With the Future of Financial Advice implementation date fast approaching – and product commissions set to become a thing of the past – several fee-for-service business models have stepped into the ring. Aleks Vickovich reports
Suffer now and live the rest of your life as a champion,” the great Muhammad Ali told himself during hours of arduous training.
Financial advisers busy preparing for the Future of Financial Advice (FOFA) reforms will be hoping that dictum will also apply to them.
From the hours spent poring over legislative documents and ASIC guides, to the phone calls to
licensees and consultants for assistance, and the fear of losing clients, the costs of FOF A for many practices have been significant.
On top of the daily grind of providing quality advice and helping people achieve their financial goals, practice principals have had to find spare time to work out that most fundamental question: how, in a post-commissions world, will they themselves be paid and pursue their own goals and aspirations?
For some, the can has been kicked down the road.
Despite the July 1 FOFA implementation date, a recent ifa online straw poll found a majority of the 116 respondents were not prepared for the reforms, with 44 per cent saying they are “working on it, but more needs to be done” and 15.5 per cent indicating they were “not prepared at all”.
More recently, 33 per cent of attendees at the van Eyk national conference indicated they were “borderline confident” that their practice and staff will be ready by July 1, while 8 per cent said they were “not confident” and 5 per cent said they were “extremely unconfident”.
In ifa’s discussions with advisers across the spectrum over previous months, many have blamed dealer groups for not providing more guidance on the move to a fee-forservice model and the logistics of FOF A compliance.
However, as compliance specialist Kate Humphries of Pathway Licensee Services points out, the blame can hardly be laid squarely with licensees. “The full FOFA guidance was not released by the regulator until very recently,” she says. “I understand that some authorised reps are frustrated at the silence from some licensees, but it is really not their fault.”
Commenting on the findings of the ifa straw poll, Financial Planning Association (FPA) chief executive Mark Rantall said it was not too late for those still unprepared for FOFA – “but you’d better get a move on,” he warned.
The following report looks at the remuneration models that are emerging as potential commercial blueprints for advice practices in the post-FOFA reforms era. Using both commentary from business and pricing experts, along with some case studies of advice practices, it will look at the pros and cons of the various fee-for-service models and hopefully provide some clarity to those who are still kicking the can or offer some guidance for those still open to making a switch.
The warm up
Just as boxers get into the zone through doing push-ups and listening to rap music, so the consultants canvassed for this report were unanimous that there are important steps to take before the remuneration model decision can be made.
For Strategic Consulting and Training’s Jim Stackpool, self-confidence is fundamental to any business or remuneration model. “One of the marks of a good professional is that they doubt their own worth but they also need to have the confidence to price their services boldly and communicate [that] clearly to the client,” he says.
When choosing a pricing model, Stackpool says you need to be confident enough to pitch your services with a price that is going to turn off some consumers.
The aim is to get a balance between “fee tension and a confident proposition”, he says. “If you’re winning 10 out of 10 clients, you’re probably pitching it too cheap and won’t be able to fund your growth.”
Stackpool’s golden number is 66 – not the year England won the World Cup, but the percentage of your clients that should be accepting your pricing offer to indicate you have got it right.
Humphries says that when choosing a model, a close analysis of your own business costs is essential first, including tallying up the costs of office space, staffing and research. The aim is to work out “what you need to charge to be ahead of your operating costs and then to add what is needed to be competitive”.
For Sue Viskovic, managing director of Elixir Consulting and author of What Price Advice?, the first steps go beyond simple pricing mechanisms. “Advisers need to understand it’s not just about deciding on a fee model and then setting prices; they have to re-evaluate and possibly change their whole client engagement process,” she says.
“They need to get a good handle on how they offer their advice and the sort of experience they want their clients to have, and then investigate what back-office structures are required to make that a reality.”
To prepare for this psychologically, some advisers have enlisted an outside coach. Peter Stewart, principal of Perth-based Australian Financial Services (AFS) practice Benchmark Consultants – and a client of Elixir – has recently been through the process of moving to a new fee-for-service remuneration model.
“The move would not have been successful without the help of outside consultants,” Stewart said. “They took us through a logical process to come to our pricing and service offering model.”
However, gaining confidence, doing a cost analysis or enlisting a business consultant, is only the beginning. The road to a successful, FOFA-compliant remuneration model is fraught with indecision while in the meantime, each model enjoys its fair share of champions.
The blue corner: hourly rates
The extent to which financial planning is truly a profession is one of the more contentious issues within the broader financial services industry.
For many practitioners, there is no doubt: they list planning alongside law and accountancy and therefore well and truly in professional territory.
