I remember back some 25 years ago when I first got started in the financial services industry. The rules around giving advice and disclosing any interests we had in that advice was nothing like it is today (back then the laws about a ‘statement of advice’ – which has been with us for well over a decade now – was still more than a decade into the future).
In those days we didn’t get asked very often for financial advice anyway. If you wanted financial advice you usually went to your bank manager or your accountant, if you had one. If you wanted a product you went to your stockbroker or your insurance agent.
I remember back then at the insurance company I was a salesman for, we had to take it in turns to be ‘agent on duty’. Whoever drew the short straw had to spend the whole day stuck in the office, so that someone was available for walk-ins. However, towards the end of the financial year that seat was hotly contested because the walk-ins were no longer time wasters, they were there to make their $3,000 contribution to super to get their end-of-year tax deduction. This contribution ended up in whatever we had to work with, which was usually super policies that paid sometimes as much as $2,000 in commission. Not bad for a few hour’s paperwork.
Decades since Wallis
I don’t remember where we had to disclose the commission, but I sure remember it not being something that was overly laboured on with the client. Nor were they particularly interested, either – by and large they weren’t interested in reading long-winded advice, they were there to claim a tax deduction. You can well imagine, though, that disclosure of these types of commissions became a fairly touchy subject.
In the late ’90s a comprehensive investigation into Australia’s entire financial system was conducted and it gave rise to the Financial Services Reform Act in the early 2000s. The investigation came to be called ‘the Wallis inquiry’, after the chairman, Stan Wallis, a successful businessman who won the Centenary Medal in 2001 for his work on the inquiry. Stan Wallis was pretty sharp.
For instance, he called for the mandatory licensing of real estate agents selling negative gearing packages because they were clearly giving investment advice. He also had this to say about commissions and their ability to distort the quality of advice:
It appears that the information disclosed to retail purchasers is too voluminous and legalistic in many cases to serve its purpose. […] The inquiry also believes that consumers need information about fees, commissions (including trailing commissions) and the remuneration paid to their financial advisers or brokers so that they can determine whether a recommendation is skewed in favour of a particular product. – Wallis Report, March 1997
Wallis noted that accountants and lawyers also provided financial advice but he said that licensing arrangements needn’t apply to them because their professional standing, ethics and self-regulatory arrangements were sufficiently reliable. Unless, he said, the lawyer or accountant changes their remuneration in a way that alters the nature of that professionalism:
However, a clear distinction needs to be drawn if an adviser acts on an unrebated commission or similar remuneration basis which substantially alters the character of the relationship with a client and places such advisory activities on a footing similar to that of other financial advisers. In such cases, financial market licensing should be required. {…] Professional advisers, such as lawyers and accountants, should not be required to hold a financial advisory licence if they provide investment advice only incidentally to their other business and rebate any commissions to clients. – Wallis Report, March 1997
All aboard the gravy train
With this sort of legislative and media backdrop I can well imagine a bunch of suits in a boardroom agonising long and hard, “How can we keep the gravy train running without upsetting the apple cart?”
Eureka! The asset-based fee.
Little slice of genius really. It’s calculated precisely the same way as a commission, as a volume of product bought by the client, but it’s a much more palatable disclosure to make. After all, asset fees aren’t junket or payola paid by banks and insurers, they’re fees deducted from the client’s investment account.
In practice it makes not a lick of difference – regardless of who pays it, it’s an incentive and the ‘adviser’ doesn’t get paid unless the client is convinced to enrol in some sort of transaction. It’s a method of remuneration that tries very hard not to look like a commission but operates as an incentive in precisely the same way.
The weak rebuttal has been put forward that an asset fee aligns the interests of the adviser and the client – the adviser receives more money for doing his or her job well and growing the client’s asset, and the remuneration reduces for doing a bad job. Not only is this a lame argument, it just doesn’t stack up: an adviser who loses 10 per cent of his or her client’s capital by doing a bad job still earns 90 per cent of the fee … ask the client who started out with $1 million whether this was a good deal!
Here’s an idea though …
If you are genuine in your desire to align the interests of the adviser and the client, stop pretending conflicts of interest serve some useful purpose for the client (because they don’t, they only serve the intermediary) and simply remove them.
All that’s left is a fee that you charge to do your job.
The IFAAA will be hosting a series of webinars on how to go independent, including switching from asset-based fees. Check out the association’s website for details.
Daniel Brammall is president of the Independent Financial Advisers Association of Australia (IFAAA).
As believer in the market I believe buyers and sellers determine what they will pay or accept for payment for services.
For anyone with a different view I don’t agree with your ideology.
