Ray Griffin takes a look at the fee-for-service debate and explains why this model will benefit clients and financial advisers alike.
There is now an across-the-board transition to a fee-for-service model in the financial services industry. This is something that those who have been calling for greater professionalism in the industry have wanted for a long time.
As with almost every advance toward professionalism over the last 20 years, the Financial Planning Association (FPA) is leading the way with its 2012 fees deadline — but it would be good to see legislation in step with professional standards. Such legislation should, at a minimum, separate products from remuneration.
I suspect many commission-based planners are anxiously wondering how they will make the switch to fee-for-service. Many will struggle to simply muster the courage to broach the subject to clients.
In a typical week, much of what a financial planner does involves technical issues — everything from superannuation legislation to strategies for understanding the buy-back conditions of the latest preference share offer.
As a result, many planners will instinctively think that the transition to fees-for-service is a technical process.
To some extent they are right — it is true that there are technical aspects to a change of this magnitude for a business. What will the impact of the change be on the financial bottom line? How will the timeline of change be structured?
The answers to these questions are all embedded in the preparation that must precede such a change.
These are issues that can be quantified in real terms, but the overriding success of the transition will be determined by the preparedness of the people in the business to lead the change process. Do the business principals believe it will be good for the business?
Do they believe that it will also be good for clients? Are they prepared to take a fresh look at how the business can operate under the changed regime?
Some will embrace the change with open arms, but others will have to be dragged kicking and screaming into the fee-for-service environment.
A few years from now many will wonder why they resisted the change for so long, and some will have either failed in business or chosen to retire rather than endure the change process.
One is reminded of anecdotes about businesses with cash-tin and paper-receipt-book account keeping systems that closed just before, or shortly after, the onset of the GST legislation.
Those that plan the change thoroughly will be surprised at the overall ease with which it can be implemented.
They will also be pleasantly surprised at how well many of their clients respond to the initiative.
They will readily cite the benefits of being able to wake up on January 1 each year with a reasonable understanding of where their businesses will be financially on December 31.
They will also be enjoying the changed service offering the businesses provide to clients.
The latter point is critical. There has to be something in such a change for clients — it cannot be all one-way traffic. In return for paying fees on a regular basis, there has to be something added to enhance the overall service offering to clients.
The days of simply picking up a trail commission cheque are rapidly diminishing.
The future will still see investments being ‘sold’ — but in a legislatively ideal world, the term ‘financial planner’ would be defined and enshrined in legislation.
It’s incredibly disappointing that successive governments have failed to equip the peak professional body and the regulator with the capacity to exert much greater control over who can call themselves a financial planner.
Such delineation would see people who want to just ‘sell’ investments labelled as such — an ‘investment salesperson’, say — while the title of financial planner would be reserved for those who meet the requisite education, professional and service standards.
Note that the original intent of the dozen or so visionary Americans who conceived of the personal financial planner in the early 1970s did not envisage that a financial planner would be an investment salesperson.
Given the brand damage inflicted upon financial planning in this country by commission-earning investment salespeople masquerading as financial planners, it’s high time that the government more overtly supported the professional efforts of organisations like the FPA by agreeing to define ‘financial planner’ in legislation. This is not an unreasonable request.
When it comes to quality personal financial advice, the community cannot have it both ways. People can’t expect highly professional financial advice if they don’t allow the advice provider’s nomenclature to be defined at law.
This is because all financial planners are besmirched as unprofessional with each investment collapse.
It really is time for the government to recognise that the Financial Services Reform Act was never going to be enough to prevent Storm collapsing.
Additionally, organisations like the FPA should be given some real legislative bite as gatekeepers of the profession.
The transition to fee-for-service will be painful for some businesses. But like most things in business, careful planning increases the chance of success and reduces risk.
To use academic ‘speak’, a transition from commission to fees is a change management process that will consume time and resources with no guarantee of success.
Initially it is about identifying the key perspectives of the change process that will include clients, financial implications, processes and knowledge acquisition and management.
A transition strategy needs to be developed, taking account of the unique aspects of the individual business, and the intricate detail of the transition steps should emerge from the strategic planning.
Finally, an overriding management and reporting system needs to be developed to monitor the transition plan.
The transition to fee-for-service is overwhelmingly about planning, implementing and then managing the required processes and their impact on the business stakeholders: clients, employees and the business owners. For most financial planning businesses, all this is achievable.
But the prospects of success are enhanced with detailed planning, which must be implemented.
While for most types of businesses change evolves incrementally over time or is brought about by competition, for financial planning in Australia this massive change to remuneration methodology is being demanded by the community — and is now being led by the professional body.
Combine that with the ongoing inquisition by legislators, and it is abundantly clear that we will soon witness a massive transition to fee-for-service.
This is a good outcome for the community and the budding financial planning profession.
It will lead to better outcomes for all parties: clients will be empowered with the capacity to control payment to their service provider; the solvency of most financial planning businesses will be enhanced; and the mainstream media will have one less major criticism of financial planners.
It will take us one step closer to a time when financial planners are critiqued solely on the quality of the advice they give and the community genuinely believes that clients really do come first. And that time cannot come too soon.
Ray Griffin is the principal of ConsultGriffin and a veteran financial planning industry observer.