Terry McMaster, director of Dover Financial Advisers and its parent company McMasters’ Group, is one of them and according to him, the ‘hourly rate’ fee-for-service remuneration model is reflective of the industry’s professionalism. Accountants and lawyers – both of which have a presence within McMasters Group – have long used the ‘hourly rate’ as a remunerative model of choice.
For McMaster, the adoption of that model was a “natural progression” when Dover was launched. “We just extended the fee model of our accounting practice and law firm when we set up the financial planning arm,” he tells ifa.
A report authored by McMaster in 2012 made the case for the hourly rate in detail. Among the advantages listed were a lack of conflicts of interest and a high level of transparency.
The professionalism factor also featured highly. “[The hourly rate] is familiar to clients and associated with high professional standards,” the report states.
Despite the perceived professionalism, and perhaps the ‘class’ associated with hourly remuneration, its champions are seemingly outnumbered by its opponents in the advice space.
Stackpool does not mince his words: “[The hourly rate] is crap,” he says emphatically. “The premise is that, ‘the more I work the more valuable I am’ – which is misguided. This model rewards inefficiency and rewards hording of work and pegs your entire value to your hourly rate.
“If you’ve been giving financial advice for 50 years you might be able to do something in half an hour that adds more value than your hourly rate.” According to Stackpool, this model is not only “as dead as the retail bookstore” but it is “worse than commissions”.
Sue Viskovic also “counsels strongly” against the hourly rate, arguing that it can lead not only to inefficiencies but also that it is counter to the new thinking that remuneration models should reflect in the wake of the FOFA reforms.
“In reality, clients don’t care how long it takes to do something; they just care about the value of the advice. But the hourly rate puts the focus on the time taken, which should not be the focus,” she says.
From a business perspective, Viskovic adds that the hourly rate is also unsuitable to advice practices as it throws away the benefit advisers have in being able to “generate leveraged revenue that is unrelated to the human capital in the business”.
In other words, the hourly rate is a model limited by the number of working hours in the day. In order to increase revenue, you will probably have to increase staff numbers, which is inherently risky, Viskovic says.
Meanwhile, John Hewison, chief executive of Hewison Private Wealth, uses an hourly rate as part of his business’s remuneration model and describes it as “quite viable”. He does, however, admit there is a chance for manipulation and ambiguity: “It does depend on you being legitimate in the way you calculate the fee – it’s a trust thing,” he says.
But for Stackpool, even the professionalism argument falls down. “The idea that because accountants and lawyers use hourly rates advisers should too is ridiculous,” he says. “The more progressive lawyers and accountants are abandoning this model anyway.”
The red corner: flat fee retainers
Elixir Consulting advises clients right across the remuneration model spectrum. “There are pros and cons to all models,” Viskovic says, but adds that when she takes clients through those pros and cons, overwhelmingly they opt for flat fees.
The model recommended by Elixir is essentially a flat fee retainer – levied either on a monthly or an annual basis – with a “value overlay” on top. This model best allows the adviser to have a clear ongoing fee arrangement, with a clear scope of advice, according to Viskovic.
However, it has the added benefit of allowing the flexibility to charge additional flat fees for work outside that scope where there is greater risk involved or where complexities have arisen.
When Peter Stewart – whom Viskovic describes as having been a strong supporter of a commissions-based model in the past – decided to enlist Elixir and adopt a new FOFA-complaint model, he went the whole hog. He facilitated a complete overhaul of his business model, including replacing staff members who were resistant to the change, and implemented the preferred ‘Elixir model’ of a flat fee with ‘value overlay’.
To say that Stewart is a happy customer is an understatement: “The new model has been great,” he says. “It’s transparent, it’s easy to explain and the fees are determined by a logical, fair process rather than just made up figures.”
As well as its being convenient and logical, Stewart identifies a number of associated benefits. “Clients can tell we’re not just trying to sell a product or waste their time under this model, but that we are really trying to help them,” he says.
Through adopting a long-term view of the client relationship, fostered by the retainer model, Stewart’s practice has broadened its service offering – he has even needed to retrain and specialise in estate planning. The change has given him a “new lease on professional life” and re-invigorated the reasons for which he became a financial planner in the first place.
While Viskovic champions this model, she admits there are several risks if it is not positioned correctly. “It’s really important that absolute clarity is provided about what’s included and what’s not,” she says, ”otherwise complications can arise.” She also admits that from a revenue perspective, flat fees can have the downside of not producing any benefit from the market – a “free kick” to which many advisers became accustomed prior to FOFA.
On the other side of the coin, says Hewison, it is when markets are down that the flaws of the flat fee model are really evident. “If I was an advice client and there was a market depression, and my adviser was enjoying a nice safe flat fee while my portfolio value was dropping, I’m not sure I’d be too happy about it,” he says.
