Are we product floggers or professionals, asked Jeff McMullen at the recent Financial Planning Association (FPA) national conference. A panel of industry identities then gave their views on a series of questions he posed.
Once again, the key differentiator between whether you were a professional or not seemed to boil down to whether you took commissions or charged a fee-for-service.
A fee-for-service is not a shortcut to professionalism.
Does anyone really believe that if every adviser converted to fee-for-service our image would suddenly become whiter than white?
Of course not, professionalism is more than how you charge for your services. It’s about qualifications, experience, expertise, morals.
The problem with the fee-for-service debate is that the concept itself is very murky.
Does it mean that advisers should only be remunerated after they have performed some pre-agreed, designated tasks?
Someone on the panel said advisers should get paid an annual flat fee, agreed in advance.
Other people think an ongoing adviser service fee deducted from a client’s account is ‘fee-for-service’. The purists think that this latter service fee is really commission in disguise.
It is simply not feasible for the average adviser to make a profit operating a pure fee-for-service business, so let’s stop pretending that it is.
Many established financial planning businesses have rich, older clients with significant assets and little debt.
These clients may well be happy to receive an invoice for $10,000 a year, and I wish I had a client base like that. But I don’t. My average client has $200,000 in super, a bloody big mortgage and a couple of kids.
They know they can call me any time they like without fear of getting a surprise invoice through the mail. They know they will receive at least one annual review (usually two). They know, because it’s clearly stated in my 10-page Statement of Advice (SOA) that I will receive a percentage of their assets in adviser service fees or commissions. They know the costs of their financial advice are being partly paid for by platforms and fund managers.
Do they care? No. They are happy and I am happy. There is a strong chance that I will lose these clients if some altruistic do-gooder makes them pay me from their own pocket. My ability to run a profitable planning business will disappear and the clients will lose the ability to receive professional advice.
Noel Whittaker, one of the panel members, commented that while people are relatively relaxed about having tax deducted from their salary on a PAYG basis, they get really cranky when asked to write a cheque for back taxes. This psychological reluctance is one of the biggest issues with pure fee-for-service.
Don’t get me wrong, I am a strong opponent of upfront commissions. These are fees that are deducted from clients’ savings and delivered to advisers out the ‘back door’ under the guise of ‘entry fees’.
It would help the cause of professionalism if these fees/commissions were banned and advisers had to charge a separate upfront fee for consultations, SOAs and implementation.
It would also help the cause if trail commissions were separated from management fees and shown separately as adviser service fees.
What gets lost in this interminable debate is that there are only so many clients an adviser can properly service in any given week, and the costs of running a practice are much more expensive than most people imagine.
A financial planning practice with two advisers needs at least two support staff, an office, compliance, research, training and so on. All up, not much change out of $250,000.
It is ridiculous to believe that under the current compliance regime independent financial advisers can profitably provide advice to young people or families with few assets.
It would be a different story altogether if advisers were allowed to meet with people like this for an hour or so, discuss their situation and give them some helpful hints.
No fact-find, no SOA, just a good, old-fashioned chat. Advisers that were interested in providing this scaled-down service could be listed on a database and the consultation fee could be a standard $300 or so. And if the Government really wanted to do something to bring financial planning to the masses, it should make the fee tax-deductible.
Lastly, will people please stop comparing financial advisers’ fee structures to doctors, lawyers and accountants?
Most doctors’ bills are subsidised by the Government via Medicare, most ordinary people never get to meet a lawyer and most accountants only ever meet their clients once a year at tax return time.
None of these groups has to produce a Financial Services Guide, a SOA, a half-yearly report or justify everything they have ever said.
In summary, let’s try and make sure that in our desire to make the industry more professional we don’t get sidetracked into issues that make good editorial copy but don’t advance our cause very much.
Rick Cosier is a financial adviser at Healthy Finances.
