“Strategy advice” from “product advice”

There have been a number of calls in Australia for legislation to distinguish between “strategy advice” from “product advice”.

The Joint Parliamentary Committee on Corporate and Financial Services Inquiry into Products and Services has been listening to submissions by all stakeholders in Austarlia.
The recent submissions said that the consumer would be better served by “clear, legal definitions that make a distinction between institutionally owned product sales advice and indepently owned strategically focused advice.

Many of the submissions believe that it is difficult for the consumer to identify whether they are dealing with a financial product salesperson or an independenyt financial planner committed to putting their interests first. There have also been calls for an increase in competency standards and that a new professional standards body be formed. Only planners who have the requisite competency level and are registered with this body would be allowed to call themselves financial planners.

There definitely seems to be a groundswell of opinion calling for stricter controls and standards in Australia.

Do you think our regulators will follow the Austalian path or will they follow a path of least resistance?

Lets hear your comments!

• International developments regarding the charging of fees

Introduction

“Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbour. Catch the trade winds in your sails. Explore. Dream. Discover.” Source - Mark Twain

Many of you may still remember the story of the Princess and the Toad, where an unhappy Princess frees a handsome Prince from a frog’s body with a juicy, wet kiss?

Imagine if she had avoided the Toad and that instead, the Princess had looked at him and thought: “How disgusting. I’ll never kiss you.”

The story would have a new ending: Rather than marrying a handsome, young prince and living a happy life, the princess would continue along her way, unhappy and despairing, having missed a great opportunity.

Now, consider this: Toads are a part of your life. Every “problem,” “issue”, and “situation” you would like to avoid, but have to deal with is a “Toad.” They come in all shapes and sizes, from varied sources, and you cannot hide from them.

You may set them aside, hoping they will go away, but Toads do not just vanish. Actually, when neglected, they often get bigger, smellier, and slimier: “Problems” grow, “Issues” begin to stink and “Situations” ooze out of control.

What do you think this mental rotting does to your mood and creative mindset, not to mention your productivity level?

Action is the only way to purge yourself of mental Toads. Dealing with your problems head-on will teach you that anticipation is usually much worse than just puckering up. As Albert Einstein once said, “Amidst every problem lies an opportunity.” Don’t turn away from Toads and blind yourself to possibilities.

The issue of moving to fees is one such Toad that continually seems to create consternation among South African advisers.

We raise this issue here because it has begun to create new debate in countries such as Australia, New Zealand, United Kingdom, Canada and the United States. Interestingly enough, both governments and professional bodies are beginning to consider that there needs to be a split in the way financial advisers are remunerated for advice and the implementation thereof. In this newsletter we explore these developments and also list some tips on how to prepare your practice for the inevitable move to a fee-based practice.

Immigration also seems to be on everyone’s minds and in our presentations around the country many advisers talk about the number of their clients leaving our shores and the impact that this is having on their practices.

There seems to be an opportunity for advisers to team up with practices overseas and assist their clients in the move and also ensuring that they continue to earn remuneration off the management of these assets.

We believe Addwealth from Australia has a solution worth considering. We asked Warrick Lace to explain more on their offering at the end of our newsletter.

International developments regarding the charging of fees
There are many wonderful people working in the financial advisory industry, yet the image our industry enjoys in the community and in the media is far from impressive.

The recent economic meltdown we have experienced has done nothing to enhance the value our profession plays in the lives of our clients. Hardly a day has gone past where stories revolve around “product flogging”, high levels of commission, biased advice, conflicts of interest and legal actions by both regulators and clients against their advisers.

Notwithstanding the above, there have also been negative stories about other professions as well, including the accounting and legal professions. The role of accountants in the Enron tragedy is a case in point. This has lead to major legislative reforms and the restructuring of service delivery models by these professions.

Let us consider the noise being made internationally:
The Australian Financial Planning Association (FPA) has recommended a move away from commission payments by 2012. They are advocating a fee-for-service or direct-charge model for their member advisers. In this regard they have published a consultation paper in which they are attempting to align remuneration with the advice provided. The Australian FPA is recommending that its members adhere to the following principles relating to remuneration:

1. Consumers rather than product providers pay for financial planning services
2. Fees should be separated between “advice” and “product”
3. Fees should be “stopped” if no more ongoing advice is provided
4. Consumers must be able to understand and compare the fees they are paying.

The Australian FPA is proposing that by 1st July 2012 all new advice, service and products will be delivered using structures that satisfy the above principles and that are negotiated between the adviser and their clients.

