When it comes to financial advice, it is a fair assumption that, generally, the most significant financial benefits of accessing this service will occur in the first 12 months as clients are moved into better suited products and the foundations are laid for the client’s financial future.
According to financial adviser Nathan Fradley, this makes it easier to demonstrate the initial value of advice as the savings and potential returns will usually outweigh the fees being paid.
“Let’s say you take them from product A and you move into product B and you save them $6,000 a year in fees, and you charge them $3,000 per person. So, they’ve saved at least your fee just in product fees, right?” Fradley said on the Challenge the Standard in Financial Advice podcast.
“You’ve moved them to a low cost index product, and every year they would be paying less money and therefore we’re still ahead having paid your fee, but if they didn’t pay your fee and they just implemented the advice initially, they would still be ahead, arguably, by more on a pure quantitative basis.”
However, once it comes to ongoing services, demonstrating value strictly based on dollar figures can become challenging, as there is unlikely to be significant changes made to their portfolio or product placement each year.
“It’s always the struggle when you’re positioning an ongoing fee or an upfront fee, and you’re like, they want to know what’s the ROI? What’s my dollar return?” Fradley said.
“And it’s like, ‘Yeah, here’s your dollar return as at now moving forward, when you’re including ongoing fees to that’, but you’re arguably not going to change their super fund every year.
“That’s an initial advice benefit, not an ongoing advice, so that’s sort of a first trap.”
PlanningSolo founder Jordan Vaka added that insurance, for example, is a product that essentially has no dollar value when initially purchased, with clients only getting a return on that investment if and when they need to make a claim on that policy.
“You are recommending something for which clients will hopefully get no dollar benefit from. It is only a cost. But there’s a value to it and that’s why we recommend it,” Vaka said.
Fradley added: “It’s the thing you want to pay for to lose on.”
Once advisers reach the stage where all the product changes have been made and the quantitative value doesn’t exceed the annual fees charged in an ongoing arrangement, Fradley suggested that the value going forward is “all qualitative”, and that can be hard to demonstrate.
Given the history of fee for no service in advice in the past, Vaka suggested that this could then raise concerns if the adviser is unable to illustrate the benefits of their services beyond the numerical.
“That’s an uncomfortable space, I think, for a lot of advisers and certainly a lot of compliance departments and possibly some regulators – I am charging for a relationship. I am charging for access. There is no dollar return on this,” Vaka said.
He added: “I think if you were to put in front of a regulator or compliance department, here’s a client scenario, they have received no dollar benefit at all from working with me in the last 12 months, it’s cost them $5,500 and they’ve happily paid it there. I believe there would be some parties who would try to stop that.”
While Fradley believes there is some level of understanding among regulators around this, he also conceded that there is potential for situations such as Vaka described to occur, adding that there are likely some within the profession who would take the side of regulators looking to reprimand other advisers for this.
“I actually think there’d be some advisers that would cannibalise their own; ‘Well, you haven’t done anything. That’s not how I would have done it.’ There’s advisers out there that are so quantitative they don’t realise their own value. They don’t realise their own value of qualitative,” he said.
“They don’t realise that because the quant is easy. It gets you in the door. ‘We save you these product fees. We save you this tax. Put this extra money into super and over time, it’s going to save you this tax. And I can pay you that. You’re going to save this much money, and it’s a 1,400 per cent increase in ROI. How good is that?’ That’s easy.
“And none of that, when you survey the clients, is the number one reason they see you … That is so robotic that you’ll lose it to your large language model. That is the difference between a great adviser and the value of ongoing advice.”
Although the financial benefits are likely the biggest initial driver when it comes to advice, Fradley explained that, in his experience, this is rarely the most valuable takeaway for clients.
“I just finished a plan with, in the first 12 months, just by some basic restructuring stuff, we’ve saved them two – three times the fee just in one go, and they wouldn’t have done it if they didn’t know. So, if they never saw me, they wouldn’t have got it,” he said.
“And, so, it’s amazing, but they even said that’s not the most valuable thing we got out of this process.”
