Speaking at the Centre for International Finance and Regulation symposium in Sydney yesterday, Mr Medcraft appeared to endorse elements of a paper presented by Macquarie University academic Professor Geoff Kingston titled Regulation of Financial plans and Allocated Pensions.
“[Mr Kingston’s] research [that shows] the misalignment of interests for financial advisers who charge asset-based with risk-profiled clients nearing retirement or early stages of retirement I think is very interesting,” said Mr Medcraft.
The ASIC chairman also took the opportunity to reiterate his concerns with the financial advice sector.
“In terms of conduct regulation, clearly these are issues being considered by David Murray’s [Financial System Inquiry] – in particular the role of financial advisers,” said Mr Medcraft.
“At ASIC we regard financial advice as a very high-risk sector and one that is an ongoing focus,” he said.
Asset-based fees have been a contentious topic in the wake of FOFA, with Financial Service Council chief executive John Brogden labelling Industry Super Australia’s attempts to conflate them with commissions as a “furphy” earlier in the year.
“Here’s the difference: they go up and down if your assets go down – and a lot of people’s assets went down in recent times. It’s a furphy to suggest that commissions continue with asset-based fees – they don’t,” said Mr Brogden at the time.
Medcraft how about bringing this closer to your home? A review of Commonwealth public servants receiving an indexed defined benefit pension for the rest of their lives (now or in the future) rather than market linked returns is required, as this is a “misalignment of interests”. The very definition of Public Servant means their sole role is to act in the public’s benefit. An archaic public funding system of paying non-active ex-public servants from current or future revenue makes less sense (by a few billion dollars) than a hypothetical argument on planners charging FUM or fee for service.
It is not up to ASIC to make statements such as this. They are supposed to be there to enforce regulations as laid down in legislation, not try and make the laws themselves. In recent times they have not shown they are really doing what that are in existence to do so Medcraft needs to butt out of this and focus on what he should be doing
What’s amazing coming out of the FSI report is the major contradiction from the people involved – breathtaking…
% asset based fees do not equal poor advice. Flat $ fees do not equal good advice. What is in the clients best interest, charging 1.1% p.a. or $5,000 flat fee? Is the answer different if the assets are $100,000 or $1,000,000? Each client/adviser relationship has merit. How we get paid shouldn’t be the focus. From my experience, clients prefer to focus on solutions and outcomes for their financial needs. Business owners make commercial decisions about how their business is run and remunerated.
Why does everyone in this debate assume the asset based fee is the same for everyone? e.g. 1% across the board, meaning higher asset clients pay much more. An asset based fee can be 0.4% 0.8% 1.1% and can be varied so it broadly meets the flat fee required to service, whilst still rewarding exceptional returns, and making the adviser share in unexpected losses.
I wonder whether the scrutinisation of financial planners will ever end? We just went through 4 years of FOFA reform and now this! I tell you what Medcraft, when I first became a financial planner in 2004 guess how much my monthly PI premium was – $320! Guess how many claims I have had made against me in 10 years – ZERO. Gues what I’m paying now for PI – $750 per month! So when ASIC start regulating fairer PI premiums to businesses who have no claims and maintain good compliance and reward those businesses for doing so (which is never happen because that’s contrary to their agenda) then I will consider charging a flat dollar cost to my clients. Anyway, back to work now I have over 500 FDS to print up!
No one outside the client/adviser relationship should have the right to dictate how much is charged and by what method fees are collected as long as the client is fully aware of what is being paid and what service is being provided. Value is in the eye of the beholder. I have the right to charge as much as I choose for what I do. My clients have a choice. Who dosnt have a choice? If clients don’t like it that’s fine they can go to one of the more charitable practitioners.
Country Bob, why do you assume that % based fees result in a $1mil client paying twice as much as a $500k client? A firm might choose to use a hybrid approach or a tiered fee structure.
At the end of the day every business owner should be able to determine their own fee model based. As long as the fees are clearly disclosed in both $ and % terms then shouldn’t it be ultimately the client’s choice as to whether they’re comfortable the value exceeds the cost?
Regulating consistent fee disclosure (which we already have) is a good idea. How a business charges its clients should be left to the market.
