On Friday last week the S&P/ASX 200 Index fell below 5000 points. If this carries on for much longer you’ll start to see the implications across the funds-management industry. Budgets will be slashed, costs will be reined in, and there will be retrenchments (quietly, of course).
Fund managers accumulate investors’ funds and get paid a percentage “fee” for managing the money. If that’s the way you get paid, then you’re in the same business they are. If your clients have a reasonable proportion of their funds invested in equities, then there’s a good chance the business you’ve worked hard to create has fallen in value over the past couple of weeks, because its revenue has declined. There are a couple of “ifs” in there, but not an outlandish number.
You may now be facing the same decision as the fund managers: how to cut costs, and who to sack. Was the market fall your fault? No, of course it wasn’t. Was it foreseeable? Maybe it was. Could you have stopped it? Yeah, right.
Looking at it another way, the value of your business has been hit by something that wasn’t your fault, wasn’t foreseeable, and which you couldn’t prevent. Congratulations – that’s some business you’ve got there.
You are what you’re paid for (and so are we)
If you do not get paid for the strategic, technical and structuring advice you provide to clients – you know, “financial planning” – then you can’t really claim to be in that business. I know the responses to this view: charging a percentage of assets is administratively convenient; clients prefer it; it aligns client and adviser interests; and so on. Sure, it’s all of those things. It’s also a compromised way for a professional services firm – any firm, for that matter – to generate revenue.
I recognise that by this definition Conexus Financial – the publisher of Professional Planner – is an advertising sales and sponsorship business that calls itself a media and events business.
That’s a characterisation I have to accept and it will stay this way unless and until we can persuade sufficient numbers of our readers to pay us directly for what we do. (Do you fancy paying a $150-a-year subscription fee? Do let me know if you do.)
Right now, our business model requires us to create circulation for the magazine and page views for the website, and to attract the right calibre of delegates to our events, to make us attractive to sponsors and advertisers. We generate circulation and page views and attract delegates by – we think – creating solid content for the magazine, website and events.
But with the exception of a nominal registration fee on some of our events, we do not generate revenue directly from doing those things. I wish it were not so, but that’s how it is. So I understand a little bit what it’s like to say you’re in one line of work (journalism/financial planning) but to be paid for achieving something else (advertising and sponsorship/asset gathering). This is the state of most journalism in the world today. (However, a fundamental difference between journalism and financial planning is that journalism isn’t a profession – it fails most tests of a profession.)
True professional services
It remains a mystery why more firms are not actively seeking to uncouple revenue streams from investment markets. It simply makes no commercial sense for the success or otherwise of a business to be at the whim of things that its owners and managers simply cannot influence. There are enough challenges in running a business as it is without having to contend with an unreliable and unpredictable revenue stream if you don’t absolutely have to.
And you don’t absolutely have to. Clients already pay you for what you do; it’s just that you’ve opted to link that payment to something outside your power to influence. The flipside of uncoupling revenue from investment markets is that if markets rise, your revenue doesn’t rise. But why should it? You’re no more responsible for a market rising than you are culpable for it falling.
Professional Planner has always stood against conflicted remuneration of all kinds in financial planning, on the basis that you just can’t build a profession on a foundation of conflict. Asset-based fees create conflicts of their own, and are not appropriate for true professional services firms.
But it’s difficult to build a sustainable business on shifting sands, and so in the coming year we’ll be actively seeking out firms that operate on a true fee-for-service basis, and highlighting to readers the business benefits that come from that.
You should be paid to do things that really add value for your clients. You add value in many, many ways, but being able to control the direction of investment markets isn’t one of them. You should not be paid more when markets rise, and you should not suffer when markets fall.
If that’s how your clients really want to pay you – and I’m assuming you’ve offered them an alternative and they’ve selected the asset-based method with informed consent – then have a think about what they’re actually saying about what value you are to them.
Reflect on the work you’ve put in, the study, the professional development and the years of experience it’s taken to get to where you are today. Is that what your clients value?
Then try to explain why something that is beyond your power to influence or control should mean those skills and experience, and the business you have built with them, are worth less today than two weeks ago. It’s madness.
