Published in BRW, page 46, August 12, 2010
Financial planners will need to adopt new business models to succeed under legislation that is due to take effect on July 1, 2012.
The new rules stop financial planners earning commissions, volume-based payments and fees calculated as a percentage of assets under management on geared investments.
The changes are good for clients and should offer them greater protection from being drafted into inappropriate investment products by advisers biased towards schemes that reap them a higher commission.
But for most financial planning firms it will mean finding a completely new business model and adjusting to it.
The peak accounting bodies – including the Institute of Chartered Accountants in Australia, CPA Australia, the National Institute of Accountants and the Accounting Professional & Ethical Standards Board – have thrown their weight behind fee-based remuneration as the appropriate business model for accountants offering financial planning services. They feel it’s the easiest way to avoid conflicts of interest.
In June, they released a draft standard (APES 230 Financial Advisory Services) that excludes “commissions, percentage-based asset fees, production bonuses and other forms of fees or remuneration that are calculated by reference to product sales or the accumulation of funds under management” from their definition of fee-for-service.
More importantly, they propose to make all members conform to the new definition from July 1, 2011.
The Financial Planning Association (FPA) has also recommended that from 2012, fee-based remuneration become the modus operandi for financial planning advice.
This means that financial planners operating on commission have 12 months – two years at best – to review and adjust their revenue structures.
Moving off commission to a fee-for-service model is a dramatic shift. Financial planners will need to agree on their pricing and terms upfront.
Where in the past they offered the same services to retail clients year after year without formally re-engaging them, this won’t be possible under a fee-for-service regime.
Financial planners will need to re-engage clients each year and convince them to keep buying services.
They need to seek help from accountants, business strategists and also work with dealer groups to ensure the processes they follow support the move to fee-for-service.
Many people are urging financial planners to adopt an hourly rate like accountants and lawyers. I disagree.
An hourly rate is problematic for financial planners and could result in a lot of unhappy clients and disgruntled staff.
Here’s why: first, accountants often work out how much to charge a client after they complete the work and invoice accordingly.
Clients have no idea what they are going to pay a business before the work is completed and value can’t be communicated.
Meanwhile, staff complete work according to target hours instead of offered getting chores done as efficiently as possible.
Rather than an hourly rate, I think financial planners would be better off developing a price list or structure that considers the total value of the service they’re offering. Fees should be based on outcomes and the value of those results for customers.
Financial planners who are serious about not only surviving but excelling under the new fee-for-service regime must give serious consideration to their business structure now.