During a panel discussion at ASIC’s Annual Forum in Sydney yesterday, Mr Brown – a chartered accountant and chairman of the Australian Defence Force Financial Services Consumer Centre – responded to FSC chief executive Sally Loane’s comment that there is no “technical silver bullet” for consumer and media concerns about the financial advice industry.
Mr Brown said there is a “silver bullet” and that it lies in removing incentives such as product commissions, including asset-based fees.
Many within the advice industry “obfuscate” and refuse to admit that removing conflicted remuneration from advice is what the industry needs in order to move forward.
“Once that is fixed, a lot of these things will fall into place and all these discussion we have been having today [on remuneration] and the threat the industry feels it is under will just go away,” Mr Brown said.
“So in fact there is a silver bullet. It’s just we don’t want to accept it generally speaking,” he said.
Mr Brown added that asset-based fees are a “highly conflicted” form of remuneration and advisers should not be using it.
“An asset based fee is a commission by another name. FOFA has banned certain types of commissions paid by third parties, but as an adviser, you can drive a truck through FOFA by using asset-based fees, which the industry calls a ‘fee for service’ in many cases, but it isn’t,” Mr Brown said.
Addressing the same panel discussion, ClearView managing director Simon Swanson concurred with Mr Brown on the issue of asset-based fees but expressed concerns about whether average Australians will pay upfront for advice.
“I concur with Robert’s comments, strangely enough, on that it is a commission by any other form so let’s just agree with that,” Mr Swanson said.
“But the average punter… I don’t actually think they have got the money to pay for the advice upfront.”
Former TAL chief executive Jim Minto added that we need to be careful that the regulatory system does not drive lower income people into general advice relationships only.
“[A majority of Australians] are the victims who we are now going to remove access to advice from and substitute with more simpler sales-type models because the paradox in life here is that advice is the thing that people most value and they are less likely to get it out of these outcomes anywhere else,” Mr Minto said.
The real problem with everything is that the continuing lack of interest by the average Australian in their own wellbeing(financially and other). That is why FoFA came about – socialism in practise.Its time for everyone to be really honest and start to give a toss about themselves and their families(where applicable).Take interest in your own life and stop blaming everyone else if/when it goes wrong.When there is a contracted/disclosed/agreed method of payment for services rendered, where is there a problem? The biggest single issue is that people need to be educated about money and when seeking professional assistance, it is service that must be paid for.The profession needs to summarily dismiss and punish anyone who is proven to deserve it because of fraud or other wrongs. The only thing that matters in a correct situation is that the parties to the relationship can trust each other, agree to the scope of that relationship and then the payment terms in any agreed format.
That’s the problem Dave. Thankfully many advisers who use asset based fees when managing people’s portfolios also charge a set fee in combination, or charge a set fee for non-portfolio advice. It’s not just one or the other. Ample flexibility out there. Let’s not kill off alternate ways of charging because some don’t like it.
Craig, I welcome the debate and expect it will continue (it is a source of entertainment for some people).
I hope and expect one things of you; to believe me when I say that just because you may charge % based fees that I think that it makes you less trustworthy. Not in my eyes. I can believe that people like you can manage the conflict of interest.
It irritates me a bit when these debates get personal.
The reason I enter the debate is to bring up the fact that financial planning has what I believe is a MASSIVE perception issue. The public by and large doesn’t trust us. Most people don’t have a financial planner.
I had coffee with an accountant this morning that ‘it’s not a good look’ when we were discussing percentage based fees.
That gets under my skin because I can’t disagree with him. I feel it’s holding us back. Nothing personal…dare I say…mate.
Well Matthew…you know what they say:
“Expect nothing and accept everything
and you will never be disappointed”.
PLEASE HELP…..
I use flat $ fees only, always have, but am not against others using % based fees, but can someone please explain to me how you set an appropriate % to use? If a client has advice needs that don’t relate to their investment balance (cash flow, debt management, taxation, structures, estate planning, business buying/succession, risk protection, education needs, liaising with their accountant, solicitor, etc, etc) then how do you tie that into an asset based fee???? And what if real estate is the most suitable asset class?
Or are all the asset based fee advocates on here just giving limited advice on an investment portfolio only and not having comprehensive discussions?
Portfolio management is only a fraction of the advice I give and value I offer, so NO WAY I’m limiting my fees to a % of that, certainly not when the bad times is when I work hardest and provide the most needed advice (why get paid least then?).
Non-sensical to me…
TD, I thought you rested your case. Anyhow, as per your previous minor contributions you remain well off the mark. and now I rest mine.
Disappointed in you Craig.
Thought you would have had some words of wisdom and experience to share what you would say in response to what I’ve witnessed in the past.
Instead you choose to avoid reality. Soft.
Pavel has to wait for others to come up with an argument before he can jump on the wagon. Clients!!! Give us a break. IFA or ISF staffer more like it..
Craig, as much as I’d like to help you out, I’m booked solid to mid year w/ very satisfied exisiting, fee for service, clients. Maybe next year.