This move has also received support from another advisory body in Australia. The Investment and Financial Services Association (IFSA) has confirmed that their members will begin phasing out commission payments from 2010. They are currently drafting a new set of arrangements, which will assist advisers in separating investment product fees and advice. The Australian consumer group CHOICE has also begun a campaign to end the payment of “perverse incentives that lead financial advisers to push products on their clients”. Their members are calling for “honest fees for honest advice”.

Interestingly enough, top Australian financial advisers are of the opinion that commissions should be banned to protect the “majority from the dangerous minority”. These advisers are calling on the Australian Government to legislate that only those advisers that are remunerated by way of fees may be allowed to call themselves “independent financial advisers”.
In New Zealand the Ministry of Economic Development is consulting with consumer bodies and advisers on new disclosure requirements for advisers. Their disclosure paper states that the most important part of the disclosure statement for the client states how an adviser is paid, how much the consumer is paying and any incentives the adviser may have that could influence the advice they give. Legislation is to be fully implemented in 2010.

Our financial advisory profession has once again been cast in the spotlight and there has been a groundswell of public, regulatory and professional membership body support for a move to fee-based remuneration for financial advisers. This is as a direct result of high profile corporate collapses such as Lehman Brothers, Bear Stern and AIG in the USA and Storm Financial in Australia, as well as the impact that the Maddoff and Tannenbaum scandals has had on investors worldwide.

The approaches now being mooted by all the commentators are said to be designed to reduce the potential for product providers to influence financial adviser’s remuneration.To clarify the debate it is worth mentioning the difference between asset-based fees and commission, which can also be based on a percentage of client investments, is the fact that asset-based fees are directed by the client and commissions are directed by the product providers.

In June 2009 the United Kingdom’s Financial Services Authority (FSA) issued rules that essentially codify a fee model for British investment advisers and bans the collection of commissions. These rules also take effect in 2010.

Under these rules, advisers will be able to set their own charges for advice. The reason for this change is that efforts are being made to remove the product provider influence over adviser remuneration. There is a distinct approach to disclose the costs of advice from the underlying costs of the product. British advisers will also be required to hold additional capital as a provision against potential liability for activities excluded by their indemnity insurance policies. Minimum qualification levels for advisers will also be raised as will requirements for continuing professional development.

The FSA has realised that advisers may leave the industry if barriers to entry are raised or income potential is diminished. However, it believes that departures will not restrict consumer choice.

A Strategic Insight Study in America completed in May 2009, revealed that financial advisers not only continued to shift towards fee-based remuneration (away from commissions), but that the trend towards fee-for–advice distribution accelerated during the financial crisis. In fact, fee–based business models gained market share!

The report also stated that, “the financial services industry continues to move towards a culture of advice and relationships”. Clients were requiring more customised counselling and the retirement of Baby Boomers will accelerate the trend to fees going forward.

A study by PriceWaterhouseCoopers (PwC) in their latest 2009 Global Private Banking and Wealth Management Survey found that smaller wealth managers were taking advantage of the financial crisis either by moving to rivals that need people who can handle clients effectively or by opening boutique shops that provide the high-touch service levels clients now crave.

And, in what almost looks like a nod to the U.K. Financial Services Authority's recent efforts to ban commissions, the PwC study urged all financial services businesses to revisit the way advisers are compensated as a means toward improving the quality of advice clients receive. "Long-term remuneration packages for financial advisers must be redesigned to encourage responsible behaviour and delivery of consistently good client advice," the study said.

Comments on these developments

As a practice management business we can only applaud these developments as it serves as a potential model for both business and remuneration changes in South Africa.

No doubt this opinion will not be well received by colleagues in the industry. But, it is believed that the change occurring in the above countries will create a better financial services industry for everyone involved in it:

1. The impact on your clients
The question of how much clients are paying for advice or services will no longer be dependent on the adviser they use and their level of disclosures. Transparency will lead to a greater focus on continuing service in order to justify the fees charged. This will in turn lead to better client maintenance and the development of trust in the financial services industry.

2. Current advisers
Eliminating up-front commissions will help our industry transition from a sales industry to a client relationship based industry. How many clients out there never hear from their advisers after a product is purchased? Clients should be allowed to choose when to engage and when to leave - as should advisers). In this way only those advisers offering ongoing advice and service will receive ongoing remuneration and a steady and growing stream of income and new clients.