This is a very interesting topic. Kingston’s research including Agency theory broadly supports, in layman’s terms, asset based fees for actively managed funds and the case for pure fee for service is weak. In essence my reading of his hypothesis is that if an adviser cant add value on assets they should not charge asset based fees which has some merit. The only downside on this is that the major contributor to performance is asset allocation in a portfolio so the type of asset even cash is irrelevant.
Craig, I can help a client get an appropriate asset allocation together but I can’t stop the GFC. Getting paid for investment outcomes that you have little control over doesn’t seem logical. I would rather have clients pay me because they value the fact that they aren’t as stressed during a GFC because of the education and understanding they have received around their financial plan. They know that their investment outcomes will vary, no matter what anyone does.
generalisations Country Bob…”I suggest a lot of advisers like percentages because they can sound small”.
Well actually, their annual statements show actual dollar amounts, not percentages and so do FDS letters and SOA disclosures. You would know that. Plenty of advisers and dealer groups were converting to fixed fees at bottom of the GFC too…was that in the client’s interest or for the cashflow survival of the advice provider?
Isn’t every client a “risk profiled client”, with some clients being risk averse and some being comfortable with greater volatility based on level of existing assets,experience in and understanding of market fluctuation and personality type?
So, is it better to charge a client an annual flat dollar fee regardless of whether they have suffered a reduction in their investment of say 20% ?
As basic as it is, most clients can clearly understand that “if they do well,then their adviser does well” and the same in reverse.
What it appears to be happening now is that every career academic has an opinion as to how best to control the choices of how consumers should be paying for financial services.
What should be paramount is the provision of choice for the consumer to be able to make their own decision about how they pay for services, depending on the model that best suits them whether it be fee for service, flat dollar fee or asset based fee.
I’m with you Rob :)In your face and upfront. Tim, do you say to your client ‘your fee is 1.5% or do you say ‘you paid me $15,000 last year, how do you feel about that’. I can imagine it’s easy to say I charged you 1.5%, if you sold your house the real estate guy would charge around 3%. Then the client might think they’re getting a bargain. I suggest a lot of advisers like percentages because they can sound small. They don’t really want to sit in front of their client every year and say, in dollar figures ‘you paid me this much last year, how do you feel about that?’ because they aren’t confident about what the client will say when they actually realise what that little percentage adds up to.
Arguing that higher FUM represents greater PI exposure doesn’t wash with me either. I reckon that’s just making excuses. I still don’t understand why so many advisers still think it’s ok for a client to pay twice as much because they have twice the balance. Doesn’t make any sense. Just charge an appropriate dollar based fee. If the client doesn’t think it’s value for money they will tell you.
The returns that clients get on their investments should be only a part of the value we add. Any adviser who bases their value on getting clients better investment returns definitely increases their PI exposure.
Stephen, if less wealthy clients don’t see the value in what we can do for them then it’s up to them to find an adviser who suits them. We do some pro-bono work on occasion but we are not a charity.
[quote name=”Tim Ross”]Given that most asset based fees are around 1-1.5% which equates to approximately 10-15k for a client who invests $1m – I believe that most investors with a pro active planner would see it as good value. financial planning is a complex skill with increasingly high requirements to be able to give the client broad ranging guidance in a wide variety of interconnected although different elements which are unique for each client’ circumstances. Asset based fees are clearly disclosed and present a scenario where both adviser and client want to see a prosperous outcome.[/quote]
Why not charge $15K? If it is such good service you should want to be remunerated for it. % based fees are a way of indexing in a non transparent way.
Financial Advisers who agree with banning fees tied to FUM obviously don’t understand their own business. All things being equal, clients with higher FUM DO cost the business more and should be charged more accordingly. Whether you do this using a % of FUM or a tiered flat fee structure is academic. Flat fees are appropriate when costs directly associated with the work can be measured. But a large portion of business expenses cannot be tied to a particular client or a particular piece of work and, therefore, must be shared across all clients. PI insurance is a perfect example. PI insurance costs go up as business risk increases. Higher FUM = Higher Risk and therefore, the cost of PI should be weighted based on FUM. I would argue that advisers only using fixed fees are probably overcharging many of their less wealthy clients.
