Planners and risk advice
At the FPA's Professionals Congress in Brisbane this week, the director of boutique financial planning practice Wealth Elements, Dean Van Zyl, discussed how he approaches changing the way he charges clients for risk insurance advice.
Dean Van Zyl: When I started in financial services, I have to be honest, like a lot of you I was really attracted to this concept of being able to significantly change people’s lives and put in place protection plans and, at the same time, do really, really well at it and earn the upfront commissions of the past.
But if I reflect on the last eight years and all the clients I have worked with, if I were to say those commissions were a conflict with my clients and therefore they received bad advice, I would say absolutely not.
We are going to talk about the challenges of transitioning and I can tell you, for a small boutique practice like mine, there have been some incredible challenges. Whenever there is change there are massive challenges; however, that’s really where opportunities come from.
We are then going to look at whether we can really build a sustainable practice that involves fee-for-service risk advice. Now I know it is going to be more difficult for risk-only advisers, but there is a way forward and I am going hopefully to give you an insight into what that looks like.
Now, any business adviser will tell you that you need a strategy to reduce costs and save tax [to make up for lost revenue]. That is really not a forward looking strategy. But at the end of the day, to deliver risk advice, you need to consider how you can reduce costs – if anything just for the enjoyment of still providing risk advice when revenue has dropped.
I started with an AMP licensed practice and I started with percentage-based fees [and then moved]. I was always charging advice fees but we were also taking upfront commissions, and that’s just the way things were done. Over the last 12 months I sat back and began to think about why I actually provide risk advice. Now, my client base consists of young professional families.
So I sat back and thought about why we really provide risk advice, and for our business – and our mantra – it is to ensure that the families that we do work for have a complete risk management plan that spans their whole lifetime and to ensure their human capital is protected for as long as possible. And that is probably what really enlightened me to actually drop what I knew about being an adviser and say there are some issues here. The only thing I will say about ASIC is they did bring up the long-term sustainability of insurance. When I talk to my clients – particularly when I had met clients who had come from other advisers – they had these insurance policies (which, thank goodness, they set up) but the problem is they are being cancelled after four, five and six years. And the conversation was starting to come up more and more with clients [about] whether they will have this policy for more than four years. So, families’ cost concerns, sustainability of premiums and this concept of staying insured became a real big issue for me, and I saw it with my client base. If you have a young family client base, it is going to come up, because as premiums grow and they grow quite significantly, they are starting to tug with other resources.
The biggest issue for us was being able to deliver a risk management plan that focused on getting clients to 15 years and still being able to keep insurance.
I am sure you would agree, into your 40’s that’s when these policies are likelier to be needed. So that conversation led to where I feel risk advice is going. When taking the product revenue out of [insurance products], best interest duty started to open up to me and I started to see that I can achieve best interest duty in a much better way when I strip out all the cost. When I turn just risk advice into strategic planning for the client I can improve the strength of my best interest duty. Now it’s not to say that anyone who does just risk only can’t meet their best interest duty, however, I believe that the legislation is pushing for advisers to engage with their clients in more than just risk advice. So, it is pushing for more comprehensive advice – not just to say ‘what do you want me to do for you’, but to say ‘we need to think about these things that are important’. When you take the product revenue out and you can build a plan that a client can keep for the long term, you really start to build up your best interest duty. That is something that really stood out to me. So it is about moving away from just risk advice to strategic advice. Now some of the insurers have had workshops on what is strategic risk advice. But what I have realised is when you take away the commission side of the policy, it completely changes how you can build a strategy for your client because you can start to tinker with some aspects of the advice and consider the short, medium and long-term needs of the client.
So this started to develop within our business, and I was talking to our clients, talking to our team and talking to my mentors and what we realised is this started to lead into a fantastic value proposition for us. We know that in two years, 60 per cent [up-front commission] is where it will stand, so for us, to be able to sit with our clients – I have had the best conversations over the last 12 months with my clients when all product commission is taken out of the picture. They will say, I just want to stop you there. When you talk about independence and the fact that you strip all the cost out, that means that when we look each other in the eye means I know you are doing the right thing for me because why on earth would you not do that. Now, this does not mean that fee-for-service advisers will provide hands down the best advice, but there is an incredible value proposition you can build with this structure. So what I would like to do is not say to you that all of you must be fee-for-service advisers, but think about the marketplace that you operate in, think about the demographic that you work with and then start to think about how far should you go. Should you go to fee-for-service? Or, should you stay in your existing model?
The engagement piece with our clients was absolutely fantastic and what I want to position for the future is professional services. I wanted to turn wealth elements into a professional services-era styled business. That means that you do strip all product commission out of it so when you deal with a client, you are just talking about fees and you are just talking about the services you provide.
Two distinguishing pieces of feedback that we got from our clients – I am sure everyone likes to be in control of your spending. When you do charge commissions, the client is not in control of that spend. So what we realised is when clients see our fees, they are 100 per cent in control of their spend, and that has become very, very powerful. Our engagement with our clients has never been better, because the client is completely in control of the spend. So really, this has become a focus of product costs for us and minimising the product costs.
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