That only applies if both parties know what the fees are. Some planners have made an art form of concealing their fees amidst volumes of “boilerplate” material, usually sourced from third parties. Such asymmetry of information makes a parody of a “free market”.
The regulations (ie the law) is quite clear that cannot happen.
This article was total waste of time.
Dan really?
Absolutely 100% SPOT ON! Every single financial Planner and firm that charges “fee for service” and hides behind that mantra is kidding themselves. It’s still commission in disguise. Everyone knows it, you all do it and there is no defending it so don’t try and retort with your saint hood passionate about service statements. It’s all a load of rubbish, it’s a commission and your charging it.
95% of people could simply see a financial planner once or twice a decade until they reach their mid 50’s or so. Don’t try and kid yourself your steering the investments, you are not. Stop charging this conman fee for service and stop ripping off innocent people.
Cue the worst offenders…..
Steve, I think it is time for people like you to end your bitter crusade against us and wake up to the fact that our clients appreciate our service and are happy to pay our fees. If your accusations were true, annual Fee Disclosure Statements and Opt-In would have wiped out our profession. But they didn’t. Four years later, most advisers I speak to are thriving and struggling to keep up with referrals from happy clients.
Um Steve, you’re an expert exactly how? Assume you’re actually not even in the industry but some antagonist sitting on the sidelines and commenting like some parasitic life form.
At least get some grammatical lessons and learn the difference between ‘your’ and “you’re” and the use of CAPS to emphasis a point is especially infantile; you are embarrassing yourself, sonny.
You know those ‘experienced’ advisers that wants things to return to how they were in the ‘good old days’… No need for education, professionalism or compliance etc… That is Steve.
Anyone who thrives in the current environment is the devil because he cant justify his own service.
Steve a key part of our offer to clients is the active management of direct investments.
Robert, I’d love to see an independent analysis of the “value added” from that “active management”. Most professional fund managers have underperformed the market index over the last ten years.
May be so maybe not.
However in Australia It is not your position to stop people deciding that they wish to take a certain course of action. Maybe you would prefer to reside in North Korea?
Food for Thought “Anonymous” what happens if every investor simply invested in an index fund?
Daniel, it has ALWAYS been a requirement to disclose Commissions, shame on you buddy.. Especially if a member of the FPA. Clearly the author feels if all pricing methods were banned and percentage based remuneration was the only form of remuneration that all advisers would revert to poor advice and not act in the interests of the client. One’s remuneration method does not determines ones ethics. Perhaps the author is easily swayed and admitting to a previous period of non disclosure is worrying. What works for one advice firm will not work for another and demeaning fellow advisers on the basis of their charging methods is unethical. It causes nothing but confusion and turns the ordinary Australian away from seeking advice. Working with higher net worth clients, I charge flat fees, clients sign annually. However I can understand and appreciate when percentage based fees are applicable.
This article has done more harm than good.
I was considering looking at IFAAA as we are a large IFA dealing specifically with accountants under our own AFSL on a fee for service basis but after reading how poorly thought out this article is, I will be steering clear of them – especially if their own governance isn’t good enough to pick this nonsense up before being published in the public arena. Disgraceful!
As John M said below, obviously Dan’s IFAAA stooges are checking these comments and voting – even more pathetic! What a joke of a group, seriously immature.
Obviously Dan has had his cronies come on here with voting for some of these comments. Dan you’re conflicted and the FP who charges F4S is conflicted as much as the one who charges asset based. There are equal arguments both ways, and both have inherent conflicts, it is called commercialism, mate.
The lazy F4S planner who sets up automated monthly fee transactions has nil incentive to work any harder than a planner on ABR, in fact less so when markets come down.
You’re either ignorant, uneducated in this area, or lying for personal gain (or all three!) if you believe the trash you’re spinning here.
It is people like you that give the Financial Planner a bad name. A salesman that was more than likely grandfathered into an adviser when legislation changed with out doing any Financial Planning studies at that time or was it where the licencee shared the answers to Financial Planning questions???????
Contrary to what you say a Financial Planner doing his or her role makes sure that a client is aware of fees. NOw days Statement of Advice pages are numbered not like the 90’s where the office copy of an SOA had every page but the clients copy had the disclosure page omitted -particularly when nil entry fee was encouraged to the client ( it costs you nothing!!!! was the line ) with a bite on the ongoing fee ( increased to cover the 4% usually paid out to the practice upfromt) ) for the client while they stayed in the investment.
