Accountants urge Planners to change fee system
In the wake of the Westpoint Property Group collapse in Australia (more than $300 million lost, mostly in superannuation and retirement savings); the Institute of Chartered Accountants are agitating for change in the financial services industry. It says financial planners should move away from commission based remuneration and towards a fee system which is more closely linked to the services provided.
Hugh Elvy from the Institute of Chartered Accountants said: “The key issue that we've actually introduced and raised was that fee for service is looking at actually receiving a fee, remuneration based on the advice you're actually providing, not based on the fact that a transaction or a product sale will occur. As a result, the fee will actually be calculated on a personal basis on the complexities of that particular advice. They just want to go and see someone, get the advice and be confident that it's appropriate for them.”
The financial services industry has debated moving to fee-based remuneration for some time. Those opposed to the change claim that over time an investor will end up paying less in a commission-based product versus paying an ongoing adviser fee of 1% per year.
Ostensibly, this appears to be the case. If a client invests $100,000 into a lump sum fund with a 5.00% front-end commission, they will have $5,000 deducted from the investment. However, if a fee of 1% of the investment value was charged every year for seven years, then $7,000 would be paid in fees. And, as the value of the investment increased, the fees paid to the financial planner would also.
However, this simple example does not take into consideration the true costs associated with investing over that seven-year period. It’s true that if you owned the same investment for seven years and didn’t make changes; that you would benefit from paying a commission versus fees.
But there will only be a handful of every 100 people who will hang on to the investment that long. It’s not unusual for an investor to go back to the financial planner that received the initial commission (or to a different one) to complain about the performance of the investment. Many times the financial planner then recommends the investor make a change that involves another commission.
Paying a management fee, or even better a professional-service fee, affords the investor control over the relationship. A fee-based financial planner or adviser, can only improve their standard of living by first improving their clients.
If you consider all the time initially spent with a client, it takes retaining that account several years in order for the financial planner to profit from it. As a result, the financial planner continues to be motivated to meet the needs of the investor and keep them satisfied.
And if you were to poll investors, they would tell you unreservedly that they would rather have their financial planner’s compensation tied to their performance!
The worst investment you can make is having an advisor who doesn’t do a good job. You won’t know if you have the right advisor until after you’ve worked with her for at least a year. If you’ve purchased commission-based products it will be costly to change. It’s not so with a fee-based financial planner.
Don’t be fooled by the argument that it is cheaper to pay a commission than to work with a fee-based financial planner. It’s just not true.
However valid Hugh’s comments may be for financial services providers to move away from commission; to claim that they should charge by the hour (as most accountants do) is akin to offering a drowning man a glass of water. Value-Based Pricing is far better for both the client and the professional.
Ric Willmot works with professional service firms on improving fees and pricing structures. Solutions to assist your business are at hand. You can have Ric Willmot provide an obligation-free evaluation of your fees system during October. Be quick though, he will only be doing six evaluations. Contact us to arrange a mutually convenient time to meet with Ric and listen to your firm’s particular situation. Ric also has had a number of articles published recently on this very subject, which we can post or email to you; just ask.
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