80% of the fee for service models within Australian financial planning firms won’t work in three years time.
In their quest to get “legislation-ready” for Monday 2nd July 2012, most planning firms are not thinking through their hastily implemented fee for service models. I reckon the majority of the recently implemented fee for service models could well be the kiss of death for many planning firms, and will signal an end to the glory years of getting too well paid for doing too little for far too long.
Why is this?
The common fee for service models being hastily implemented at the moment are product and transaction related rather than value and service related. Fee sizes are based upon events (i.e. funds placement, retirement plan development, insurance purchase) and a quantity of product purchased (i.e. size of funds invested, size of premiums paid, numbers of hours worked) rather than ongoing service and quality of advice provided.
What’s wrong with this?
Plenty.
Ongoing revenue is justified … how?
With these new fee for service models built upon particular events (e.g. new house, retirement, inheritance) and quantity of product (e.g. insurance) surrounding them, how are you going to justify your ongoing fee when there aren’t many events and not much ‘transactional activity’ in the second and subsequent years?
The leakage of ongoing revenue will start with a just a few clients initially but, like most landslides, it will gain tremendous momentum before engulfing the whole firm and tearing the heart out of the firm’s profitability.
Even the name “fee for service” gives that impression that the fee is for service. So in subsequent years what is the ‘service’ that warrants your fee?
This is going to be particularly interesting for firms that have never had to justify their service fees in the past because they were willingly paid by the product manufacturer, not the client.
“You’re paying how much for how much service?”
What are you going to say to the client paying $3,000 a year, who never calls and only wants one review a year, compared to the client paying $1,000 a year, who calls all the time and drops in for a chat every time they’re in town? How long will it be before the clients paying $3,000 figure out they’re paying the equivalent of a new large plasma TV every year for a fraction of the services enjoyed by someone else who’s paying only a fraction of their fee?
Before you console yourself with the thought that these two clients don’t know each other and won’t share their fees, I’ll remind you that we live (thankfully) in a free enterprise society.
You’re right. These two clients won’t talk and find the discrepancy in fees paid and services provided. They don’t have to. The market will notify them. It’s like those ads on TV about police breath tests – it’s not a matter of if, but when.
How do you compete with new ‘financial supermarkets’?
New competitors will emerge in the marketplace, attracted either by a superannuation levy climbing to 12 percent, or by the financial planning proposition’s foundations being more solid than tightening mortgage or brokering propositions. These new players will see the obvious soft underbelly of ongoing financial planning fees for service as manna from heaven.
When the annual opt-in and opt-out legislation is implemented, these new compliant competitors are going to win clients from many fee for service planners as they blitz advertise with ‘cheap’ offers for ongoing fees for relatively similar services.
Remember the quick demise of the 1970s corner store when large neighbourhood supermarkets started to emerge? With Federal Treasury forecasting our superannuation system growing from current levels of $1.26T to $5T by 2030, it’s a no-brainer that there will be a lucrative landscape for developing financial supermarkets.
They’ll be cheap, probably virtual, and ruthless in penetrating our existing client bases with new “compare the difference” adverts. These new players (which will include offshoots of existing majors) know that price is the most effective weapon for penetrating new markets.
I reckon they’ll leverage the impending legislation with honeymoon offers of “first year’s ongoing advice fees waived” and easily lure your fees-for-service clients over to ‘opt-in’ with them.
When the going gets tough, fees fall …
Remember the global financial crisis? Remember when your overall revenue was dropping and no clients were placing any funds? (Thankfully some advice firms had ‘diversified’ into risk and picked up some work there, phew!)
Most fee for service models still don’t address the basic issue that the majority of the fee isn’t determined based upon advice quality, but on product quantum. So when markets twist and turn, the majority of your fee continues to twist and turn. Ironically, when advice clients most need advice, the fee for that advice is actually dropping, and, without new transactions, new revenues dwindle. (Isn’t it true that when the going gets tough, when uncertainty is rising, we need advice more than ever?)
It makes no sense
Why does the fee for service have to increase if more product is purchased? Is it fee for service or fee for product? I can understand paying more for more product when I’m buying mince at the butcher, or topsoil for my garden, or petrol for my car, or airtime for my phone.
But when I’m buying advice and advice services, I want outcomes more than I want products or effort. As proven by the disillusion resulting from the global financial crisis, all the financial products and efforts by planners don’t mean a thing if the client’s outcomes are not achieved.
Where’s the value?
Initially amazed, I applauded the quick and early efforts by most of the majors to ‘convert’ their distribution to a fee-for-service model. A quick look under the modified bonnet, however, shows it’s more of a compliance job than a professional job, and I figure they were (probably correctly) simply starting the process by making their advisers compliant. They haven’t yet put the time and considerable effort in to make their distribution forces not only compliant but also competent and professional in explaining both the initial upfront and ongoing value in their fees.
Let’s get this right.
It’s not about fees-for-service. It’s much more simple than this fancy-pants marketing term (remember holistic?)
It’s about value for money.
Great advisers have realised this and have long been practising pricing techniques that align the value and the price. Even in those years when investment balances dropped, when tax effective programs weren’t tax effective, when their insurance products were not the sharpest price, great advisers were spending the time with their advice clients, understanding what value meant to each of them, delivering on that proposition, and getting well paid.
Part of the journey
If your adoption or move to the emerging fee-for-service models is only a staging area for your firm on its larger pricing journey towards more transparent, more client-aligned and more value-based fees, then you are to be supported, encouraged and singled out.
But make sure you tell your clients that this fee for service proposition is just part of your transition from good to better to best pricing practices. These fee-for-service models won’t hold water in three years, but I do acknowledge that they might give you valuable breathing space for now.
It’s been a long time since Australians have faced as much financial uncertainty as they face today. It follows that the underlying need for financial advice has never been greater than today, and that these times, therefore, are the best of times to be building great advisory firms.