Mytops you forgot to mention about those who were “given” CFP status in the show bag/lolly bag in those days without having to do a basic undergraduate degree. I believe they were giving out CFP status like candy. Shaem I never put my hand up for one ayy. Now these same people sit pretty on large trail books built on commissions and zero compliance regime and now start pushing out articles of nonsense that is nowhere near practical or commercially viable anymore for anyone other than large banks and large insurers or those with large trail commissions. i have one staff member and will struggle under new regime.
i say take away ALL commissions and asset based fees from everyone includes riskies and investment planners. no grandfathering. take away all commissions and all trails from everyone if you want to put your money where your mouth is and then lets debate of practicality of our bsuiness.
How this comment can be at -8 rating is amazing. No doubt the IFAAA have got people on here voting down the valid opinions of good financial planners.
I think there is some confusion between asset based transaction fees and asset based portfolio fees. In my view, asset based transaction fees definitely carry a sting in the tail as there is an implicit bias towards selling something to clients – if they don’t buy, you don’t earn. In contrast, portfolio based fees are not distorted by the need to transact – implying that adviser and client interests are more closely aligned.
Firstly, clients are not that silly especially when it comes to paying fees.
The method of charging fees is a personal matter between the adviser and the client and quite frankly your opinion is irrelevant.
It all comes down to the clients assessment of the services provided and if the client expectations are being meet.
I would suggest that every adviser that charges a fixed fee will be receiving give or take about the same remuneration as the adviser that is charging an Asset Based Fee. After all they are not a charities.
The viability of their practice depends upon it.
It seems to me that you are suggesting that advisers that charge Asset Based Fees are overcharging their clients?
If this scenario was correct then all advisers that charge a fixed fee would be taking our clients away in droves. I can assure you that this is not the case.
It strikes me that regulators and commentators are as one when it comes to bagging advisers (of all colours, risk and Investment). if they were all ‘Fair Dinkum” why not leave the existing commission options in place, and make it mandatory for advisers to offer alternative solutions? there are a significant number of my clients who dislike the new deal we have foisted on them via so called reforms. as has already been said, many clients like the asset based trails, they have unfettered access to me and my office staff, we respond with alacrity and deliver as required. now we charge for calls to and from clients with no ongoing fee arrangement, they don’t like it and it grates with me as well.
the unintended consequence of deciding for others what they should want vs what they actually want !!
Whilst my practice charges a fixed price monthly retainer (covering everything to do with their portfolio) which is reviewed annually and can be cancelled by the client at any time, I actually see no harm in asset based fees for clients. However, I think financial advisers using asset based fees are often harmed. For instance, when markets fall and when a client needs her financial adviser more than ever before, why should the adviser be paid less; as if the adviser was responsible for market fluatations.
What I find bemusing is the advisers that advocate against adviser fees as a % of FUM while continuing to support fund managers that charge a % of FUM. If the advice business manages investment portfolios why is their % of FUM fees and different to fund manager fees ?
Or you can charge a blend of a fixed fee and a percentage. A fixed fee relative to the strategy and percentage based on managing a family’s investment money. Doesn’t have to be one or the other. A balanced article would have been nice, but sadly members of the IFAAA struggle with that.
I agree that any fee charged where service is not given is a problem for the adviser and as the banks now know these fees generally have to be refunded to the client. However, your argument that asset-based fees were ‘invented’ so advisers could continue to ride the gravy train is outdated and flawed in the extreme. The bulk of advisers in Australia have been charging asset based fees via Wrap accounts since the 1990s and certainly many, many years before commissions were outlawed. Whether the client retainer is charged as an asset-based fee (many of which are scaled and/or capped) or a fixed dollar fee is entirely a decision for a business principal. Clearly each business should choose whichever method they feel most comfortable with. Your article unfortunately comes off as simply promoting your own agenda and does your organisation more harm than good.
Asset based fees are a great way to introduce prospective clients with smaller balances to the benefits of financial planning. When their balances and situation improves to be able to pay, we then revert to a fixed fee. JJ
Our profession has had more than enough discussions on fees over the last five years. This generates controversy but removes the focus on our clients which is where advisers and practices should be spending their time.
Get off the pulpit Dan and focus on your practices providing a decent level of service to their clients rather than preaching to everyone else.
Improved education standards will resolve pricing issues over time and we have had more than enough reform to clog up back offices without more of this nonsense.
Good headline to grab attention but wasting everyone’s time.
I agree Paul. We actually charge a flat dollar fee, but we don’t wear it like some sort of badge of honour, we do it because it makes good business sense for OUR practice. That said, I’m utterly fed up with the endless posturing and grand standing going on within our industry. Let the free market decide which model works best for clients.
