Advisers move away from reward mentality

For my last article of the year, I normally summarise my previous articles over the past 12 months. However, this time I want to only do that in part. That’s because this year was the last year of the past and the first year of the future. We will look back on this year as being a watershed year in the evolution of our industry.

Recently, we have had Credit Suisse Asset Management head of retail funds, Brian Thomas’ collaborative paper on hypercompetition, the appointment of an independent chair to the Financial Planning Association, and the Financial Services Reform Act. Technology has enabled the emergence of individually managed accounts and some players are considering finally developing straight through processing for transactions. Also, the first of the Web-based financial planning software packages are appearing for advisers.

We now know that wireless application protocol (WAP) and screen scraping won’t happen this year. We also know that it will be a while yet before consolidators or institutions dominate distribution. And now there is only three years for Cerulli’s prediction of only four platforms dominating to come true.

Wholesale has discovered that retail is the place to be and conferences, forums, symposiums, seminars and their ilk are a growth industry in their own right. They will soon qualify to be packaged as an alternate investment product.

Other professional bodies are looking for ways to assist their members to do financial planning. The life agents are re-inventing themselves. At the recent Association of Financial Advisers conference, it was obvious most had learnt the hard lessons and were now looking for ways to use their considerable selling skills to capture the wealth accumulation market.

More than half the superannuation funds now offer access to financial planning, one way or another. Stockbrokers are doing more financial planning, as are the discount brokers.

Dealers are now going to extraordinary lengths to attract advisers. At the start of the year, equity in the dealer was being offered, then equity in the platform and if you were lucky, also a buyer of last resort facility.

Anyone who went to the recent FPA convention would have discovered a dealer who is now throwing in steak knives. This new dealer, an old one under a new guise, is offering 100 per cent of the splits, progressive cash payments for volume into their platform and options in the dealer. It will be difficult to count the compound result of the offer.

But is hypercompetition demand side or supply side driven? At the moment, the competition is for the intermediary. The intermediary is being feted by fund managers, platform providers and other service providers. No wonder financial planning is so attractive to other players. But market forces will prevail and supply will catch up with demand very shortly.

Hypercompetition and change are here. Not everyone will like it or the diversity it brings. Some of our more patronising colleagues believe there is only one way to do financial planning, and only by an independent financial planner. They look down on other styles of planners, even though many are CFPs. With some, there is also a siege mentality.

However, let’s look at the way some discount brokers are going to provide financial planning advice. They are doing it as a joint venture with a dealer who is a principal member of the FPA. If a client wants financial planning, they are sent a comprehensive fact finder. The fact finder describes the service, the process and the fees. When the fact finder is returned, it is given to one of the dealer’s CFP advisers. They ring the client to discuss the fact find and produce a plan that satisfies CFP standards. The client can elect to receive ongoing service from the adviser who did the plan.

How is this different, except for the data collection, to how advisers provide advice now? What is different is how the fees are charged and who receives the fees. The client is charged separately for the plan, for implementation and for ongoing advice.

The flat dollar fee for the plan is paid to the dealer/adviser. On placement, there are no entry fees and the trailer is kept by the discount broker. If the client wants ongoing service, the adviser receives a fee for this.

This is a pricing model I like. The adviser is paid a proper fee (one that reflects the cost plus a margin) for the plan. They are properly rewarded for the advice they have provided, irrespective of whether funds are placed or not. Their only other reward is a fee if the client elects to receive ongoing advice — they do not receive the trail.

In this situation, the adviser receives no reward from the fund mangers at all. Advice has been separated from placement, which is not the same as implementation. The plan could have recommended no placements and still be implemented by the client, who can also elect to receive ongoing advice. Why does implementation have to be equated with placement?

How radical — an adviser being paid, and properly paid for giving advice — no rewards for placement, no ongoing trail. And, who’s doing this. One of our so-called independent patronising advisers? No, it is being done by one of the so-called ‘low life’ discount brokers.

Well-known financial planner Leonie Henry recently made the comment of the year, if not of the decade. She said: “I wanted to be paid for the work I did, not for the placement of funds.”

Leonie gives me hope, as do the e-mails that I receive from many advisers who are trying to restructure their business as an advice giving business, where they too have broken the nexus between advice and placement. They see that it is not only right for their clients, but also right for their business — as they are in total control of their revenues.

The number of advisers accepting the breaking of this nexus is the most significant watershed event of this year — the evolvement of financial planning into a true profession.