It's the afternoon of Thursday, 19 November 2009. Hundreds of financial planners and associated industry participants are sitting in an auditorium of Melbourne's Exhibition Centre, feeling deflated.
Many had hoped to leave the FPA National Conference with the question 'what fee do I charge my client?' answered. However, the question remained up in the air, with the adage 'there is no one answer' echoing around the now silent room.
Two months on, in January 2010, the same question goes unanswered.
"It's one of the hardest things for businesses to do, but I think it's harder for financial advisers because we've never had to do it before," Elixir Consulting managing director Sue Viskovic says.
"We've always just had the fund managers and said 'well, we'll pay you 50 basis points or 3 per cent', or whatever it is. So most advisers have never had to sit down and think about it before, and when they do, they often find that what they have been using provided by the fund manager is not appropriate."
Viskovic is one of many industry commentators who advisers are turning to for answers. Yet, as she did in November last year, the author of the Adviser Pricing Models research reaffirms there is no one answer, no silver bullet to pricing advice.
"There's no easy answer. They're going to have to put some work in because the actual modelling terms, the structure of it, there are probably half a dozen different ones that they can choose from," she says.
For Strategic Consulting and Training managing director Jim Stackpool, the reason pricing of advice has become so difficult for advisers and the broader service industry to grasp is because pricing theory has languished.
"We're still pricing like we used to price in the 50s or 60s - an hourly rate, or commission on a product," Stackpool, the author of What price advice - the secrets to maximising success in a commission-free world, says.
"So when these client-focussed advisers look for the tools in the cupboard and say 'how do I price this stuff?', they've only really got two very simplistic tools - price by the hour or price by the product.
"There needs to be more debate in the industry about pricing alternatives, because a lot of people are cynical and just say 'oh you price by putting your finger in the air'."
The pricing debate
The initial industry debate on pricing shifted up a gear close to 12 months ago when, in May last year, the FPA announced a push away from commissions to a fee-only remuneration model for its members.
The association's move was greeted with mixed reaction from the industry. Fellow advice association, the Association of Financial Advisers (AFA), flatly disagreed with the FPA's stance.
In June last year, AFA chief executive Richard Klipin declared the way an adviser charges for services does not make them a "better or worse adviser".
Klipin said if an adviser employs a fee-based offering it will not guarantee consumers will receive better quality advice or that advisers will build better businesses.
"While some of the recent debate on this issue has been spot on, some has been filled with distortions that cloud and hamper the issue. It's time for some clarity," he said.
While the FPA took a stand to release its proposed remuneration policy, the association has not followed up with a pricing scale. For good reason, FPA chief executive Jo-Anne Bloch says.
"Members have always resisted the FPA publishing any form of table template average or whatever because there is no such thing as one-size-fits-all advice. Everyone is individual," Bloch says.
"We have in one of our consumer brochures for a financial plan expect to pay between x and y, and every time we put anything like that out we get a flurry of complaints from members.
"We never get members saying 'this is a good thing'. We always get consumers and the media saying it's a good thing. At some point in time we're going to have to reconcile how we make the cost of advice available to people as an encouragement and how we can qualify and couch it in such a way that doesn't confine or limit a particular financial planner or business model."
Bloch says while there is certainly a demand for a so called "pricing list" from a consumer standpoint, advisers consistently balk at such a suggestion.
"Yes, and they very much resent our interference, and even with the remuneration policy where some members were confused about what we were trying to do, they thought we were trying to tell them how much to charge their clients, so we stick the principle of the higher level disclosure approach and we resist being too prescriptive around what members can and can't charge specifically," she says.
"They have different models, they have different services, they have different ways of doing things, and they want the capacity to do that with their clients. So we understand that, but there is pressure, as I said, from an investor/client point of view so that they can see what the average is, or what the best is. That's a natural position for a consumer to take."
Stackpool agrees. He says the real battle for advisers is how to price peace of mind for their clients.
"The financial pornography in the press is telling them [clients] they've got to buy the best, most value-added product," Stackpool says.
"But they want someone to trust, but they think that the best product is a function of price or performance. So our clients, with their desire to align the outcomes they want and the outcomes clients want, they have to re-educate the clients or de-select the client if they can't be re-educated."
He says the performance of the product is core to the proposition, however it isn't the proposition.
"What's core to the proposition is maximising the probability that you're going to achieve financial goals and we're going to get your financial house in order and that you have some greater control about your financial future and we held you accountable for delivery of that," Stackpool says.
"Yes there will be products that can perform and don't perform, there will be savings we can and can't make, but if you get the mentality that your payment to us is only going to be based on the tax we save you or the investment gains we make for you, then you're not the right client for us.
"That's really a challenge, particularly for up and coming advisers who have often inherited a base or bought a base of clients where there has been a strong relationship between the former adviser and the client, that it has fundamentally been based upon a product nature."