The black corner: asset-based fees
Asset-based remuneration has long been a business model stalwart within the finance sector. Alongside product commissions it has helped innumerable financial planning practices become profitable and successful and is often seen as being in line with the free market ethos that lies at the core of financial services.
In the new regulatory environment, it is also an increasingly controversial model.
While it did not ban asset-based fees outright, the Accounting Professional & Ethical Standards Board (APESB) issued a clear rebuke of the model in its recently-released APES 230 standards for accountants who also provide financial advice.
“The board strongly recommends to professional accountants that clients be charged on a fee-for-service basis for financial planning services to minimise the opportunity for conflicts of interest,” ABESB chair Kate Spargo said in a statement.
For Stackpool, “asset-based fees are a fee-for-service model that is basically just another version of commissions”. An asset-based model under which an adviser takes a percentage of the funds under advice (FUA) of the client – the most prominent of asset-based models – represents all that is wrong with the industry and the reason more Australians don’t take up professional advice, he says.
“If you’re trying to give independent advice, it should be based on the complexity of the client’s life not the amount of money they have,” he says. “Under the [percentage of FUA] model, advisers are always on the lookout for high-net clients.”
This view is now shared by Stewart, who has worked under an asset-based model for most of his career. “It is conflicted,” he concedes. “The premise of asset-based fees is that if a client has more money they will receive more care and attention from the adviser and this is not right.”
But for Hewison, the asset-based fee is not about greedily trying to get more out your client. On a philosophical level, he suggests, it is the model that best creates an “alignment of interests” between the adviser and client, thereby helping to build trusting relationships.
“You win together and you lose together, depending on the market,” he says.
Humphries adds that from a compliance perspective, “it is perfectly fine under FOFA to charge an asset-based fee as long as it’s not on any borrowed monies”. Therefore, as long as the regulator allows asset-based fees in some form, it is likely that many practices will hold on to this time-tested model.
The rainbow corner: hybrid models
While each fee-for-service business model has its champions, many advice practices are implementing models that include aspects of each.
Hewison Private Wealth, for example, charges both hourly rates and a percentage of funds under advice on top of that. Even Terry McMaster, who spoke enthusiastically about the suitability of hourly fees, uses a hybrid model, occasionally charging one-off transactional flat fees for specific tasks (though these charges, he points out, are still based on estimates of hours required).
Hybrids are the way forward, Stackpool suggests. While a strong advocate of flat-fee retainers for long-term advice clients and for developing strong, transparent fee arrangements, he says advisers should have the flexibility to offer different models to different clients.
“We advise a one-off transactional fee for client engagement, outlining the scope of advice and then placing the client on a monthly retainer and then additional fees can be charged on top if that scope changes,” Stackpool says. “But they should also be flexible enough to offer ‘wham-bam transactions’ for some clients as well.”
In effect, Stackpool suggests splitting up the client base into several models based on the wants and needs of each.
The downside of the hybrid is that a more complex fee structure can be more difficult to explain to a client, as both Humphries and Viskovic point out. And speaking about his own hybrid model, Hewison admits “you need a client base that is intelligent”.
As the industries and professions that provide financial advice merge and converge, however, this more nuanced hybrid system may prove to be a popular choice.
The white corner: performance-based fees
Based on the ‘no win-no fee’ culture of American plaintiff law firms, the performance-based fee model is rather elusive in Australian financial services circles. “I’ve heard people talk about it but never seen it implemented as a serious model,” says Humphries.
McMaster, however, has had a different experience: “I’ve seen it done, but never done successfully,” he says.
The performance-based model involves advisers being remunerated based on the portfolio returns of clients. Viskovic agrees that many advisers offer great value in the investment space, and that this is sometimes a core component of their value proposition. But at the same time, she doesn’t think it is a model that is in line with FOFA thinking. “The premise is that an adviser’s role is to outperform the market rather than help people achieve their goals and make the most out of things that are in their control,” she explains.
According to the Dover fee-for-service report, the performance-based fee has the benefit of “goal congruency”, akin to the argument made by Hewison for asset-based fees. However, it is certainly a riskier model than asset-based fees, gambling remuneration on the chance that the adviser always helps the client make the right investment decision.
“Psychologically, if the model is to get paid for beating the benchmark, this is a win-win for clients and advisers, but it would be a very brave planner that would take this on, given that most experienced fund managers haven’t managed to often beat these benchmarks,” says McMaster. “It is probably wishful thinking.”
But then again, as Ali also said, “Life is a gamble.”
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