timely advice on specific matters such as buying a property, estate planning, or getting married or divorced, advice firms need the capability, capacity and confidence to deliver advice on an as-needs basis.
Fortunately, when it comes to profitability, frequency is irrelevant. Strong, lasting client relationships are built on value, trust and history – not number of interactions.
The professional advisory firm of the future will not charge ongoing advice fees.
Instead clients will be billed for work completed.
They will have an accounts payable and receivable department, and potentially the facilities to process payments on the spot, like doctors.
They’ll also be data-mining experts that use technology to store, record and retrieve data and produce reports that enable them to proactively market to clients at critical times in their life.
Business buyers will place a higher valuation on firms that understand this because they’ll have much stronger client relationships than those with a subscription-style model. They will be well-positioned to deliver sustainable growth.
Right now, these professional advice firms aren’t fighting to preserve business models that are out of favour with consumers and the regulator. To them, this is akin to running south on a ship that is sailing north. You can find these businesses on the ship’s bow, leading the charge towards professionalism.
Paul, if we were giving a once a year review I would agree but we provide service to our clients. A whole range of services throughout the year to ensure that they don’t have to worry about money. Taking away peoples ability to choose how they pay for the service they want and adding such a prescriptive rules that are inflexible and don’t allow for clients health issues, travel plans and other life issues and disasters isn’t going to benefit the client. It is just adding extra administration. I agree that there should definitely be regulations to ensure that clients don’t pay ongoing fees for no service but this is from one extreme to the other and wasting time and resources of quality advisers whose clients have elected to engage them to provide them with service. The 12 month part needs to be more flexible.
Some points are ok, others unworkable. Unlike Solicitors, Doctors etc, planners have to substantiate any advice with a SOA or something similar. This means a lot more information is required compared to other professionals.
What the client doesn’t understand and doesn’t want to understand is the amount of legislation and compliance the adviser has to meet when providing advice that covers old ground. Consequently, they feel that they are being asked to pay for advice previously provided, or do not accept that they need to pay the amount being charged.
The problem with the “Gurus” such as the writer of the article, is that they talk about issues, the future etc, but do not provide an answer!
Paul, the concern here has nothing to do with non-payment but another unnecessary administrative burden.
Our practice and most in our license have moved to annual fee arrangements for all our larger clients specifically to get away from the FDS and opt-in process. The client still gets to review their services and has a complete view of fees and services prior to any commitment. The current legislation is implying we will have to TURN OFF the fees every twelve months and then turn them back on to satisfy the rubbish that has been put forward. If a client forgets to approve the fees being turned back on, even by a week, you have to disengage from their advice. They then realise their error and re-engage and the practice, to follow the letter of the law, will have to do up new advice documents, get more forms signed by the client and start the whole process again. This will happen for clients who pay by direct debit or via a platform
The argument is not about the fee structures, it is about another flawed and wasteful use of practice resources when we already have the FOFA recommendations dealing with the issue.
To your point on one-off fees. I hear a lot of commentators argue that to be a profession we need look more like legal and medical practices. What most commentators forget is that many of their services are mandated and in medical services, the fees are prepaid via Medicare and private health care. If patients had to pay the full costs when they visited a doctor, they would never go and health issues that could be dealt with easily would become chronic.
Lawyers do tend to charge transactions fees but many of their services are mandated by banks and government institutions. Conveyancing, loan applications, M & A, stamp duty, litigation are just a few examples where you have no choice but to enlist legal services. Lawyers have to compete to supply these services but clients have no option on whether they utilise them. With litigation, they can charge a 40% success fee that recoups months of work.
Advice is not mandated, not subsidised and not tax deductible. If an adviser rang a client to say we need to look at your portfolios so come on in and we will charge you a $2500 one off fee. This would be a minimum fee as we need to do the actual work and have trained professionals to talk to and we need to produce a document to appease ASIC and AFCA and protect our PI insurer and Licensee. I think there is a pretty good chance that clients will decline.
We are still on the hook for the advice but the client can’t afford to have a review. A forty year old turns into a fifty year old with no reviews, no tracking and no adjustments for changes in circumstances, oh, and then we get sued for inappropriate advice.
This is the transactional view of financial planning and it makes sense for a person with multiple senior roles with product providers to have that view. Transactional advice is clearly cheaper than ongoing financial advice and it allows product provider to sell their products – which have *ongoing* fees – at a lower cost.
Is this truly the time for product providers to turn on financial advisers, trying to reduce their earnings? Examples are those licensees who turn on their advisers when it comes to remediation costs, or the LIF insurance changes where the insurance companies reduced adviser remuneration by what looked like 50% to most advisers. I don’t see a sustainable business model for a licensee with adversial adviser relationships and the insurance companies are hurting badly with much less new business written and many good advisers now only doing investment advice.
Good financial advice is not transactional. It is ongoing. Most people have a … difficult … relationship with money and there are many areas in their life where they can do much better financially and have a much better time in the process – if they only knew how. A good financial adviser knows how and can share his/her insights but the process typically takes years or even decades. A good adviser can help clients enormously in many circumstances but a lot of such opportunities arise only during regular client conversations, with the client often having no idea that they might be making a big mistake or what opportunities are available for them.
We now have an ASIC commissioner who sees no point in ongoing advice and here we have a product provider with the same view, and our legal environment with its achingly heavy compliance requirements is making ongoing advice much more expensive. Are we really heading in the right direction here?
Some good points. These professionals are not fighting as they are not providing a large degree of inane information via a SOA for every tiny detail of advice. A lawyer does a one page sensible summary of the likely work and a quote for cost. They also charge their hourly rate with no correlation to the value they are delivering e.g. working on a high level document or an easy phone call. Similarly my accountant never shows me alternatives considered, large reports, they just get on with it.
I just had to justify for compliance why I didn’t give advice to not twist a small super case (as part of a strategic advice piece). ‘So please advise why you didn’t advise the client to keep the advice they recd elsewhere; how it is in their best interests, how they are better off (just keeping what they have).’ Imagine if this was their home. “I believe it is in your best interests to keep your home…..” We are in crazy land some days.
Paul, I don’t think anyone will argue that that the community will benefit if more people seek ad hoc, reactive advice ie client has a problem, goes to seek one off advice to solve the issue. However, your article overlooks the fact that many clients are willing to pay for proactive advice – ie expecting their adviser to identify issues for them and the adviser then reaching out to the client first eg, changes in legislation, changes in investment quality etc. This requires genuine active management by an adviser ( as opposed to the lip service, fee for no advice, as identified by the Royal Commission), and there is a limit to a single adviser‘s capacity to delivery this service. This is what true ongoing service clients expect and remain willing to pay for. And they have a further reasonable expectation that they will be at the front of the queue when there is a crisis, not in line behind the next bit of new (ad hoc?) business. And the market has already spoken on the value of a such a service, where genuine ongoing service income is valued at 2.5 times plus, accounting style annual fees are valued at 0.9 times plus, and ad hoc medical services are valued at 0 times.
I’m normally a very positive person but it strikes me that for an industry still grappling with interpreting and implementing the post-RC and FASEA requirements, a better analogy than running south on a ship heading north is running towards the light at the end of the tunnel which turns out to be an oncoming freight train :-)
Respectfully, could not disagree with this more and shows how out of touch you are. You assume people can identify when they need advice. People generally are not financially savvy. Its more complicated then ever and they also have less time. Planning is not a legal business relationship. Its ongoing support and counselling to develop good decision making skills in all financial matters. Your article only serves to show that you don’t understand the needs of the Mum and Dad client bases and worse, like the regulators believe access to advice is only for the rich.