InFocus: Asset-based fees – utilitarian or inappropriate?
Survey data presented to this month’s Money Management Future of Wealth Management – Advice Conference served to confirm that, notwithstanding the critics, asset-based fees continue to represent a crucial revenue option for financial planning practices, particularly where mid-tier and low-value clients are concerned.
What the survey revealed is that, nearly a half-decade after the changes wrought by the Future of Financial Advice (FoFA) changes, advisers are continuing to struggle to find billing methodologies which meet both their needs and the needs of their clients.
Importantly, the Money Management research came just ahead of research conducted by MetLife which confirmed the continuation of the age-old dilemma for financial advisers – convincing clients of the value of advice and justifying what they should be prepared to pay for that advice.
In fact, the Money Management research revealed just how convenient asset-based fees were in the minds of advisers as a mid-point between the kinds of arrangements they could negotiate with high net worth clients and what could be managed with respect to relatively low value clients.
What the survey revealed was that advisers were comfortable with imposing an annual fee on high value clients and some mid-tier clients but were far more inclined to use asset-based fees for lower net worth clients.
The problem, of course, is that a question mark continues to hang over the future of asset-based fees, notwithstanding the fact that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry stopped short of recommending their total elimination.
Perhaps unsurprisingly, much of the criticism of asset-based fees has come from the home of fee for service – the accounting profession. But that criticism inevitably overlooks the reality that financial advice is much more of an ongoing relationship between adviser and client than the tax-time relationship which often exists between an accountant and a client.
Then, too, there is the reality which has been reinforced by the most recent MetLife research – that financial advice clients continue to struggle with what financial advice should cost and how they should pay for it.
What the Money Management research also confirmed is that advice really is becoming too expensive for many consumers, if only because advisers are now making some rather brutal and pragmatic decisions about which clients they actually want to service. Clearly not those with low balances and a reluctance to pay fees.
The survey revealed that in the months following the Royal Commission there had been a 12% reduction in the number of clients being serviced by advisers and it was clear that it was lower value clients who advisers had chosen to drop from their lists.
This then raises the question about how these lower-value clients will actually gain advice with the answer appearing to be greater use of robo-advice and, if the Australian Securities and Investments Commission (ASIC) is right, the provision of advice via superannuation funds.
Asked by a Parliamentary Committee about whether advice was becoming less affordable in the wake of the Royal Commission and other regulatory changes, ASIC pointed to advice inside superannuation.
Giving evidence before the Parliamentary Joint Committee on Corporations and Financial Services, ASIC commissioner, Danielle Press pointed to superannuation funds as being the likely conduit for advice delivery.
Under questioning from former financial adviser and Queensland Liberal back-bencher, Bert Van Manen, Press said the regulator was aware of unfilled advice needs and the changes to the system.
“Advice in superannuation as well, and I believe that much of advice that lower income Australians will receive is through their superannuation fund,” she said.
“Super funds both industry and retail have been providing advice for a long time,” Press said.
However, during the same committee hearing, ASIC acknowledged that it was still seeking to come to terms about how superannuation fund members were charged for that advice and whether it was appropriate.
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