Stick to what you’re good at

It’s always easier to tell someone else how to run their business than to focus on running your own.

This came to mind the other day when I read a piece by a high-profile life insurer telling dealer groups and advisers how they should be remunerated.

The essence of the viewpoint was that fee-for-service is inherently good and that commission is inherently bad, regardless of the business model.

I find that odd because a method of payment is just a method of payment rather than a moral statement. It’s a bit like your utility provider saying “you can use Bpay if you like but don’t pay by debit card because it’s immoral”.

I’d argue that if the client and the adviser agree on a method of remuneration that is satisfactory to both parties, then that’s it. It’s up to them and no one else.

Clearly, remuneration on either a commission or a fee-for-service basis needs to be disclosed correctly and be legal, and there’s no suggestion that this is not the case for either type of payment.

After that, whether a payment is a fee, a commission, or anything else for that matter, is up to the client and the adviser.

The life insurer seemed to feel entitled to get between the adviser and the client to enter that debate. That seems wrong to me.

Now, I’m not knocking life insurers, I work for one. But when it comes down to it, life insurers tend to be good at manufacturing products, insuring lives and paying out claims.

We’re not perfect by any means, but if we focus on product manufacturing — whether it is insurance, super, platforms or even fund management — we do it reasonably well, by and large.

Institutions aren’t so great at entrepreneurial spirit and intense interaction with clients. That’s where advisers and dealer groups excel.

Over the past 20 years, in ever-changing conditions, this entrepreneurial attitude has built thriving, customer-focused and profitable businesses that are flexible and resilient to change.

Dealer groups in Australia have driven the growth of one of the most advanced, trusted and, dare I say it, compliant financial services markets in the world.

The regulators have provided a well-ordered market too. In fact, it’s a tribute to the mainstream financial services industry today that when issues do arise, they are often where consumers have purchased products outside the normal regulatory framework that applies to managed investments and super.

I’m fortunate enough to be a non-executive director on the board of Australia’s largest non-aligned dealer group, and I have to say, dealer groups and product manufacturers are not the same.

As a non-executive board member, I provide input into discussion on strategy, an industry view from a manufacturer’s side and a wider perspective from a marketing and platform viewpoint.

The executive team runs the dealer group — and does it very well — with rapid and profitable expansion, which comes from understanding their target market and delivering what is needed.

It’s a great and very beneficial relationship because, from a manufacturer’s point of view, I get a real insight into the world of the adviser and dealer group.

However, roles and responsibilities are quite clear.

It only starts to get complex in organisations where the dealer group and life company tell each other what to do and how to run their businesses.

Let’s consider advice.

The owners of a company have the right to ask for a return on their investment.

Where a dealer group is institutionally owned, this often used to mean that advisers could, or did, only recommend the products produced by their owners. After all, he who pays the piper calls the tune.

What’s important is that the customers understand what they are getting. Are they getting the best solution on the market or are they getting the best solution their adviser’s ultimate shareholder offers?

The dealer will need to ensure that customers are aware about whether the adviser is able to recommend a range of financial solutions or just a limited range, particularly if the range is limited to just those of the company that owns the dealer group. Provided this is clear, then everyone is happy and the customer can choose their adviser accordingly.

It is encouraging to see that many of the large institutions now allow their advisers to offer a range of solutions from different providers.

While the regulators have driven some of this, it is a great step forward to allow advisers and thus their clients a wider range of choice.

It seems to me that giving advisers the ability to choose the best solution for their clients is way more important than arguing about how the advice is paid for.

Returning to my previous example, however, there is no automatic right for life insurers, fund managers or indeed advisers to dictate how other organisations behave. We work in a fiercely competitive market. That competition brings benefits, with respect to innovation and efficiency, to consumers. It also means that we can’t — and shouldn’t — tell our business associates what to do. They will do what they think is right for their business — if we think alike, then we’ll work together. If we think differently, then we’ll go elsewhere. That’s the power of competition.

And then just as I was climbing off my soapbox, I read something quite bizarre, in the online edition of MoneyManagement no less.

According to a speaker presenting to the Financial Planning Association’s Sydney chapter, there is an alternative to fees and commissions. If you don’t believe in commissions and a fee-for-service model doesn’t suit your clients then, to quote the article, “advice is provided on a cost recovery basis . . . charge a pool of financial planning clients an additional management expense to cover the cost of running a financial planning division”.

Maybe I lack imagination, but that sounds to me exactly like charging a standard trail commission across all clients, regardless of fund size, and regardless of whether they get advice from a financial planner. This neither sounds like a step forward, nor a transparent way of operating. In fact, the desire to disguise the cost of advice as a management expense shows a shocking lack of confidence in the value propositions that advisers offer and the value of advice itself.

Stephen Trist is general manager of key accounts at AvivaAustralia and a director of Professional Investment Services.