Commissions have once again become a hot topic among the investing public after the recent ACA/ASIC survey.
The alternative, fee for service, is used by a number of dealer groups, although most still rely on some commissioned-based business. This is especially true for clients with low investment balances.
However, in an environment of falling returns, many clients do not want to pay any additional costs such as a fee for advice.
Strategic Consulting and Training director Jim Stackpool says the real problem in the industry is that historically it has grown up with commissions.
“The fee for service debate has been hijacked by the methods of collection,” he says.
“The question of fees for most of the industry is that it’s brokerage-based. It is still about collecting a percentage of funds under management. Some (advisers) talk of a fee-based service, but generally most are still collecting off a product.”
Stackpool says switching to a fee for service model is about confidence.
“Have I (the adviser) the confidence to challenge the relationship?”
Stackpool admits it is easier to put the client into a product, but in the future that might not justify the future earnings of a practice.
“There is a proliferation of product and most will be indistinguishable, except for the price,” he says. “The features in products are replicated, so price becomes the difference.”
The current climate of client anxiety is entirely performance-driven, Stackpool says, but many advisers also experience fears when the subject of payment arises.
“The only time an adviser gets a bit uncertain of the relationship with the client is when the matter of fees come up,” he says.
He suggests that the solution is to move to fee for service, as that method will enable the client to match their investment expectations with the advice they receive from the advisers.
Stackpool says how the money is collected is entirely up to the advisers, but he is against charging an hourly fee.
Stackpool says advisers should explain to clients that to produce a plan will need fact-finding sessions and research, and advisers want to be paid for that time.
“For the client to join my business, I need an upfront commitment,” he says.
“Some advisers call it a plan fee, but it does need to be explicit and must explain what the client is getting in the future.”
Stackpool says advisers who work on a commission-only basis tend to take any client, as there is always a payment in the transaction.
“As price and products get sharper, that won’t work long-term for the adviser,” he says.
“The adviser needs to put price into that relationship through ongoing fees. Development of that price is a managerial decision, which many advisers won’t be able to do as they lack managerial skills,” Stackpool says.
Despite the push for fee for service, many dealer groups still operate a split method of charging.
Friendly society Australian Unity recently formed its own financial planning operation and has adopted a spilt method of charging for the advice it gives to clients.
“We use a range of remuneration models, including fee for service,” says Australian Unity Financial Planning general manager group distribution Derek McMillan.
“We use the best fit for what we would like and what the client wants. Larger clients prefer fee for service, smaller clients prefer commissions.”
McMillan says there is no hard and fast rule about which payment method a client prefers.
“We do not have a cut-off distinguishing the two, but because we are only nine months old, most of our clients are coming to us rather than through prospecting,” he says.
McMillan says Australian Unity does charge review fees and it explains the process to the client.
“It is all dictated by the client’s wishes. However, we are finding an aversion to fees,” he says. “We are seeing a trend away from upfront fees, as the client seems to want to put the issue of (investment) costs a couple of years down the track.”
Australian Unity bases its fee structure on the type of plan.
“We have a general rule that we are looking for about 1.5 per cent income from the work, either from fees or commissions,” he says.
“However, if we are not providing much work, then we don’t earn that amount of income.”
Certainty Financial is another dealer group that has a flexible approach to fees.
“We have got a straight forward approach to fees,” says Certainty Financial managing director Geoff Crewe.
“We identify how much we need to generate and we take that remuneration any way the client feels comfortable with.”
Crewe says clients pay their fee either by cheque or the product pays a commission.
He argues that as long as the client knows what they are paying for, then that is the best method for that particular client.
“It is an issue about disclosure, transparency and choice,” he says.
“It is true that clients with less discretionary funds would prefer payment to come out of the product. But, clients with more money have the ability to pay for service and usually they are the more sophisticated investor.”
Crewe accepts there is a drive towards fee for service, but he questions who is driving the debate.
“I am a bit bemused by who is driving the debate, as it’s not the consumer,” he says.
“Rather, it’s from interest groups, including the institutions, that are outside the financial planning industry.
“When we talk to the clients about fees, it’s not a burning issue with them; it’s an outsider party that wants fees.”
Crewe argues that building a relationship with the client is more important than worrying about the actual method of payment.
“The actual fee is not an issue, but there has to be clarity on which way payment is to be made,” he says.
As Certainty has an extensive corporate superannuation and risk business, Crewe says it is easier for the dealer group to adopt both payment methods.
When Kevin Bailey started Money Managers in 1996, he was able to select which payment method the company was going to use in the future.
“We started Money Managers with a clean sheet of paper, so we had no baggage,” he says.
“We set up the business with no commissions, so I was able to put into practice what I had talked about publicly. And I strongly believe in fee for service.”
Bailey says he believes there are firm distinctions between product sellers and those advisers who give advice.
“My firm belief is that product distribution is something that is done by the institutions,” he says. “That is where you have sales people.”
As a result, the service delivered by the product sellers is paid for by the institution and not the client, Bailey says.
“That is not an advice model, that is a commission model,” he says.
“Unfortunately, some people (in financial planning) will sell product with advice on the side. People should understand that they are technically distributing product.”
Money Managers is a fee for service business and fees are charged to all clients.
“Our minimum fee is $5,000 and the client knows what the fee being charged is for.”
He says the fee covers such areas as fact finding, research and writing the plan.
“We don’t charge for placing money, that is a junior role,” he says.
“We charge for setting up the strategy, as the transactions are a commodity. The client is buying our intellectual property.”
Bailey admits that operating a fee for service model filters the type of client Money Managers takes.
“We are not all things to all people,” he says. “We think our service is really suited for people with $500,000 of investments and above.
“We set the fee and are the price-maker, not price-taker.”
Bailey says the fee is set in consultation with the client in private and does not involve a third party such as a fund manager. The client pays the fees separately.
Bailey admits a dealer group changing from a commission-only model to a fee for service business will find it hard.
He believes most dealer groups would have to look at a 12-month transition period and even after that there will be clients still on the commission model.