When it comes to debates in financial planning that will not go away, there is none more certain to divide the lines of rank and file planners than fees versus commission. Yes — it has been done before, but not done to death, at least not yet.
Putting aside, for the purposes of this article, any discussion around professionalism versus product sales and consumer choice, we’re left with but one argument in favour of ongoing fees paid directly by clients instead of commissions paid to planners by product developers. This lone point argues a planning business that operates on a fee-for-service basis is far more commercially secure than one dependent upon sales of products for commission income paid by investment manufacturers.
If ever a commission-based business owner needed evidence of the greater commercial sensibility of fees versus commissions, they don’t need to look any further than the carnage that has beset investment product sales since the onset of the global financial crisis.
While the big end of town jettisons sales-starved financial planners as quickly as the All Ords shed 3,000 points, the other end of the spectrum sees well run, more commercially secure, ongoing fee-for-service planning businesses continue to deliver service to existing clients and keep their doors open.
There can be no argument that fee-for-service businesses operate on a model that is good for all investment seasons. While getting asset allocation right before the global financial crisis has also been a vital aspect of commercial survival, the reality is that fee-based planners have continued to provide genuine ongoing service and care for existing clients throughout almost the last two years of problems.
For many years, I have struggled to understand why so many planning firms have failed to move across to fees for service. For me, there is no long-term commercially sound argument against it. Only the most sales-hardened planners who live for the thrill of the chase would attempt to mount any argument against the commercial long-term superiority of fees for service.
As I contemplated the tardy conversion of planning businesses to fees for service, it occurred to me that there can only be one reason for such reluctance: fear. Fear of having the conversation with people from whose investment capital they previously received commissions remitted by a faceless third party.
It must instil fear deep into the soul of a planner who has only ever been paid by a product manufacturer and not directly by the client. This fear really brings to the fore the question of whether a commission planner is brave enough to argue their worth to a client.
At a time when more than just murmurs have percolated out of Canberra about commissions and when lawyers and consumer advocacy groups are gliding around the carcasses of failed investments ready to once again claw away at financial planners, any business receiving the bulk of its income in commissions from large financial institutions is at the riskier end of the business model spectrum.
While no doubt there is a well-worn path foot-printed by lobbyists from the commission remitters and receivers, make no mistake, in their quieter moments the remitters will have contemplated a plan B and/or plan C.
Their plan B is the ‘how will we survive if Canberra turns off the commission tap?’ scenario, while Plan C is the ‘how will we survive if investor sentiment takes years to get up off the canvas?’. In the strategic planning meetings of some large commission-paying organisations, they will have at least tried to model plan B — life post commissions.
Indeed, all institutions have been living with plan C for almost two years — witness the retrenchments at many levels. Note that some institutions will not survive and many that do will be vastly different organisations to what they were prior to the global financial crisis.
If you are a planner paid mostly by commissions — initial and trail — have you had such scenario conversations with yourself? How would your business survive if the tap was turned off or punch-drunk investors could not be convinced to buy more investments from you?
In a commission-free investment world, the absence of product distribution incentives could not influence recommendations and, accordingly, products would only be recommended by planners on the merit of the investment.
All planners could steadfastly look every client in the eye and state that an investment is being recommended because it is entirely appropriate for the client. In return, however, clients would need to understand that, in order for their planning to be reviewed and portfolios managed, the planning business must be commercially viable.
Enter the discussion about fees and ongoing service. With almost 20 years as a fee-based planner, I can say with extreme confidence that such a discussion is really very easy. It’s like many aspects of business: the more you do it, the easier and more natural the discussion becomes.
Re-engineering a business so it is paid directly by clients on an ongoing fees basis requires careful planning and design. Determining the precise fee model for commercial viability is the first step. Once this is made, it becomes a matter of planning the transition timetable; planning the weaning off of the commission drip feed.
Then it becomes a matter of developing a plan of client communication both in writing and in person, and, while all aspects are critical to the success of the change, genuine ongoing service must underpin the discussion.
I recently had the good fortune to sell my fee-based business to a firm of like-minded people as part of a transition off the frontline of client service. At a client function to introduce the new firm, I commented to the audience that there were people in the room who have been clients of my business since 1990.
For near enough to 20 years, those same people have paid my business ongoing fees for service. Those career-long clients include both quite large and small portfolios, and the portfolio owners have all clearly found much of value in the ongoing service provided.
Right now, many planners are losing along with their clients. They are losing confidence in their ability to tough out these difficult times and losing confidence in ‘the market’, which has been overrun by pessimism. None of their professional development days really prepared them for the global financial crisis, nor did their formal education and experiences to date. New investors really are thin on the ground, even if every false dawn of upward movement in the index does steady the pulse of some hesitators.
Some planners are ready to call it quits and retire, others are looking for new careers. For those too young to retire but with too much time invested to throw it all away, they’ll need to develop an almost masochistic state of being uncomfortable in order to endure.
In a 2000 interview on ABC Radio National’s Sports Factor program, famed Australian runner Herb Elliot recalled a comment from his legendary coach, Percy Cerutty: “You’ll never grow as a human being unless you’re outside your comfort factor.”
As one of the world’s greatest middle-distance runners, Elliot repeatedly knew what uncomfortable felt like. I have no doubt that fear of becoming uncomfortable in contemplating a change of business practice — fear of such a discussion with clients — is what holds many planners back from taking that step to develop a commercially superior business model.
It’s very tough and it’s very uncomfortable for many, yet there are still more mucky debt problems to work their way through the economic pipelines of the world. It is, however, always darkest just before the dawn and to retreat now is not an option for those brave enough to stay the distance and seriously contemplate a plan for change.
Ironically, there has never been a better time for commission-based planners to mount a cogent presentation to clients of the need to move their businesses to a fee-for-service basis. Don’t let the opportunity pass you by. Now is the time for many individual planners and firms to grow; it is now that financial planning in Australia must grow as a whole.
Ray Griffin is a director of Capricorn Investment Partners.
