For many inevitable reasons, traditional financial advice models are changing.
To date, there have been two main aspects underpinning the delivery of personal financial advice.
These two aspects have been the amount of money an individual has, and the financial products the individual requires.
Show us your money, and we’ll get you the product…
I’ve included an animation I put together recently to help explain this.
Those providing professional financial advice ranged from accountants, financial planners, private bankers, superannuation funds, investment specialists, tax advisers, insurance brokers, mortgage brokers and a fast-growing number of others particularly in the area of new financial technology entrants.
Whilst majority of professionals in the existing advice market have always aimed to serve the best interests of their clients, the most common approach to providing financial advice has always had to cater with the inevitable elephant in their space – the products supporting the advice they provide.
A growing number of professionals, however, have never ‘felt right’ with any connections between their advice and to specific financial products.
Just as doctors don’t get kickbacks from the drugs they recommend, some financial services professionals have never been comfortable when the size of their fees was mainly determined by how much product was provided nor were they comfortable receiving payment from the product provider on behalf of their client – many of these financial advisers actually sought business models where they were paid by their clients solely based upon the value the client perceives is provided.
So, unlike the two main aspects that have driven the growth of today’s financial advice industry – i.e. products required and amount of money the client has – the two fundamental aspects underpinning some future financial advice models are very different.
The two new emerging characteristics driving the delivery of professional advice are complexity and services.
Complexities and Services.
Complexity is the first characteristic.
Because financial advice is usually only needed when someone faces a financial complexity that can’t be quickly, easily or properly resolved, managed or handled, without some sort of external expertise.
If you aren’t facing a complexity regarding your financial life, do you actually need financial advice? Nor should you keep paying for advice if you don’t perceive the need.
Most would say, not.
And the second characteristic of professional advice is service.
What services are required to resolve or manage your specific complexity?
The more intense the complexities, the more specialised or expert the services may need to be.
The greater the number of services required, the more coordination and management may be required for clients to enjoy the financial lives they aspire for.
How are your advice fees determined?
Not only does it help those of us seeking advice to understand the new characteristics, it’s only important to understand how is the amount of fees paid for advice best determined.
To date, the amount of money paid in advice fees was based upon how much money was invested, or how much insurance was required, or how much you had in their superannuation accounts or whatever product was purchased.
These appear all logical methods for charging for advice when the origins of fee charging was based upon products bought rather than quality advice.
But when you are a professional basing the quality of your business based upon the quality of your advice rather than the quantity of product provided, the product-based advice fees have never worked for some professionals or their clients.
So like everything else we buy in life, addressing how advice fees are determined should be solely based upon value received from that advice.
Not based primarily on the amount of money in your superannuation fund, or the amount of money in your investment fund, or the amount of insurance you may require.
If you believe that, then embrace and search out for the fast-emerging models of financial advice where the advice provided is based upon your specific complexities and services with fees determined on value, rather than advice based upon amount of product and how much you have with fees determined primarly upon how much product you need.
I hope the ‘break’ away from pricing on amount of money people have and the amount of products they require to a more value-based model of pricing based upon resolving the specific complexities people face with needed services, will not only make financial advice more valuable, but also more affordable.
Ultimately I also believe this will make financial advice more widespread particularly for those who will continue to influenced by the slogans from product providers, who will not be influenced by better initiatives in financial literacy and just want a fair go.
What do you reckon?
Jim ‘value-based’ Stackpool
About Jim Stackpool
For nearly 30 years Jim has influenced, coached, and consulted to advisory firms across Australia. As founder of Certainty Advice Group, he leads a like-minded team of professional advisory firms seeking to create greater certainty for their clients. As an author, blogger, columnist, and keynote speaker, Jim is regularly called upon for his professional insights into the advice industry. His latest book Seeking Certainty is available now.