Asset-based fees apt for COVID-19 volatility says AFA

16 April 2020

As the first impacts of the COVID-19 market melt-down began to be felt, the Association of Financial Advisers (AFA) wrote to the Accounting Professional and Ethical Standards Board mounting a strong defence of asset-based fees noting that they ensured advisers had “skin in the game” alongside their clients.

The AFA used a submission to the APESB’s review of APES 230 to mount its defence arguing that it believed asset-based fees should be retained alongside fee-for-service and life insurance commission in any refresh of APES 230.

“…we do not see any need for the removal of either asset-based fees or life insurance commissions,” the submission said.

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“In Regulatory Guide 175, ASIC [the Australian Securities and Investments Commission] have stated a very clear view that the receipt of asset-based fees does not prevent an adviser from describing themselves as independent. It is also a fact that some clients prefer to have their adviser paid on the basis of an asset-based fee arrangement. They like to see that their adviser has some ‘skin in the game’,” the AFA submission said.

“And this is exactly the case at present, as we observe the material declines in the value of the Australian and international share markets as a result of the coronavirus. As the client’s assets go down, so does the income of the adviser,” it said.

“We also struggle with the assumption that hourly fee arrangements or fixed fees are completely free of conflict, yet there is something inherently wrong with asset-based fees. There are risks with each of the models.”

“In terms of an hour fee arrangement, this provides an incentive to take longer to complete the work, or to provide services that are not important to the client. Ultimately, we believe that clients should have the ability to choose how they pay for their financial advice, and asset-based fee arrangements are an option that many may choose,” the AFA said.




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The 'skin in the game' argument is disingenuous. If this were truly the case fees would be charged as a percentage of the return, not the assets; a performance fee as it were. Participation in market beta is not a value add in itself. Moreover, the asset based fees approach may prompt advisers to grow AUM, distracting from best interest duties. Few advisers are able to add 'alpha' on investment advice. True alpha comes from the broader skill base of advisers.

I tend to agree David, but it depends what you add into the activities around the portfolio. Rebalancing for example, is this part of the broader skill base or part of the portfolio attempt to generate alpha? And if it is part of the broader non portfolio skill set, what's it really worth? Because a Retail/Industry Multi-Manager will likely do it more efficiently. And not all portfolios are designed or targeted to ' beat the benchmark', they are targeted at the clients goals/expressed needs. So the Alpha concept is blurred. But I do think many of the Vanguard type Ádviser Alpha scenarios are debatable and possibly more marketing spin in the real world than true alpha.

Quite surprising that an association should be arguing the case that advisers should have skin in the game - its not really that important an argument when selecting an adviser - anyone heard of an adviser being sacked because they don't have skin the game?
The reality of that argument is the risk to the adviser is minimal given the long term return from markets means an increase or indexing of fees to a given market exposure. No skill in that plus the only downside for having 'skin in the game' is the volatility of advice fees. On a risk return basis its pretty obvious the long term wins and the adviser gets more. The association would do well to focus on the fact that advisers shouldn't be under financial stress due to reduced fees at a time they are working harder than ever to settle clients down in volatile tikes. Why penalise a professional for working harder buy reducing their income? Its a bizarre argument from a professional body although I stress the issue with relationships isn't about "how" fees are collected and why the advisers fee for service should be linked to the risk profile of the client.....what asset based fees are linked to 100% cash I wonder?

What fixed dollar fees or hourly rate remuneration is linked to 100% Cash I wonder ?

The issue that gets missed in all of this conjecture is the client and what they want. So do they want an hourly rate? do they want to pay a commission? I do not know the answer to that so I ask them. Having one model in your business is not in a client's best interest. A person I know received a $750 bill from an accountant the other day to realign her Reckon records with the ATO. No mention of how many hours it took, what the charge out rate is, was it a junior or senior. Clients best interests and no degrees of honesty guys, that is what it is all about.

