Financial planning - it's service that matters not remuneration

When it comes to financial advice remuneration models, it's the service that matters, not the mode of payment, says Indy Singh.

There has been much debate surrounding the transition to fee for service. So much so that the Labor Government decided to review it under the Future of Financial Advice (FOFA) Reforms.

The catalyst has been the drive from industry super funds, which initially targeted financial planning and then financial planner fees, which they termed as commissions.

There is nothing wrong with commissions, even lawyers dealing with deceased estates charge commissions, as do real estate agents, and call them as such.

I recall paying stockbrokers in the early 1990s a commission of up to 4 per cent to buy and sell shares. Stockbrokers are smart people; they changed the word commission to brokerage, which seems to convey the impression of an ethical charge for hard work.

However, the direct attack on financial planner remuneration has tarnished the payment of a fee as a commission to financial planners as being false, exorbitant, unsuitable and improper.

Some believe that fund managers pay commissions to the advisory industry. The truth is that all commissions are paid by the clients, including all fees paid to fund managers and so called not for profit industry funds for their multi million dollar TV advertisements.

There is not a single funds management institution that would have risked its own capital to pay commissions.

Fund managers always first charge fees that are deducted from an investors' account and then use the proceeds from this withdrawal to keep their own share and pay the adviser’s dealer group their share.

The investor provides for the remuneration of fund management staff, operational and administration expenses and the financial success of the product issuer when a management fee is deducted from their account balance.

So on what basis can the industry funds attack an adviser who has a one-on-one relationship with the client for a tailored financial plan with continuous maintenance and a written agreement for a fee that is to be paid out of the client’s assets?

The only defensible basis is when a fee is charged but a service is not provided.

This could be possible in the world of large and compulsorily growing corporate super funds, where it would be difficult if not impossible for a financial planner to give personalised advice to thousands of members to earn their remuneration.

Some form of advice is certainly possible through group presentations, which may justify the charge.

It appears then that the industry funds, our regulators, our politicians and even our industry bodies have confused the issue and clubbed together the mandatory world of corporate super with personalised and tailored advice to individuals.

They are two completely distinct and different areas. To combine the two in one basket is akin to having the Government regulator force one set of rules for all forms of football, be it AFL, rugby league, rugby union, soccer and gridiron.

Professional financial planners charge a fee when advice and service is provided and agreed to by the client. It is up to the client to agree to the charge depending on the level of service delivered by a financial planner.

The client must then take the responsibility to spend time with the financial planner to review his or her financial circumstances.

To get a client’s written agreement for the fees to be charged, it should be sufficient for the financial planner to make the service offer at the beginning of a relationship and explain it with complete disclosure.

If a client prefers to not attend review meetings in spite of the planner’s repeated requests, it is their own decision. A financial planner should not be penalised for it.

Therefore, for review fees, a client should have the power to 'opt out' rather than have to 'opt in' each year.

If opt in is the only solution, then maybe the banks should also get a signed agreement each time a customer makes a withdrawal, and so too an accountant annually for each tax accounting client.

Why should the financial planning industry be the only one subject to this requirement?

There has been much debate on fee for service, with certain financial planning groups pushing for an hourly based charge.

In some instances this may not be such a good idea.

I recall the joke of a successful 45 year old lawyer who died and found himself at the end of a very long queue outside the pearly gates of heaven because only those who died at a ripe old age were sent to the front of the queue.

An usher asked him to move to the front of the queue since he was one of the elderly.

The lawyer looked surprised and advised that he was only 45 when he died. The usher looked at his records and said, 'That’s strange.

Your billable hours show you to be 125 years old'. This anecdote suggests that there could be a different type of conflict if we charged an hourly rate.

Indeed, one hears that the Chief Justice of the West Australian High Court is known to have said that hourly rates are something of the past.

They convey a false image of lawyers and barristers working late hours with the additional support of their staff to deliver an outcome that may not eventually be to the advantage of the client.

On the other hand, an asset based charge ensures that an adviser benefits when the client gains and suffers a loss of income when the client’s assets decline in value.

The discussion on dislocating product recommendation from a fee charged for advice still continues.

I take the liberty to presume that this mainly refers to initial advice that causes an investment to be made rather than ongoing advice, which is the area where established advisers and dealer groups earn the bulk of their remuneration.

The focus again is on product sale and the fund manager paying the fee. This is untrue, because the fund manager is simply the conduit through which an adviser gets remunerated.

It is the client who pays an adviser fee from the money invested, which is convenient to all parties, or otherwise the client would have to pay the adviser fee directly.

Separating an advice fee from a product recommendation may not be the final solution. Would an adviser still be held responsible if an advice fee had been paid separately for a product that failed?

Ultimately it is the adviser’s responsibility to understand the client’s circumstances before making a recommendation.

However, the current slant of Government thinking seems to convey the message that an adviser is always responsible, even for the failure of a product.

The product manufacturer can become insolvent and then go out and establish another product and, of course, the regulator and the Government of the day wash their hands and palm all responsibility onto the financial planner.

Let us stand back and think how many financial planners would have been accused of giving bad advice if a product had not failed.

The UK financial regulators evaluated the Australian model to develop their own. It may be time to look at their model, which requires a fee to be charged only with the agreement of the client and for an asset based fee to be acceptable.

This simple approach supports advisers and investors. Clients should be given the opportunity to opt out from a service without the necessity of opting in each time they speak with their adviser.

The industry may also consider changing the terminology of the fee paid as a commission for a service to a brokerage or asset based fee paid for a service.

The terminology is not important, nor is the mode of payment. What is important is that a service is actually provided and the client has agreed at the outset with the fee to be paid for it.

Indy Singh is the managing director at Fiducian Portfolio Services.