Industry expert calls out Australia’s unsophisticated pricing for advice

Speaking on a Netwealth webinar last week, Peloton Partners’ co-founder, owner and principal consultant, Rob Jones, highlighted that advised clients are frequently priced according to their funds under management (FUM) rather than the services they receive, pinpointing this practice as a key factor contributing to underpricing issues.

“The problems in this country around pricing are primarily related to the fact that we are fairly unsophisticated when setting fees and I think we should be a lot more sophisticated,” he said.

“Doesn’t mean it needs to be overly complex, but it should be more sophisticated, so it can be more accurate.”

Jones emphasised the need to value clients, advisers, and owners or shareholders equally, noting that they are often ranked in that order when they should all be given equal importance.

“If someone was ever to ask me a question about what’s gone wrong in this industry over the last 25 years I’ve been involved, it’s been when that equation has been wrong,” he said.

“That has resulted in a financial mismatch, a value mismatch or pricing mismatch or profit mismatch. And these are some of the issues that have plagued pricing in this country.”

Jones noted a prevalent trend where advisory fees were often tied to clients’ wealth rather than their specific needs or the value they received, advocating for a pricing model based on client needs, complexity, and value to ensure fair fees for clients and a sustainable return for firms.

“There was definitely a strong trend toward how much money someone had that they were advising on, and the fees typically followed that line,” he said.

“If you actually price clients according to their needs and their complexity and the value they receive, you’ll get a different outcome.”

“A right and fair fee for the client and a right and fair return for the firm.”

Reflecting on his own experience, Jones said his practice often made similar mistakes when pricing its clients.

“When I ran my own financial planning practice, we operated a ‘tiered percentage of FUM model’. More often than not, we got it wrong,” he said.

“More often than not, clients were subsidising other clients. More often than not, so-called simple clients with low levels of FUM are actually quite complex.

“And often, clients with money and a fair bit of money weren’t necessarily complex and were reasonably simple in terms of their financial planning needs. Getting that wrong was a big issue for us.”

His firm’s data, which analysed the record of numerous companies, revealed that 87 per cent of clients required a price increase, 5 per cent needed a decrease, and just 8 per cent were currently being charged appropriately.

Speaking on this, Jones said “Most advice firms are, in effect, not making the level of profit they should be or are being too conservative on their fees and not passing through any of the reasonable increases in expenses to clients on a regular basis.”

“At the end of the day, what we try to achieve and what we think all of you should be setting out to achieve is at all times to find a right and fair fee that a client should be paying but that must include a right and fair return for you as the firm providing.”