The debate raging between fees and commission is almost over. It has not reached a conclusion, rather the industry has moved on to the next step and is more interested in whether planners provide value for their remuneration.
This is one of the key issues facing the financial planning industry, according toHypercompetition Part 2—Survivor: Outwit,Outplay, Outlast. The paper is the follow up to the original released by Credit Suisse Asset Management (CSAM) head of retail funds Brian Thomas and national sales manager Clayton Coplestone.
In the new paper, freely available on CSAM’s Web site, Thomas and Coplestone have taken the focus away from purely looking at big picture industry concerns and tackled those facing planners in the immediate future, as well as the views and opinions of consumers.
In doing so they have returned to one of the industry’s longest running debates and found that fees and commissions have begun to be eclipsed by the overall question of do financial planners provide more value than the remuneration they receive?
The paper says this is an important consideration because planners who work with this approach will find that business continues to flow and stay with their practices despite any long-term changes to remuneration models in the future.
However, Thomas and Coplestone say the issue of fees and commission will remain of interest to planners, but will be of very little interest to consumers, who will primarily focus on the value they receive from a financial planner.
“Whilst compensation is top of mind for the financial services industry, the consumer is more interested in the value they are receiving. It is this point that will be scrutinised further as the environment becomes increasingly competitive,” the paper says.
Despite this shift from planner to consumer, the two authors say consensus is swinging towards fee-based practices.
In fact, Thomas and Coplestone state it is enviable because it provides transparency and a simplified billing system.
In their definition this means planners who charge only flat fees for service or use a retainer-based consulting process. However, the paper says many planners who claim to use this definition still derive a portion of revenue from third-party providers.
And while they are not critical of revenue gained through those methods, they say there are problems with such revenue streams looming in the future.
“The ensuing risk to their financial planning business is considerable going forward, as all components of the financial planning journey will encounter margin squeeze,” the paper says.
For those advisers who have already moved to a fee for service model, the paper says many have also moved their fees higher as the demand for service has increased, thus pricing some clients out of contention.
Into this void have stepped the commission-based planners who have catered for that group well, but now large-scale financial services providers are also targeting this market with low hourly fees or even free-advice models.
This does not bode well for commission-based advisers either, with much of the advice being supplied cheaply, or even free, at a professional level, adding further pressure to all players in that part of the market.
Moving to the next step, the paper says fee-based planning has traditionally levied a fee based on the level of assets under management, and this implies that more funds means more work for the planners.
However, this is rejected by Thomas and Coplestone, who maintain that the provision of the service, irrespective of funds under management, is the key driver going ahead.
“Successful financial advisers are not concerned with the amount of funds under advice or the method in which they are compensated for their advice,” the authors say.
“They are confident the financial advice they provide is of sufficient quality to command a payment, which is significantly below the additional value that has been provided to the client.”
The paper goes on to say that clients are routinely reminded of this and thus are constantly aware of the sources and level of remuneration received by the adviser and that under this model, changes to margins and commissions will have no effect on the adviser’s revenue streams.
The authors make this point because they also see increased competition across the whole financial services industry forcing the standard practices and procedures of planners into the class of commoditised services.
In doing this, large-scale providers of advice will begin to lower the bar on fees and pricing, and as consumers become more aware of costs, new fee models will gain popularity.
This in turn will encourage consumers to seek the best performance for their fees or the most targeted and specific advice for the lowest outlay. Combined with technology and alternative fee structure, clients will seek to unbundle financial planning as it exists at present.
Part of this unbundling will be to see consolidated reporting as an expectation and not a value add, but in doing so, prices charged to clients for this service will have to fall.
Thomas and Coplestone say this will occur mainly because while technology has driven down the costs for planners, there has been little flow-on effect through to consumers.
“Over the past decade, many of the cost savings enjoyed by financial advisers through technology have not been passed onto the consumer, who still roughly pays the same amount as they did 10 years ago,” the paper says.
At work in these statements is a key idea that services will become commoditised as fees begin to fall. However, if this occurs, the industry will also face increased levels of homogenity in terms of advisory services, according to the paper.
But Thomas and Coplestone ask will suppliers of general style financial advice still be regarded as advice sources by consumers?
For consumers who wish to maintain a less expensive option the answer is probably ‘yes’ because they do not wish to pay for a relationship or quality advice.
However, for those consumers who do seek a relationship with an adviser, an institutionalised model of advice is difficult to put in practice, despite how logical and sensible it may appear on paper, so advisers working in that way will still attract clients.
The paper says for planners concerned with the trend to commoditised service and the decline of the generalist there are a number of ways around this within a planning practice.
One is to employ a number of planners within a practice who concentrate on their respective fields, with existing models already in place making use of co-operative arrangements and alliances.
Another model is the multi-disciplinary practice where a range of practitioners are employed by the same group, thus limiting the number of referrals to advice providers outside the group.
Yet it seems that the formation of these models on a wide scale has been hampered by the reluctance of planners to become involved with other advisers.
“The most significant obstacle toward the adoption of a multi-disciplinary approach is the ego of most financial advisers operating small practices,” the paper says.
“Many of them possess a controlling type of personality that unearths excuses for not growing and delegating. This reluctance to share clients and desire to be perceived as ‘all things to all people’ will ultimately fail to meet the client’s expectations, or will still result in a mistake or an oversight.”
The paper is also critical of another failing of the industry — that is, the fixation with consolidated reporting systems such as wrap accounts and master trusts. Thomas and Coplestone say the problem with these platforms lies in that while they provide a range of benefits and costs savings to advisers, they do little for clients and the overall cost of providing financial advice has remained static for a decade.
“Much of this embracement of platforms has been in vain, with clients having little interest in the ancillary offerings by platform providers that make their financial adviser’s business more efficient,” the paper says.
Thomas and Coplestone go so far as to say that these systems actually disguise some of the inefficiencies within the industry due to the absence of straight-through processing and a reliance on the hyper margins that exist between retail and wholesale pricing.
Nonetheless, the provision of consolidated reports is being regarded as a standard part of a planner’s service, with the value from the adviser tied up in the advice and information above and beyond the paper.
“Consumers are more interested in goal setting, and readily available decisions to specific queries that satisfy their situation, rather than what has traditionally been the best strategy for their financial adviser,” the paper says.