These moves will represent a significant cost to many independent advisers and will require them to substantially overhaul their existing operational structures and business models.
It will be non negotiable for advisers to develop a process based service model from which they will be able to offer their clients a “great advice experience” going forward. Ultimately, it will mean that advisers will be able to create equity in their businesses and receive great payouts when they sell.

And why not, by this stage they will deserve it.

3. Product provider
This will require new generations of both life insurance and investment products. The trade-off is that all products in an advisers book will be paying recurring fees and increasing the value in their practices. Those product providers that rise to the challenge of developing a new generation of fee-based products will receive the greatest amount of support going forward.

4. New advisers
No doubt they will suffer the most from a fee-based environment. However, they could structure their business model to bring on board business that looks for up-front fee-for-service advice. An hourly advice fee or fee-per-plan could be initiated. The Garret model is one such very successful business model that has been “franchised” throughout the United States. Interestingly enough, many advisers internationally are being kept busy by new clients wanting a financial plan to try and understand what the “economic meltdown” has done to their previous retirement dream. The time to charge a fee per plan may be on us sooner than we think.

Client Migration: Possible opportunities for advisers

Addwealth Pty Ltd is assisting South African financial advisers in a few different ways. The first, and most obvious, way is to establish an arrangement whereby South African advisers can refer their clients that are immigrating to Australia to an organisation that they know and trust.

However, Addwealth would preferably work more meaningfully with South African advisers and is encouraging advisers to become RG146 compliant and Authorised underneath Addwealth’s Australian financial planning licence. This way, South African advisers will be able to retain management of their client’s financial affairs in Australia within an Addwealth Dealer Group support structure. Addwealth is also assisting South African financial advisers that which to immigrate to Australia themselves.

The scenarios here vary widely, and we’d love to explore the options available to you more personally. Addwealth considers the work and services that The Institute of Practice Management provides as crucial tools in helping to implement our ideas.

Their practice management experience and practical knowledge, together with the opportunity that Addwealth provides advisers to expand their operations, we think, is a very exciting combination.

News and upcoming events:
1. Addwealth will be hosting a facilitated course in Perth to complete two of the four Diploma in Financial Service (DFS) modules. The course runs from the 24th to the 28th of August. Following the week in Perth (which includes tickets to the Springboks and Wallaby’s on the Saturday night) advisers will then fly to Sydney for an investment presentation from Perpetual as well as a presentation from Stockland on Australian property on Monday and Tuesday the following week.

2. Addwealth is also proud to announce that this week it won a Telstra Business Award for Social responsibility. Please find details of this award attached.

Please feel free to contact Warrick on 083 232 4372, email wlace@addwealth.co.za or visit www.addwealth.com.au for more details.

Conclusion

There is no doubt that many advisers will need to rethink their remuneration model sooner rather than later. Sticking their heads in the sand and hoping that this issue will blow over may cost some dearly in the long run.

A safe, realistic and practical way to convert a financial advisory practice to a fee-based business does exist. It requires up to two years of preparation to complete the transition. In this time, an adviser’s objective is not to increase production. Realistic goals must be to make the conversion to a fee-based practice without letting production drop.

Before venturing into a new style of business, advisers will need their current practice to be running as efficiently as possible. It is impossible to deliver fee-based services effectively without a properly structured and fully aligned system.

Building such a system is complicated, expensive and time consuming. There are, however, systems available that can assist advisers in completing a successful transition to a fee–based business. It is important to ensure that the system chosen accommodates the desired business model.

Listed below are some steps that you can take to make it easier to transition to a fee based practice:

1. Develop a realistic game plan. Without a plan an advisers efforts to move from a commission-based practice to a fee-based practice will remain unrealised
2. Find the money – by revisiting existing clients through a segmentation process advisers may find unknown assets they possess
3. Advisers will also know where the money is, when it is due and where it is coming from
4. All non–client facing activities should be delegated and service support to existing clients must be strengthened
5. Develop an engagement agreement and ensure that the advisory practice can support the new value proposition
6. Advisers should get their feet wet first -the first fee-based business they do should not be done with their best clients, rather start off with smaller clients and accumulate the funds under management
7. Advisers should change their value proposition from marketing product to marketing problem and solution
8.Increase client contact to a minimum of 12 times a year for smaller clients and between 16 and 28 times a year for your top clients

Sure, transitioning to a fee-based practice means taking a pay cut in the short term, but down the line shifting the business model will really help advisers enhance the quality of their practices and their lives.


Lick a few Toads today – it’s not as bad as you think!

Kind regards

The TEAM at The Institute of Practice Management