What an ridiculous situation we have here between the A Team of Matt, Ben and Pavel.
It’s easy to create fictitious client commentary to suit your chosen doctrine…..just put a bunch of words in punctuation marks that perfectly align with the point you are trying to make.
I remember 10 years ago a client stated:
“I am happy to pay the % fees directly from my invested monies as it is much easier for me than having to find the money to pay a direct fee and in regard to my insurance cover, I know you are doing the right thing for me and my family because we have mutual trust and I am comfortable for you to be paid via commission because you need to be adequately remunerated for all the hard work that you do for us”!
PS. How will I possibly recognise an average intelligent client if I stumble over one?…or should I refer them on to Pavel?
[quote name=”Matthew Ross”].
These consumers out of line?[/quote]
You can write down all the quotes you want, but you have to admit there will always be happy and loyal clients on both sides of this debate. Advisers are not slack towards their clients. You will find that many advisers that charge asset based fees will negotiate with clients for maximum fee caps, removal of assets from fee calcs, and reduced % depending on advice.
“Another Mad Planner” – Thanks for asking. The answer is no. There was zero tax benefit for the money to be arranged in the way that it was. And the adviser had ignored a higher net return, with no additional investment risk, available to the client for several years.
As I’ve seen both sides of the story, your speculation is obviously designed to throw doubt where there can be none. And no, it was a non-institutional adviser. Maybe it was another mad planner like yourself?
[quote name=”Ben Liddicoat”]
Client is a very intelligent doctor but very busy. Their adviser is an industry leading CFP. There were no issues getting money out of super to pay off the debt and no issues making further contributions.[/quote]
Was this other adviser dong it for other reasons like saving tax for the client which could then mean more money in the future for the Doctor?
Just putting it out there that there may have been more options that the “industry leading CFP” was exploring. Two sides to every story young Ben, maybe it was one of your mates from the NAB!
Or this one:
Client: “My adviser told me not to pay off my home loan as it was better in the super fund”
Me: “Did you know that your fund invests an amount on term deposit, earning 4%, your adviser takes 0.9% of that as a fee if it stays in the fund, and your home loan costs you 5.5%? “
Client: “I did wonder about that but assumed they were doing it the best way. That’s what I pay them for”
Client is a very intelligent doctor but very busy. Their adviser is an industry leading CFP. There were no issues getting money out of super to pay off the debt and no issues making further contributions.
Matthew, great contribution. these examples absolutely align with my experiences too. Seems we have seen average intelligent Australims that are foreign to others bleating in this site.
Below are 5 comments I heard from consumers during the first 10 years of my career when I sat in the chair beside advisers who charged %ofFUM:
“So aren’t you going to take greater risks with my portfolio, because as my portfolio goes up, so does your income stream?”
“The portfolio feels very conservative and I have all this money but feel I can’t spend it. Are you preserving this money so that your own income stream doesn’t reduce.”
“Why don’t you recommend residential investment property in portfolios? Is it because no one would allow you to charge % fees on it?”
“I don’t want to put this $200,000 in the portfolio; it increases my fees by $2,000 per annum and yet the advice I get is the same”.
“I tell you what, if you beat the market, I’ll give you 50% of what you beat it by, but not 1% of my capital, deal?”.
These consumers out of line?
Pavel, I rest my case.
Contractural arrangements, client adviser relationship! Gee they’ve only been around 1000 years yet your tedious spurts of ignorance suggests such arrangements are a foreign concept. It obviously is to you. Your commentary contributes nothing to the debate as you can’t even get your head around basic concepts let alone put something forward that makes sense.
Gee thanks for the free character profile TD. I suppose I should take it as a complement given your retort is absent any rational argument re the subject matter, so I suppose that’s all you have left to contribute. Pity.
Robert MC Brown has had a relentless and focussed drive to rid the world of commissions for at least the last 20 years…so his commentary must remain consistent today as he would simply look like a goose if he altered his stance.
Mr Brown also chooses to state that a “fee for service” ….usually referred to an Adviser Service Fee actually isn’t!
I can’t work that out because we charge Adviser Service Fees for which we actually deliver service and advice to our clients and the fee is deducted from the clients account.They elect that option more than any other because of cash flow, affordability and ease of management.It is clearly disclosed, concise and agreed upon.
We regularly discuss fee structures costs and options with clients and the majority are overwhelmingly comfortable with the Asset Based/Adviser Service Fee option.
Maybe MC Brown should have a listen to that song by MC Hammer:
“Can’t Touch This”.!
Ah Pavel, thanks for being a fan. You’re not an adviser obviously and cant be expected to fully comprehend the adviser client relationship.
We are dealing with adults who understand what they are paying for and how they are paying, both fixed price and asset based fees. Why just because you don’t understand, you assume other don’t. Your posts display a lack of intelligence and a level of ignorance that is not matched by the general public at large.
