Whose best interests are recurring advice fees serving?
The clients or the advisory firms serving them?
Recurring fees are everywhere.
The valuations of most real estate firms are often dependent upon the recurring fees earned from the firm’s rent rolls.
Macquarie Bank’s recent $2B half-yearly profits are heavily based upon the bank’s acclaimed annuity-style (i.e. rent-seeking) operations across transport, energy, and financial services sectors.
Mobile phone plans, software app subscriptions, most insurance payments, and frequent flyer programs all thrive due to recurring revenues.
The mortgage brokers’ recurring revenue model intrigues me the most.
How this industry enjoys an unimpeded flow of recurring fees paid usually unknowingly by the vast majority of borrowers for every single year after the signing of a mortgage for virtually no recurring effort is beyond me. Their financial planning cousins on similar engagement models are now forced to jump over growing reams of bureaucratic compliance to justify every product recommendation every year.
How much longer can this imbalanced farce continue? But I digress.
2018/9 ROYAL COMMISSION
The Banking Royal Commission may be remembered for many things, but if it wasn’t for ASIC’s 2016 Report 499 “Fees for No Service Report” produced three years earlier, the headlines may have remained in the finance section rather than the front page.
Fundamentally ASIC’s Report 499 suggests that recurring revenue streams are not in the best interests of financial advice clients. It had plenty of examples of financial institutions and providers somehow forgetting that recurring fees were for valued recurring services.
While Report 499 laid the groundwork, the Royal Commission went further into the soft-underbelly of the advice industry’s rent-seeking practices.
Like catching fish caught in a bucket the Commissioner and counsels assisting made the nightly news showing how endemic their ongoing fees and entitlement beliefs to them were throughout the advice industry. Heavens only knows why non-bank advice groups (e.g. super funds) missed the spotlights when their only defense was their recurring fees were lower and without a distribution force while still being endemic.
Time will no doubt reveal more financial services rent-seekers.
So was Report 499 and the Royal Commission right? Are recurring fees driven by rent-seeker self-interest, rather than the client’s best interest?
Some advisers justify their recurring fees by positioning their recurring advice fees as one might regard a golf membership fee.
The value of the recurring fee is ongoing access.
Just as some golfers value access to their own course where everything, apart from their own skill, is “in order”, predictable and waiting for their potential enjoyment, so too some advisory teams justify their recurring fees as they keep their “members” financial lives “in order”, ready for the expected, while planning for the unexpected developments that life throws at them.
Like real golfers, clients pay their recurring ‘membership’ fees knowing financial lives have their slumps that need support, they will need the occasional lessons when unresolvable complexities persist, and they will inevitably require an upgrade to their products as technology and life advances.
Other advisers consider the recurring advice fees as some might regard a performance fee.
The value of these recurring fees is additional recurring performance.
These advisers earn their recurring fees because they promise to out-perform the other market performers.
Performance fees are sold like a personal bookie at the races with specific intelligence to ensure the kind of performance only expertise can consistently bring. These advisers usually align their recurring fee with their performance so they enjoy the recurring wins and still earn, albeit less when there are recurring losses.
A fee model is more akin to football coaches than doctors for clear reasons.
Some advisers consider their recurring fees as an ongoing contingency payment.
It’s an insurance payment. It’s the ability to “…call at any time about anything” fee.
A payment to avoid the worse financial consequences for when markets collapse, or jobs are lost, or health goes downhill, or accidents happen. Like insurance, the majority of clients paying recurring fees as a contingency are overweighting improbable outcomes while underweighting more certain outcomes. As Daniel Kahneman reminds us that’s why poor people buy insurance from rich people.
So too are contingency fee payers.
FEES FOR SERVICE FEES
Some advisers consider their recurring fees as a continual charge for continual services.
These advisers offer a number of meetings, or the promise to constantly re-balance asset portfolios, or a monitoring of cash flows, preparation of tax returns, or an ongoing assessment of insurances, debts, structures, market analysis, and invitations to one-off events.
Pricing on ‘inputs’ (i.e. “this is what we will do for our fee…”) in these times of fast-paced innovation is dangerous.
Input pricing is very different from output pricing.
One is priced on the cost of services, but for those that believe in a market economy, the real one is priced on the value of those services as judged by the people paying for it – clients. The long-gone milkman or twice-a-day postie both lost their input price war decades ago. Be careful pricing on ‘inputs’.
Eventually, all fees, recurring and up-front stand up to the ultimate value test.
Like all fees, recurring fees will only be continually paid for if the fees are of value to the client actually paying for it. Regardless of how recurring fees are positioned, they are only sustainable if they are valuable. Value to the client that is, not the provider.
So, in the future, I reckon it’s less about the sustainability of recurring fees and more about the provision of recurring value as judged by the people paying the fee each and every year.
That’s the future of financial advice.
What do you reckon?
Photo Credit: Shutterstock_1317713738
ABOUT JIM STACKPOOL
For over 30 years, Jim has influenced, coached, and consulted advisory firms across Australia. His firm, Certainty Advice Group coaches, trains and is growing a group of advisory firms delivering comprehensive, unconflicted advice, priced purely on value. The community of advisory firms aligns with Australia’s highest and only ACCC/IP Australia Certification Mark standard of comprehensive, unconflicted advice – Certainty Advice. He has authored four books regarding financial advice with his latest – What Price Value – available now in pre-release pending launch in March 2022.