Advisers should abandon any notion of charging clients fees on an hourly rate, says one of the industry’s most outspoken advocates of fee-based financial planning.
Speaking at the recent Resnik Communications Sales, Marketing and Practice Management conference, Investor Security Group (ISG) managing director Rob Keavney said charging fees based on a percentage of the client’s funds under advice (asset based fee) is better for both client and planner alike.
Keavney debunks the notion that hourly rates are superior due to the fact that accountants and lawyers use this form of charging, so it is the “proper way for professionals to operate”.
“Anyone who thinks these professions actually charge on this basis has not talked to many accountants or lawyers on the subject,” he says.
Keavney says accountant and lawyers often discount or raise fees based on how much they think clients will be willing to pay. He also says they suffer the headaches associated with collecting fees, writing off bad debts and the onerous task of filling out and checking time sheets.
“By contrast ongoing fees can and should be charged in advance so there is no such thing as non-payment,” he says.
Even without the inherent inefficiencies of charging hourly fees, Keavney argues the nature of each profession is different. Lawyers and accountants are reactive in nature, whereas financial planners are pro-active in their relationship with clients.
Further, he says the nature of their fee charging also keeps down the sale price of accounting practices to less than one time earnings, where financial planning practices are often sold for significantly more.
Keavney has been at the forefront of the push towards fee-based remuneration of financial planning services since ISG adopted a fee-based approach in the early ’90s. He remains a firm advocate of asset-based fees, especially as an alternative to a reliance on trail commissions.
Asset based fees, Keavney argues, put greater pressure on planners to focus on service because the client can sack the adviser at any point if they feel they are not being adequately serviced.
The client also gets better disclosure from a fee-based adviser because the fee comes up on each statement, not just the initial plan. Keavney says commissions also create the potential for conflict of interest.
“Ongoing fees can be charged on the whole portfolio irrespective of products recommended. By contrast, trail commissions can vary from nil to 1 per cent,” he says.
But the motives for running a fee-based financial planning business should not be confused with charitable motives. The average fee paid by a client of ISG is $5,000 which Keavney says allows the advisers to provide a high standard of service.
“One of the advantages of directly billed fees is that you can set your own level of remuneration and this is usually higher than standard trail rates,” he says.
