Tom Collins: Fees or commissions – is that the real debate?

Fees or Commissions — is that the real debate

Two things worry me about the fees vs commissions debate. Firstly are we only considering it from our own perspective — have we considered what the client might want? Secondly, disclosure, have we made a rod for our own back? Have we promised a level of disclosure that we can’t, or won’t, deliver on?

Why is it argued that fees are better, ie more professional, than commissions? The main arguments are: independence, transparency and control. These arguments may be valid, but then why are the fees charged on the same asset based model as the commissions?

Do we really add ten times more value to client with $1 million than we do to the client with $100,000?

Some advisers are arguing for time based fees, because they see this is what 'other professionals' are doing. But many would argue that time based fees really only reward the incompetent, slow and the desperate. How many stories have we heard about solicitors and accountants padding their time sheets to achieve the requisite number of billable hours. Is this the 'professional model' to follow?

Also, why do you think many accounts are eyeing financial planning with envy? One of the main reasons is because of asset based fees. They see that asset-based fees generate both higher revenue streams and higher practice value than do time-based fees.

But, how can value provided, by the adviser, be related to asset based fees? It can't. Once again - does an adviser really add ten times more value to client with $1 million than we do to the client with $100,000?

Fund managers can argue, rather tenuously, that there is some form of performance reward/penalty in their charging model being based on assets. However, some fund managers are now (and others are considering) charging on a basis that is related to performance. Is this something that advisers should consider?

If an adviser were to charge performance-based fees, how would he/she take into account different risk (volatility) profiles? Or should the fee be based on how well the adviser helps the client achieve their goals? Unfortunately, both of these pricing models might tempt some advisers to tilt clients' profiles or goals to maximise their own revenue.

Another way to charge fees would be to charge the client a fixed dollar amount. Many advisers do this now for the initial plan. But many undercharge or waive the amount when the client implements. This must be confusing for the client!"Dear client, for the plan, into which I put most of my intellectual effort, I will charge you either nothing, a small amount, or a small amount which I will waive on implementation. On implementation, which is really a clerical task, I will charge you1%, 2% or, 3% of your portfolio. Then on an on-going basis I will charge you 0.5% to 1.0% to provide you with a report - most of which is prepared by the administration service that you are also paying for."

As the consumer becomes better educated, more aware and has more choices they are going to question these inconsistent pricing models. The current pricing model works for the older client who wants full financial planning - the delegator. But what about the client who may want limited advice, or the validator - who just wants confirmation or a second opinion. They use E-Trade or ComSec for their transactions and reports, but would just like a bit of advice. What about the wealth accumulator who is just starting out - does an asset-based fee work for them?

The appropriate charging model is the one that both suits the client and the adviser. Advisers will have to develop flexible fee structures that are both sensible and match the service and value being provided.

At the recent Cairns FPA Annual Seminar, I said that if advisers were to be regarded as true professionals they would have to charge on a fee only basis. I was challenged on this statement, and on reflection I believe I was rightly challenged. There may be cases where is more appropriate to earn a commission than charge a fee. The client may prefer it, and in any event it should be their decision, not ours.

Furthermore, for me, professionalism is an attitude, not qualifications, not a designation, not even the way the professional is renumerated. With the proper attitude comes the proper behaviour. Which brings me to my second point - disclosure.

We make a big song and dance about disclosure, but is this too another area where we are false when we say full disclosure? Do we tell the clients:

That fees, especially on-going, asset based fees make our businesses more valuable,

What interest we, or our dealer, has in the master trust or wrap service that we recommend,

About the volume bonus that we, or our dealer, is receiving from the master trust or wrap service operator,

That our buyer of last resort facility rewards us more for using an in-house master trust or wrap service,

About the true cost of the deferred entry fee choice, ie. cost of additional on-going fee and exit charges compared to the other options?

Advisers desire to grow the value of their business through the use of master trusts and wraps, has caused behaviour that is not consistent with professionalism and full disclosure. Another example is the use of the master trust or wrap service when it is not appropriate for the client or their portfolio. Classic examples would be clients with small portfolios or ones with a substantial portion of their portfolio in direct equities.

My concern about the above, is not that it goes on, but that we hold out ourselves to fully disclose. Either we do, or we stop pretending and saying we do. I do not know any other profession or industry that tries as hard as we do with disclosure, compliance and complaints procedures. I wonder whether we try so hard, because we are ashamed of our past, or are we new and desperate to prove ourselves - trying to be accepted as a profession. Whatever, we are making a rod for our own back.

I do believe in disclosure, compliance and complaints procedures - I wish some of the other professions were as well advanced as us. But I think our rhetoric is ahead of our behaviour. We are setting up expectations (over promising) that we cannot (and cannot be expected to) deliver on (under delivering). I think we should look to the consumer for what they expect from us - promise and then over deliver on that. Let's stop being patronising and let's have attitude!