The debate over fees and commissions is as old as financial planning itself.
Tom Collins asks whether we are arguing over definitions.
This month I would like to expand on some of the issues I raised in my last article. These include fees versus commissions; the role of a financial planner; and the proper financial planning process.
As I have written many times, I am ambivalent about fees and commissions. What I think is important is full disclosure.
ASIC won’t let an adviser describe themselves as independent if they take a commission, because they do not regard them as being objective. I ask, what is objective and when is a fee not a commission?
Well how is an asset-based fee objective? How does it relate to the service being provided? If the value of the portfolio reduces, does this mean that the adviser will do less work now he/she is earning less? Does it encourage the adviser (subconsciously of course) to bias the portfolio to growth assets? Is there an incentive for the adviser to bias the portfolio to growth assets?
It seems to me that if an investment product pays an incentive, it is described as a commission. Therefore, we could define a commission as a payment that acts as an incentive to recommend/ use a particular product/service. If this definition is reasonable, is it not possible to define an asset-based fee as a commission?
Many dealer groups (even boutique ones) are now badging their own platforms (wraps and master trusts). The dealers invariably include a margin (in addition to any trail) in the product for themselves (30 to 50 basis points). Is this not a commission? What about the buyer of last resort or option schemes that are often attached to these platforms? Surely these are incentives to use the service, and therefore should be labelled commissions.
I don’t really care whether the above incentives are called fees or commissions. What I do care about is honesty and full disclosure. I do not think it is honest to go about saying that you can only be a professional if you charge fees and do not take commissions – yet have a very narrow (convenient) definition of what is a commission.
On the point of full disclosure, how many advisers disclose all options to a client? If the client has less than $50,000 are the retail options to the platform canvassed? If the client has a lot of money, say a few million dollars, are the wholesale and mezzanine options canvassed? Do advisers ever discuss fees vs commissions as an option?
Or, what about the circumstance where a client is in a corporate super fund that provides a generous index pension with a surviving spouse option. Does the adviser disclose that their (the adviser’s) reward will be greater if the client cashes out of the corporate fund?
To me full disclosure is more of an issue than fees or commissions. There are many situations where a commission is more appropriate for the client, and sometimes for the adviser, than a fee. The obvious situation is when someone has been retrenched. However, there is no situation where there should not be full disclosure.
Which brings me to the issue of the role of a financial planner. Is it to give advice, sell a product or service, or both? Are all financial planners advice providers? Should all (financial) advisers be financial planners? Do all clients need financial planning?
These are many of the questions that will arise out of and be debated as the full importance of the Financial Services Reform Bill (FSRB) sinks in. At the core of FSRB is advice giving not product selling. But FSRB does not equate advice with financial planning. However, the Bill does equate disclosure with products and selling.
As a result of FSRB, advice will take many forms, be delivered by many different players and via various medium. So, will financial planners be only one type of advice giver? If this is the case, will financial planners be at the apex of advice givers, or off to one elite side? Or, will financial planners be the broad base of advice givers, referring clients, where necessary, to specialists. Over the years, many have argued that the financial planner, as a holistic adviser, is the equivalent of a GP.
Unfortunately, I see the descriptor “financial planner” becoming a generic term to cover all advisers in the financial services industry. In many ways, this has already happened. (Except, you never hear ASIC refer to financial planners.) If this is to be the case, rather than worrying about the role of the financial planner, we should be worrying about the financial planning process.
Many people are critical of GPs for being “pill-pushers”, and many are critical of financial planners for being “managed fund product floggers”. Is this because the outcome of all advice giving is a product or service sale? Does this always have to be the case, or is it the result of the way advisers are rewarded, especially asset-based fees – sorry commissions? This gets me back to fees versus commissions and full disclosure.
To the best of my recollection, there is nothing in the financial planning six-step process that requires the outcome to be the sale of a product or service. But, it seems that most, if not all, presume this will be the outcome – even ASIC. In Australia, we have had the “know your client” and “know your product” tests. In the USA and UK they have the “reasonable advice” test. Maybe this is a better test if we don’t want to always end up with a product sale.
For many years now Peeyush Gupta, Paul Resnik and a few others have been challenging the way advisers do financial planning. They are not critical of the six-step process, but the order in which the adviser works through the client analysis step (establishing risk first, rather than last.) Others, including myself, are critical of what is defined as risk. In many instances, what is defined as risk is really volatility. And, to me, the greatest risk the client faces, is the selection of their adviser – but where is this published as a risk.
FSRB is going to bring many changes to this industry. The line between selling product and advice giving will be further blurred (if that’s possible). FSRB allows for advice to be given in many forms, by many different players. There is still a nexus between advice and products, and no recognition that advice, when being provided by a financial planner, covers more than investments and securities. Maybe this narrow investment product focus provides financial planners with an opportunity.
Possibly financial planners should be pure advice givers, and not sully their hands with transactions, and only charge fees based on this advice. They could forgo any commissions (sorry fees) from platforms and products. How many would survive?