TD, nice spin, and I’m sure it works wonders on clients no offay with their real consumer choices as to fees. really, when as an industry will the sins stop being confessed and simply stop being committed?
More ill informed comments from a luminary with scant regard for differences. Asset based fees charged by a fund manager and then forwarded to an adviser is a “commission” possibly..
However someone who charges their client directly, whether by fixed fee, or asset based fee, any other direct charge is charging the client for advice. It is in no way a commission.
As to conflict, the prime directive has to be to preserve capital as much as possible. There is no greater incentive to preserve capital than that allowing it to be lost will cost you as well as the client.
All of which is probably why so many clients choose to be charged via an asset management fee. Clients are not dumb and make choices. Mr Brown and others need to understand that it is not up to them to decide people are too stupid to make their own decisions.
Ah! Pavel, once again you seem to miss the point. A contractual relationship exists where an adviser and the client agree as consenting adults to pay for and provide a service regardless of method of collection of payment for the service. A document in writing about obligations of service for a fee is not a masquerade but a contractual arrangement. Get with the program please, you just sound like a bitter and twisted nut.
[quote name=”Fightback Fred”]Laurie, commissions were not banned, most advisers still live off INSURANCE COMMS and as Mr Brown says, % fees are commissions anyway[/quote]
You obviously have no idea what you are talking about. Yes commission is still paid on Life products, but the majority of adviser don’t provide advice in this area. RMC Brown saying that Asset Based Fees are commission does not make them so. When did he become the purveyor of all knowledge and fact. You need to get your facts right if you are gong to enter any discussion.
So if we simply satisfy these numskulls, remove all incentives from everything, ban every form of educational facility (because these might incentivise some to get educated and earn more than the average), Ban all sales of anything remotely related to incentivising anyone or anything since clearly this relates to profit as an incentive to operate a business. Hence best to shut down every shopping centre and retail and wholesale outlet to avoid this evil. Maybe someone needs to explain to the numskulls that at some point someone is going to have to volunteer to turn off the lights and close the door when every form of incentive is banned in society. God forbid that the person employed to turn off said lights and door gets paid a profit to do so….
Robert Brown is like Robin Hood, but in reverse! His proposal would result in cheaper fees for the rich and higher costs for the poor. Smaller independent financial planners would struggle, while the rich vertically integrated businesses would flourish.
Doesn’t charging an asset based fee say that you are worth less to your clients during a market correction? And if this is the case, how does your business respond to a major correction in markets. Do you do less work for clients, lay off staff or stop feeding your family?
Why would a good financial adviser agree to reduce their income during normal and frequent events? Amazing!
Mr Brown’s honest and clear advice that asset based fees are a commission masquerading as fee for service is both refreshing and long overdue.
his refreshing leadership on this issue stands in stark contrast to the tied old rhetoric served up by the managed funds union.
I think the responses are missing the point. This is about cleaning up the mess that FOFA was attempting to do and has failed and left an administrative disaster.
Laurie, commissions were not banned, most advisers still live off INSURANCE COMMS and as Mr Brown says, % fees are commissions anyway
Typical pronouncement from the Ivory Tower of Robert MC Brown and Simon Swanson. Commission is paid by the product provider. Asset Based Fees are an agreement between the Adviser and Client and are paid from the client’s cash account or bank account. Most of my clients want me to share in the gain as well as the pain of market movements but I now have many on a fixed annual retainer. Time we all moved on from this discussion as commissions were killed off under FOFA. By the way, I am a Chartered Accountant as well as being a CFP who has been a Financial Planner for 28 years.
I do agree to some point BUT i dont think that it is the silver bullet. I dont charge asset based fees but i think it is important to question why a super fund / fund manager can charge a percentage fee, the ATO has percentage fees and lets look at real estate agents – just to name a few. I would love a flat tax system based on proper user pays but apparently this is considered inequitable!!! Go figure. The issue is value and transparency. If someone with poor ethics is looking to rip a consumer off they will find a way. Fraud which has been an issue some planners wont be solved.
I wonder if Mr Brown has helped clients through a GFC?
We offer the clients the choice of an asset based or fixed fee.
Most clients prefer the asset based fee as they want to know in negative markets or downturns we are always trying to protect their net position. We have total alignment with the clients goals.
A fixed fee actually has the client feeling like they are still paying the same but have lost money, this can cause clients to move to cash and loose the benefit of a market recovery.
You need to talk to the people that see clients every day and not read reports.
Clients will pay for advice. They are happy to have these options explained to them and then select.It is an agreed fee structure explained and signed off by the client.
You also need to consider that an advice business is a business. We have staff and families that rely on our businesses as well.
Industry options charge a % based MER!
That’s funny…because when I’ve asked my clients about ongoing service fees for managing their assets, they prefer some element at least of percentage based remuneration because they believe my interests are then somewhat aligned with theirs….and they are dead right. They are concerned if I charge a set fee only, I may not care what happens to their portfolio, so there is another conflict. An asset based fee in this case is not a commission. Anything else you want banned without actually asking consumers??