Ethics is always a hot topic within the advice profession, whether it be in regard to continuing professional development or investing or adviser conduct, but how does it impact key business decisions?
Appearing on The ifa Show, TruWealth Advice director and principal financial adviser Natallia Smith said ethics are embedded in how she built her business, including the charging model she uses, driven by the belief that fixed dollar-based fees are overall the more ethical option.
“There is a perception that the asset-based fees are conflicted because obviously the more, because it is a percentage of your [funds under management], the higher the amount of money that you manage, the higher the fee. But are you going to do more work? So, it’s not really proportional,” Smith said.
Even so, some would argue that the business is taking on greater risk when clients have more assets. However, Smith said while this is true to an extent, it still doesn’t justify this charging method.
“Yes, you do maybe have slightly more legal obligation and risk when you manage a larger portfolio for a client but at the same time from, I guess, your output, it doesn’t really change that much,” she said.
“So, having a fixed fee, fixed dollar-based fee is considered to be a more of an ethical approach.”
When it comes to businesses taking on added risk, professional indemnity (PI) inevitably comes up, however, Smith argued that PI brokers generally aren’t overly concerned about the perceived higher risk that might come to managing clients with greater assets, suggesting that lower balance clients can also be risky.
“When you look at the claims, what happens, sometimes they are actually your smallest clients and maybe the clients that are actually not paying as big of a fee and they claim on your PI cover. So, it’s not always the case,” she said.
With ethics at the heart of this discussion, she further questioned how fair it is for larger balance clients’ fees subsidising, in a way, your lower balance clients.
On top of this, some advisers might feel obligated that, because some are paying a higher fee for their time, they need to spend more time on the higher balance clients, potentially at the expense of those at the lower end of the scale.
For advisers operating under an asset-based fee model, Smith said being “transparent and honest” about this is essential and making sure clients are aware of what it actually means for them.
Even with her strong belief that fixed dollar-based fees are the more ethical option, Smith also recognised that “it’s not the most profitable” option and, at the end of the day, businesses do need to make money to run.
“This is where you’ve got the ethical versus profitable balance where, in each person, when they run their own business – it’s not just in financial planning, it’s in any other industry – that’s what you need to consider,” she said.
To hear more from Natallia Smith, tune in here.
How nice, that Ms Smith has decided to sit on the highest mountain possible and proclaim her ‘ethics’, whilst denigrating everyone else who doesn’t see the world through her rose coloured glasses.
Personally, I don’t care how she ( or anyone else ) charges for advice. I charge what I feel is justified for not only the work i do, but for the legal responsibility not to do stupid things with a clients money. And guess what, my clients seem very happy with me, my office and my services.
When the legal profession decides to award fix-price damages to people who have had their financial world screwed up by poor quality advice, then come back and talk to me.
Settle down you angry little person. She is advocating a view – don’t be so defensive
We have mix of asset based and fixed fee. In my experience clients see an asset based fee as you having skin in the game, meaning it is in your interest to want their funds to grow.
I also prefer my retirees to be on asset based fees as they do become easier to manage as their balances fall over time.
Finally, I’d be curious as to how often and by what amount Natallia raises her fees. In line with inflation? A fixed %. This has been a more difficult conversation this past year for me than those on asset based fees.
Whether you are doing more work or not for the fee misses the much bigger ethical problem with asset based fees.
Asset based fees involve a massive conflict between advising to invest, versus advising use of funds for other purposes where no asset based fees can be earned, such as debt reduction, business expansion, or extra contributions to union super funds.
Could not agree more. Heavily conflicted, extremely generalised method that should have been eliminated post Hayne