The elephant in the room - the product manufacturer
Last year, many within the industry clung to hope that the parliamentary joint committee's (PJC) inquiry into Australia's financial services industry would provide answers to the fee debate.
The findings of the report, led by chairman Bernie Ripoll, found the financial advice industry has significant structural tensions that are central to the debate about conflicts of interest between advisers and product manufacturers.
"On one hand, clients seek out financial advisers to obtain professional guidance on the investment decisions that will serve their interests, particularly with a view to maximising retirement income," the report found.
"On the other hand, financial advisers act as a critical distribution channel for financial product manufacturers, often through vertically-integrated business models or the payment of commissions and other remuneration-based incentives."
In its submission to the PJC, ASIC noted the historical basis for the links between manufacturers and advisers.
"Remuneration of distributors of financial products was historically set by the product manufacturer. It was based on the value of products sold and deducted from the amount paid by the consumer for the product. These remuneration settings encouraged product distributors to sell certain products," the corporate regulator wrote.
"As the market for financial advice services has grown, the historic connection with product manufacturers and this remuneration structure has conflicted with investors' needs for quality, unbiased advice and their perception that this is what financial advisers provide."
ASIC also used its submission to describe Australia's advice industry as still being characterised by its "distributive function".
"Today, financial advisers usually play a dual role of providing advice services to clients and acting as the sales force for financial product manufacturers. Approximately 85 per cent of financial advisers are associated with a product manufacturer, so that many advisers effectively act as a product pipeline," the regulator said.
"Of the remainder, the vast majority receive commissions from product manufacturers and so have incentives to sell products ... this structure creates potential conflicts of interest that may be inconsistent with providing quality advice and these conflicts may not be evident to consumers."
As part of its report, the PJC released 11 recommendations, one of which called for the end of payments from product makers to advisers.
The committee recommended that the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.
The ceasing of payments from manufacturers to advisers is a welcome decision for many advisers, according to Viskovic.
Of the many advisers she spoke with while conducting research for her report, the most positive feedback she received about changes in fee structure was that of advisers wishing to remove themselves in a business capacity from the fund managers. "They saw commissions and the fund manager determining the fee they could charge and they felt that wasn't their role," Viskovic says.
Meanwhile, it is Stackpool's view that product manufacturers have done a great "snow job" on advisers in the transition to a fee-for-service model.
"They've done a great snow job on us telling us to move to fee for service. What happens if there's no product? I'd say 95 per cent of most fee-for-service advisers don't get paid when there is no product. How can that be fee for service?
"I don't care if there's no product, it's fees for the service. Let's call it fee for product and service. Let's start debunking this fee for service. It's even more insidious than the move to holistic, because we're now going to consumers saying 'don't worry about commissions, we're fee for service' but it's still fee for product."
What changes has the industry made?
Outside of the Ripoll inquiry and its recommendations, dealer group principals and institutional advice heads have moved past the discussion of how to price advice, and are now attempting to implement change on a practical business level.
In November last year, dealer group Professional Investment Services (PIS) rolled out a new fee payment system called AccountPay.
The internet-based system was designed to allow clients to pay fees by a number of methods, including credit card and direct debit.
The system involves no upfront fee, with direct debit payments subject to a small transaction fee of under $2.00.
There will be no cost to financial advisers to use the system, PIS chief executive Robbie Bennetts says.
"The system will help people when they need to transition to fees of whatever type," Bennetts says.
For example, if an adviser sits down with a client and spends an hour a month on the client's business, charging the client $150 an hour, once the adviser types in details relevant to that client, the system will automatically charge the client for that $150, he says.
"We've built that for our advisers, we've built a lot of functionality and we'll be announcing a full kit for them to make the transition where necessary," Bennetts says.
Colonial First State (CFS) has also been proactive in its approach to transitioning its business for a new era of advice pricing.
In December last year, CFS reshuffled its executive team, creating four new roles within its CFS Advice Business.
The reshuffle has meant Financial Wisdom general manager Tim Browne will assume the role as head of advice delivery, while CFS head of distribution services John Carnevale will take on the role as head of advice academy.
Other staff changes include head of distribution development Matthew Brown taking on the new role as head of advice development, and Commonwealth Financial Planning head of strategy Helen Blackford stepping into the role of head of advice business management.
The reshuffle has given CFS advice business general manager Paul Barrett a firsthand look at what approaches advisers are taking regarding pricing methods.
"I've seen all sorts of different approaches. I've seen the highly-segmented model where there are certain types of clients that are charged fee for service, certain types of clients who charge asset-based fees and then I've seen specialist firms that only focus on one style of client or one type of advice," Barrett says.