Given that most asset based fees are around 1-1.5% which equates to approximately 10-15k for a client who invests $1m – I believe that most investors with a pro active planner would see it as good value. financial planning is a complex skill with increasingly high requirements to be able to give the client broad ranging guidance in a wide variety of interconnected although different elements which are unique for each client’ circumstances. Asset based fees are clearly disclosed and present a scenario where both adviser and client want to see a prosperous outcome.
Totally with the sentiment in this article. If a client asks me how much will your service cost I want to be able to say $x……not y% of your assets. How can you be taken seriously if you can not put an actual dollar figure on your service?
Mr Medcraft, why not start with a lunch with Mr Murray where you get to the bottom of when the CBA culture was started that gave us Storm and then the current debacle as well? You know CBA, whose Townsville branch lent money to pensioners to invest in highly geared investment structures and no one noticed. Honestly we have an inquiry presided over by one of the mandarins of the last century’s financial institutions who it all started with. Institutions don’t go rotten overnight, it takes decades.
Advisers should be paid by their clients, Institutions should choose between manufacture OR distribution. Only then will every one have a clear picture of motivations and remuneration.
When you have that move on to the other issues. There will be a whole lot of less of them to deal with.
Professor Kingston’s talk did not endorse the banning of asset-based fees. In fact, the Professor endorsed a fee structure involving three fees: One flat fee and two asset-based fees. One of those Asset-based fees is a “fulcrum fee” which is tied to an agreed performance benchmark. In cases of underperformance, the “fulcrum fee” actually pays money to the client.
I’m undecided on whether it is a good or practical idea, but we should be wary of lumping asset-based fees in with commissions indiscriminately. We have to remember that we are talking about perverse incentives here, and not just any payment that correlates with FUM.
Spot on Paul. Interesting how Mr Medcraft does not pick up on this. The debate on asset based fees is such a red herring.
Seems ASIC were pretty unfocused when the whistle-blowers at CFP turned up on their doorstep. Seriously, what a crock.
I believe Fund Managers Fees are different, as well as having different legal obligations due to their Unit Trust structure. My understanding it is illegal for a Unit Trust to charge a $ based fee per unit holder as they are required to share all returns and costs on a per unit basis.
However, I think that Fund Managers should operate on a flat fee model. BY this I mean they should charge a fixed fee to provide the management/investment service to the Unit Trust + cost recovery for transactions (brokerage) and trustee services.
This would be more transparent and could be reviewed annually in a similar way to Public Company Directors Fees are. If they increase their fees and you are not happy you could leave.
one would think Medcraft would be better concentrating on getting his own house in order first rather than spruiking what ever at conferences ???
There is a place for both asset based fees and flat fees. Asset based fees are intimately aligned with client interests – if performance is good, the fees increase, if poor they fall. They therefore clearly align advisor interests with client interests.
Both asset based fees and commissions should be banned. Advisers should be paid directly by clients for services actually provided – not on the basis of the amount of money invested. Super funds should not be involved in the remuneration process. Only then will conflicts of interest be reduced.
Why should someone with $1,000,000 pay twice as much as someone with $500,000 when their advice and service needs are the same? Totally agree asset based fees should go. It might take a generation or 2 for the legacy product to roll out but the industry has to start somewhere if it wants to become a profession. Oh, and I don’t believe the ‘skin in the game’ argument cuts it. Sitting in front of a client every year and saying ‘this is the dollar amount you paid me last year; how do you feel about that?’ is the real conversation.
Here we go again…where is the misalignment exactly? Are they suggesting advisers are doing higher risk investments for people hoping they might get paid more if markets keep going up…but the reverse is also true. I charge asset based fees and I can tell you, my priority is ensuring their investment objectives are met. Now that’s called a Best Interest Duty. If an adviser was focused on making more revenue by pushing clients into higher return higher risk assets, that would be a breach, just as selling a product purely to get more FUM or over-servicing a client in order to charge more fees.
Should asset based fees also be banned for fund managers? Perhaps a flat fee should be charged for each unit holder?