Is the fees vs commissions debate just a smoke-screen?

It’s been hard to hear anything else above the din generated by this debate; however, at least two other trends have the potential to make the fees versus commission debate, though important, become a comparative storm in a teacup.

Trend 1 – Jeremy Cooper’s review into Australia’s superannuation system

An initial glimpse into Cooper’s recommendation shows the potential introduction of a universal default fund.

This fund would be an alternative option for Australians who lack the inclination or capability to engage in their own retirement income strategy. This is a high proportion of people, since approximately 90% of Australians are already in default funds (“Choice widens to not choosing”. Editorial. Australian Financial Review, 16 December 2009, 54).

Cooper presumably believes that the vast majority of Australians probably won’t need advice if such a fund was universally available and was in essence very simple. Hearing the government’s call for cheaper alternatives for the management and care of Australia’s $1.1 trillion pile of mandated superannuation, Cooper hopes to halve the current estimates of 1.2 per cent (120 basis points) in superannuation fees to 60 basis points.

If Cooper’s suggested universal default fund were launched, what would be the consequences for Australian retail financial planning businesses?

I can think of several.

Most financial planning businesses are generating a lot of money in ongoing fees from their semi-active or inactive clients, each and every year. The planner may or may not see these people annually.  For many businesses, these clients represent the majority of total clients but only a minority of the firm’s total revenue (though often still enough to pay for a couple of support staff).

Such clients are prime candidates for Cooper’s new fund. Most won’t know how to transfer, but as with cheaper airfares, once they know about it, most will want to shift across for the lower fees. And guess who they’ll turn to for the transfer support? Their current planning firm.

Retail financial planners would see huge increases in the amount of enquiry and switching work from the majority of the client base, who won’t expect to pay for it.

Another thing – if 60 basis points becomes the new ‘retail’ rate, how are your active clients going to view any charge above this?

I know myself that I don’t like to pay more than $120 to fly the Sydney-Melbourne route any more.  I used to regularly pay three times that amount. I predict that if 60 basis points becomes the new ‘retail’ rate, your active clients will want to see lots of value if they have to pay anything above that.

Firms that don’t have retainer pricing have probably got a couple of years to get it into place.

There will also be ramifications on the purchase price of financial planning client bases.  If you’re thinking of selling some of your inactive or semi-active clients, you might want to accelerate your plans. Pricing of these client bases can only go one way – down.

Throw into the mix the push for greater fiduciary relationships, and the owners of retail financial planning businesses are looking at a couple of busy years ahead.

They’ll have to:

  • decide which clients they want to work with;
  • sort out their minimum retainer fees;
  • transfer their inactive or semi-active clients out of the business for some fee before they leave in droves by themselves;
  • justify their fees to those that remain; and
  • probably handle even more paperwork, to implement their new fiduciary responsibilities.

Good time to dust off your own business plans to ensure you’re ready for this.

Trend 2 – Increased corporate takeover activity in the financial services sector

NAB, AMP, ING, IOOF, AXA and more – what’s more important for the owners of retail financial planning businesses than who buys who in the coming months, is why they are buying each other.

The people running these organisations need scale to survive and thrive. The banks in particular are out to slash the operational costs of running superannuation schemes. They’ll aim to become more efficient, with better systems and processes, and by getting bigger.  For all the majors, every basis point saved represents tens of millions of dollars.

The major banks are buoyed and recognised for their resilience under the global financial crisis, with two of the biggest on track for $6 billion annual profits. A good time to be saying to their shareholders – “we know what we’re doing; will you help us fund the growth by acquisition?”

Owners of retail financial planning businesses should ask some of the retail computer business entrepreneurs of the late 1980s to early 1990s what was it like trying to do business when:

  • their range of suppliers narrowed;
  • the accumulated scale meant massive increase in direct competition; and
  • they became just a little bit more insignificant in a larger crowd of amalgamated businesses.

I know what it was like, because I was one that didn’t survive.

The 1980s collapse of most computer hardware firms taught me the lesson that there is no long term financial viability in trying to compete on the price of your product. The ‘subsidies’ we as software providers once received in computer hardware dried up – in virtually just one year – as one hardware vendor bought another, and another, and another.  We couldn’t move quick enough to shift our revenue flows to computer software, and so suffered our fate.

The ‘scale game’ being played out among the majors is much, much more than just a distraction as to who will own your platform in the future, and what brand name will be behind the products or services you buy.

Converting to fees is just a ticket to the new game. It won’t allow you access to the pitch where the new advice game will be played.

The products are becoming increasingly ubiquitous and commoditised.  Planners can’t afford to rest their future on the sale and distribution of products.  These are the best of times to be making your plans to add real value to your selected clients, based on the quality of your advice, not the quantity of the products you provide.

Image: graur codrin /

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