Many many clients over 30 years have understood and agreed that in the event of a market downturn, it is only fair their adviser is being paid less when their invested monies have decreased in value. Similarly, they have agreed and openly expressed a view that if their adviser has the asset allocation and investment option strategy suitable to their risk profile and delivering the results required , they are satisfied the adviser's remuneration is based on their financial success and achievement.
It is not as palatable for clients to receive an invoice or direct fee request for the same level of remuneration when their own income is under threat and when their account may have retracted by tens and tens of thousands of dollars.
All of a sudden, the fixed dollar remuneration or hourly rate basis can appear to be very expensive at the worst possible time.
And whilst those who only subscribe to the fixed fee or hourly rate model will always try and denigrate those advisers who accept asset based fees, it is a choice that should not be taken away from the client to elect how and when they choose to pay for the advice provided.
In this current challenging environment, advisers who are remunerated via asset based fees are working very very hard for significantly less remuneration..........and many clients agree that is a fair and reasonable outcome.

I prefer a tiered asset based fee model, and I have received positive feedback from my clients over the years. Many of them prefer it, just like the AFA are saying. But several months ago I switched all my clients to set dollar fees (which resulted in fee increases for most) due to FASEA's farcical code of ethics. Now I'm sitting pretty and my income hasn't changed due to Covid19. Great for me, but a shit outcome for my clients. Well done FASEA. You are truly champions for consumers. Lucky you did all that consumer research, consulted with experienced, practicing advisers and spent time understanding how financial planning practices operate before making radical changes to our profession

Do advisers who only charge the client a monthly fixed dollar fee rather than asset based fee elect not to charge the client if the client has 100% asset allocation in Cash ???.....or do they still continue to receive the monthly fixed amount paid from the client account?.......I think I can answer that question..................YES.!!!!
Advisers who repeatedly criticise other advisers who accept asset based fees is akin to a religious group telling another their philosophy or beliefs are wrong and that they are right.
Clients and the consumer have a right to elect how they pay for advice as long as they are clearly informed of their options. One model does not suit all clients.
Similarly, the situation regarding the banning of advice fees to be paid from MySuper accounts is equally ridiculous.
Take for example the current environment where people are struggling in regard to cash flow, but would be happy for comprehensive advice fees to be deducted from their MySuper account.....and the Govt tells them they cannot elect that affordable option and must pay the fee from other, non super sources.!!
But consider the absurdity when you are unable to pay for advice from the super fund itself for advice which is not directly related to your actual super fund, but for a client over age 65 and whose superannuation fund has become Unrestricted Non-Preserved, they can withdraw the amount directly from their super fund, paid into their bank account in order to pay for non super related advice.
The source of the funds to pay for the advice is still originally from the super fund.
This is the absurdity of the whole process where Trustees can release the monies to a 65 year old , but not to a 64 year old to pay for either super related or non super related advice.......
If an adviser is providing comprehensive advice to a re-retiree or retiree in regard to their superannuation in addition to potential Centrelink benefits does the adviser have to spit the fees so that a portion of the advice relating purely to the super fund can be paid from the fund and the portion of advice related too Centrelink must be paid from outside the super fund ?.............If so, this is completely unworkable, confusing and ridiculous.
If this was a My Super account, the future may result in none of the advice being able to be funded from the super account.......whoever has dreamed up this garbage is not in the real world.

It was stated in the article that “In Regulatory Guide 175, ASIC [the Australian Securities and Investments Commission] have stated a very clear view that the receipt of asset-based fees does not prevent an adviser from describing themselves as independent." I don't believe that is correct. If it is could someone correct me., as I'm currently converting all clients to flat fees with the objective of calling myself independent.

Old Bob,

Financial services providers that receive asset-based fees are not prevented from using restricted terms such as ‘independent’ merely because of their receipt of asset-based fees.
You will find in 175.74

https://download.asic.gov.au/media/4698465/rg175-published-10-april-2018...

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