"So you've got a whole range of complex parts to that question and it very much comes down to what the individual adviser or firm is looking to offer its client base."
In Barrett's view, the way to address the question of 'what fee do I charge my client' from a business standpoint is through communication.
"I think we've got a number of advisers who have been preparing for this environment for many years. We've had a number of advisers who are already there, we've got some who aren't there yet and are looking for guidance. I receive phone calls from advisers wanting guidance on this," he says.
"The way to address a question like that is to go and sit down with your adviser or the business and have a good look at the type of advice they provide and the ongoing services of advice and then work from there.
"One thing is for sure - advisers have to have a really good understanding of what it costs them to generate the advice and service they provide."
Barrett says the first step to understanding what the costs are relating to their own business is to look at their client base.
"Try and look through your client base to indentify trends and patterns around the types of clients that you have in your firm. Once you have identified that you can start segmenting that client base and the service offering, but I think the vast majority of advisers have pretty good understanding of that," he says.
"The next step is how they package up services and then offer them to their clients. I think a key success factor for advice firms going forward is how you deliver mass customisation, how you make sure the underlying advice process is streamlined and efficient but you can still deliver tailored advice to the different client segments you want to deal with."
Fellow dealer group Securitor is also in the throes of shifting to a fee-for-service model.
The BT Financial Group-owned firm already has more than half of its advisers transitioned to fee for service.
Yet the transition is not the firm's priority. Across almost all of BT Financial Group's advice units, new pricing models for advice have been adopted.
"If you think about our bank planners, for some time now our planners have not directly received commissions or fees from products," BT Financial Group general manager of advice and private banking Geoff Lloyd says.
"For some time now we've had a policy called 'no fee no plan'. So we believe in the value of advice and we charge clients for it on a dollar basis."
Which fee model should you choose?
Again, it seems there is no single answer.
In its submission, ASIC said commissions create conflicts of interest that are "inadequately managed by disclosure", and suggested the PJC consider recommending a ban on a range of remunerative practice.
"While the reforms to clarify the fiduciary-style duty of advisers will have a significant impact on the ability to use commission remuneration, the government should still assess changing the policy settings of the FSR [Financial Services Reform] regime so that advisers cannot be remunerated in a way that has the potential to distort the quality of advice given," the regulator said.
Under ASIC's submission, the regulator suggested the following forms of remuneration would not be permitted, particularly in relation to personal advice:
. up-front commissions,
. trail commissions,
. soft-dollar incentives,
. volume bonuses,
. rewards for achieving sales targets, and
. fees based on a percentage of funds under advice.
A number of industry bodies and institutions agreed in part with ASIC's proposal.
While the FPA is aware its members and the broader advice community do not wish a charge sheet to be produced, the association does believe a comparative fee table is required, according to Bloch.
"What we're putting in our Cooper Review submission is a comparative fee table, where you could compare the fees and charges across a number of different products," she says.
"Therefore, you could compare the advice your adviser is providing and you can separate that from the product and be a little bit clearer about what you are doing.
"We think that is a step in the right direction. Again, not to nominate the quantum, but to nominate what you're comparing, and we don't believe advice is any different."
Bloch says advisers should be able to talk about upfront advice, ongoing advice, ad hoc advice and non-specific advice so that consumers can compare it.
"Members don't like the idea of shopping around for advice. They like to put their model on the table and they like to negotiate the fee for their model with their client and they don't really like benchmarks or averages or comparisons," she says.
"That's just the way it is at the moment, but as I said, that's something we need to work through because of the demand."
In Viskovic's view, advisers need to look at the pros and cons of an asset-based and fixed-fee model and select the one that works for their business.
"I don't believe you should keep charging more and more until you reach the ceiling, I think we need to be able to create affordable advice for people at all different scales of the advice spectrum," she says.
"But one thing I do believe is that even at that lower end of lower touch advice, advisers don't charge enough for what they do."
Yet for Stackpool, the selection of a fee option is the least of the industry's worries.
"I think, unfortunately, 2010 is going to be that little bit more confusing. The game changer is going to be legislation. A lot of the firms who try and take their heritage across to this new world are going to find it difficult and they are in for a tough time," he says.
Stackpool says the confusion will also spread to the consumer in the short term.
"Unfortunately, I think we're not moving towards keeping advice in the reach of most Australians, and I think there is going to be more compliance thrust upon us as an industry in the short term," he says.
"I really don't think the up and coming advisers in the next year will really get the validation that they have selected the right career, as I think there is going to be more mud thrown at them. And at the same time, the product manufacturers are going to get a little bit cleverer and build product that looks like advice, when it's not advice. It's product-related advice."
While it does not look probable that the issue of pricing of advice will be resolved by the close of 2010, the fact the industry is doing more than merely discussing the issue is a sure sign it is on the right track to finding a solution in time.