What a long waffle on about ancient history by a dinosaur who speaks through his rear end! What about other conflicts such as higher hourly fees versus industry average, or is this somehow okay? You have your own axe to grind, self promoting of course, and a holier than thou attitude with little aptitude If you were true to label you would be advocating a set fee that was enforced as an industry standard, no variation – but of course that wouldn’t be a free capitalist society would it? Just the same as different business models, comrade.
My clients like asset based fees ,they know it and understand it . I have been in the Industry over 40 years . the more they make the more I make for Super clients ..When there balance go’s slowly down to nothing , I get nothing . If they don’t like it , go somewhere else. Why do they like it ? Because they are free to ring up and I don’t charge them a phone call fee per 30 seconds like a lawyer does , or an accountant to do small things like sending out forms , costly annual service fees each year for extra advice etc. Commissions are not bad , bring them back I say provided the clients wants them . Sorry ,they are already here in every other Industry , real estate agents 2% to sell a $1million house ?, stockbrokers and those that also churn the portfolio,( cant see ASIC looking at them) what about the1% ” placement fees ” for Broker for new IPO’s . ASIC didn’t stop them charging a commission, did they .
Actually Mark, if you want to take it a step further, the government advocates asset based fees / commissions in the form of Stamp Duty on property. Time the hypocrisy ended I think!
Weakest argument ever
So fund managers and super funds with a percentage admin fee are also evil. Let’s move everything to flat dollar fees or perhaps we could just focus on ensuring our clients understand what and how they are paid first?????
Yawn… This looks like some of the rubbish I see on Whirlpool
Thanks for the history lesson/sermon from the mount Dan. What audience do you think you are you writing this article for? Do you honestly think there are advisers that haven’t heard this a million times.
I suppose the author, will be protesting about council rates as well? as they are assets based fees?
No of course not, as long as it is disclosed what is the problem? Do you think your clients are that stupid not to realise we get paid? If I provide value for money quality advice, how I get paid means nothing
So, this “article” full of historical non-sense and righteous grand standing is nothing more than an advertisement and recruitment tool to get as many people to hook in to an IFAAA webinar ?
Absolutely love this article. I am sick and tired of all these “investment advisers” riding the commission gravy train and at the same time calling for the cancellation of insurance commissions deflecting on to us riskies. The industry should enforce the cancellation of any “asset based” fees and also “stop” advisers from collecting the clip from client super funds.
Let’s make it “transparant” where advisers sell their value proposition as a “fee for service” and where clients “must” pay from their cashflow rather than investment advisers taking easy option to charge % of Funds from client super fund. Let’s move the industry into a full fee-for-service on “all” fronts, just like accountants and lawyers and doctors.Lets become professional and move out all the rogue salesman. Regards, Riskie.
It’s only a conflict of interest if you let it be, and by following BID you can’t let it be. Any ongoing service is the same as a commission, and charging a fee for risk advise is also the same as a commission. It just changes name depending on who pays it. It’s a payment for a service. Commission doesn’t need to be a dirty word, and dividing the industry on another topic for your own agenda when we need to stick together can’t be commended.
I tend to agree with you Daniel, although I’m sure plenty won’t.
I bought a practice four years ago which was on percentage based fees and have transitioned it to flat dollar annual fees that are either paid yearly in advance or in 12 monthly payments, then at the next review if we’ve done the job, they’ll sign up again.
I’m now facing two issues. The valuation of my business is always a hard conversation, and now that I am selling my business many potential buyers have baulked because the risk is that clients won’t re-sign. Isn’t that always a risk with opt-in if you’re not meeting your obligations or the client’s expectations?
Haha don’t get me wrong I am with you 100% as my book is flat dollar also but lets not get it twisted, those generally buying books are looking for pre-opt in asset based fees where they can sit back and watch the money roll in for no work. Its still rife in the industry and opt-in lost a lot of its impact when they grandfathered all the people doing the wrong thing as they always do.
“Not only is this a lame argument, it just doesn’t stack up: an adviser who loses 10 per cent of his or her client’s capital by doing a bad job still earns 90 per cent of the fee … ask the client who started out with $1 million whether this was a good deal!”
I don’t even charge asset based fees but that is a stupid argument. If I charge a fixed annual fee, which I do, if I lose 10% of a client’s capital I still get paid 100% of the fee. I have no problem with asset based fees as long as there is specific investment advice being provided above “invest in this managed fund”.
Just someone else ‘talking their book’.
What about the fact that Asset based fees adjust downwards in line with markets as well as upwards. Flat fees mean the adviser & his business feel no pain when the client is losing out.