The whole fees versus commission debate is a non-issue.
The real issue is the cost or, more importantly, the value to the client, rather than how they are charged. What most of us call a fee is in fact little different to what the man in the street calls a commission.
I doubt that one per cent of the financial planners who say they are hourly fee-based are true to label. This is no different to the accounting profession. Some accountants say they work on an hourly rate, but when you quiz them you find they have both “mark-ups” and “mark-downs”. This means they charge an amount that they think the job is worth and the client will pay.
Pure hourly fees encourage inefficiency. The longer you take to do something, the more you earn. The industry must do better than this.
Some years ago, we at Count Wealth Accountants got sick of listening to the fees versus commission debate and decided we would become fee-based. To do so, we set maximum charges/fees separately for up-front advice, on-going advice and non-advice (i.e. a placement service).
The adviser could charge less than the maximum fee and could even charge an hourly rate (although this is not recommended) but the total could not be less than our scaled fee. The adviser could even specify his/her own minimum fee on the Adviser Services Guide.
The benefit of a scale fee from the dealer’s point of view is that we can then state our maximum scale fee in our marketing literature.
And by unbundling the advice fees from the commission paid, both the adviser and client can clearly understand that advice carries significant value, whereas placement of investments adds little or no value.
Because our maximum up-front advice fee is much less than the commissions paid on most retail funds, we lost a couple of advisers.
Some of our accountants have also joined out competitors because there they can charge whatever they like. I probably receive two or three calls per year from clients questioning fees plus a few more calls about tax and accounting fees.
The average up-front fee as a percentage of up-front business written is therefore much less than the maximum fee, and the average is closer to 1 per cent than to 2 per cent. For efficiency, the up-front advice fee is usually collected via discounted commissions.
The on-going advice fee (reviews are compulsory) is collected from trailing commissions and an invoice or direct debit.
Count Wealth Accountants does not compete on price but we do compete very much on value and on the quality of our advice and service. Value is not just the advisers’ fees, but the total package.
And because we don’t wish to compete on advisers’ fees, we have been very active in getting a better deal from banks, life companies and fund managers for our clients.
Our industry is still very inefficient and must change. To do so, we must concentrate on the real issues and not red herrings.
<I>Barry Lambert is managing director, Count Wealth Accountants
