The illusion of product choice
Recent research from Dealer Group Advisers reported in MoneyManagement indicated that financial planners pose a considerable cost to their dealer group. Indeed in some cases “giving an overall loss of $5,000 per adviser”.
The managing director of Dealer Group Advisers went on to say that “financial planning firms in the past looked to counterweight these costs by charging fund managers to place their products on the dealer group’s platform”.
What he has highlighted here is not only that shelf space fees are nothing new per se, but that their existence owes much to the state the industry has reached.
At all levels we are like primary school children lined up for selection on the preferred football team, each jostling to be noticed, and doing whatever it takes to make that happen.
The fact is that at ground level, the affiliation of advisers to one dealer group over another comes down to the issue of cost.
A planner has to remain competitive in order to both contain the cost of output and retain or increase the client base.
The decision to align with one particular licensee over another will therefore come down to the costs of what are perceived to be the core essential services.
Whether one dealer group provides, for example, a better compliance or practice development solution will not, unfortunately, necessarily influence the decision, as these are construed as providing a value that is not immediately measurable.
The corollary is that it has also become a competitive market at the next level among the dealer groups, with various incentives being offered.
Dealer groups need scale in order to remain sufficiently profitable.
So, for most dealer groups a lower overall cost can be passed on to advisers because of the receipts from associations with fund managers or associated service providers.
These can be in the form of rebates paid back on total funds placed, or in contributions (‘sponsorship’) towards professional development days or annual conferences. Or it can be in the form of an annual fee for inclusion in the products made available to planners within its network.
The shelf space fees — the fees paid for inclusion in a platform — or similar means of distribution, as Dealer Group Advisers indicated, is not a new phenomena.
BT has indicated it will be seeking higher rebates, while Aviva has indicated that Navigator will not be. The argument justifying it has been that it is akin to the practices of manufacturers paying a supermarket chain to ensure products are placed in a prominent position on the shelves at the stores.
Yet, the situations bear no similarity whatsoever. A person shopping in a supermarket makes his or her own choice. There is no one at their elbow guiding the selection towards a limited range of the required product.
A financial planner who is affiliated with a dealer group is usually limited to a choice among those products that are on an ‘approved product list’ compiled by the dealer.
Ideally (and the public perception is that this should be so), the products that are selected and approved are chosen because they satisfy objective criteria based upon such things as performance, consistency of management style and ratings.
Where, however, that list is further refined because of the complicity of the fund manager in paying a fee for the privilege, the judgement is therefore seen to be biased.
While the financial services industry is operating under tight competitive margins at all levels, in the overall framework of consumer and regulatory attitudes layers of support payments and general incentives are not the way to keep the system turning over. It is starting to resemble the complications and intricacies of a Bruce Petty cartoon. It is now almost impossible to unravel each of these layers of incentives and to describe them to an unfamiliar public in a meaningful and effective way.
Whatever arguable business survival reason is proffered, there is an unfortunate resemblance to the trucking payments made by the Australian Wheat Board.
Ultimately, it might be motivated by the cost of remaining functional in a highly competitive market, but one must ask the obvious, in the end analysis, does it appear to compromise the integrity of the structural nature of the commercial transaction?
No matter which way you argue it, shelf space fees are an arrangement that taints the industry.
Even commission payments, themselves a comparatively more direct and transparent form of arrangement, are increasingly under fire. Almost all of the recent submissions to the Federal Government inquiry into superannuation had something critical to say about the influence of commissions.
The public at large is becoming increasingly attuned to the need for, and value of, good financial planning advice.
However, with this positive comes an equivalent demand from the consumers of those services to have confidence in the objectivity of the advice given, and the transparency of underlying arrangements that might be perceived as affecting that objectivity.
Lucille Bennetto is head of compliance at Lonsdale FinancialGroup .
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