Tony Vidler directs us to this article by Alan Moore of XY Planning Network. It contains a comprehensive list of all the main methods for charging fees in the investment and general financial advice sector. There are some gems to be picked up for those that work in focused insurance businesses, or run an advice business in which insurance, home loans, and KiwiSaver are significant components. The establishment of a good fee schedule and methodology provides a valuable hedge against concerns about the fee model. Having one does not mean one cannot support the other - you can offer fee options as alternatives to commissions and also hybrids of the two. Do check it out.
What should advice cost? That was an excellent question from the audience during the first two of our recent getting in shape series. Perhaps this seemingly simple question surprised our panel. The answer to the question is not easy. It was a kind of sub-plot in the day's event: the question of the cost of advice is part of the disclosure story, part of the story about the future of advice, part of the story about the value of advisers solidly backed up by the research shared on the day. When asked what advice should cost the panel made a good beginning - in both Wellington and Auckland the first answer was "it should not be free". This echoed John Botica's earlier comment during the first panel in Wellington where, talking about disclosure, he asked that any advisers taking commission should not refer to their advice as free. Of course advice isn't free. Often something that is not paid for is not valued. Advice is paid for (whether by fee or commission) and it is valuable.
The question came up in the context of a discussion about how to make advice more accessible. For people to value advice they must first know it is available, believe it is worth getting - but these are just pre-conditions. Often we know something would be good for us, but don't do it.
Many people struggle with making the time to meet with an adviser - not just because of the time for the meeting, but they fear the time the work around the meeting will take. A good portion of the population are certain that their finances are a mess, and if not, then the musty file of papers definitely is a mess. So they fear judgment. Many people struggle with making room for the cost of advice. If they believe that it will require payment at the time and their budget is already stretched they will be reluctant to make an appointment. Commission has a valuable financing role to play here - but it is not the only mechanism, of course, that can make access to advice easier.
So although advice should not be free, we need to make it easy to start the process. Which means the initial steps should be free - and easy to do.
Most advisers offer initial discussions at no charge. More can be done to make brief trials of the value of advice accessible. Social media helps, Zoom and MS Teams helps, but nothing quite beats a meeting - and the ability to slip into a 20 minute session on KiwiSaver at lunch or hear ten top tips on managing your home loan at the local mall are probably under-utilised strategies. Now add some tools in the client's first language (which will not be English in about a third of cases in Auckland) and spoken by someone who at least knows your culture a bit... these are access strategies. They reduce the psychological costs (fear of rejection, fear of shame, fear of being exposed as not having 'enough money to qualify for advice').
The Financial Markets Conduct (Australian Licensees) Exemption Notice 2020 issued by the FMA allows Australian licence holders and representatives to operate in New Zealand. Although MinterEllisonRuddWatts special counsel Alistair Robertson says there is nothing to worry about, some advisers have expressed their concerns about allowing Australian advisers to enter the market at this time. Robertson has clarified the terms of the exemption saying that Australian advisers that choose to move to New Zealand will be able to continue servicing Australian clients.. The exemption doesn’t allow Australian advisers to service New Zealand clients. Australian advisers looking to achieve the exemption will need to:
“Hold a current Australian financial services licence, be in the business of providing a financial service in Australia, and not have a New Zealand place of business.
Be registered as a financial service provider in New Zealand, and be a member of a dispute resolution scheme.
Take all reasonable steps to ensure its representatives submit to the New Zealand courts in respect of the relevant financial services.
Give the FMA written notice that it intends to rely on the Exemption Notice.
Have procedures that give reasonable assurance that the licensee and its representatives comply with relevant Australian regulatory requirements when giving regulated financial advice to a New Zealand retail client under the Exemption Notice.”
“The FMA released an updated exemption that allows Australian financial service licence holders and their representatives will be free to operate in New Zealand without a local licence, following the rubber stamping of the Financial Markets Conduct (Australian Licensees) Exemption Notice 2020.
The move, which came at around the same time that politicians were scrambling to finalise a trans-Tasman travel bubble, was the finalisation of a proposal first put forward to the industry in August 2020.
Some advisers may be worried that allowing Australian advisers into the New Zealand market at such a tumultuous time of regulation change could cause trouble.
Alistair Robertson, special counsel at MinterEllisonRuddWatts says that New Zealand advisers have nothing to be worried about.
“The exemption is limited in scope. It does not allow Australian financial advisers to solicit New Zealand retail clients. It generally allows Australian advisers to continue to service Australian clients if they, the adviser, move to New Zealand without having disruption to those clients and without complying with the New Zealand licensing regime.” Click here to read more
In other news
Susan Edmunds, reporting at Stuff.co.nz, tells us of a client that was surprised by the extent of the fee a mortgage broker charged when they refinanced their loan early. They complained about it to FSCL, here is the essence of their decision:
FSCL said the adviser was entitled to a fee but the terms of engagement were too vague to be enforceable. “The clause did not set out how much the clawback fee could be, or how the fee would be calculated. It simply said that, if the client fully repaid their loan within 24 months, the adviser would be entitled to charge an early repayment fee. For all [the client] knew, it could be a $25 fee, as opposed to $2500.”
Faced with that, the adviser agreed to waive the fee. That's the problem with a vague disclosure - a few examples could have made this really clear. Glen McLeod makes a robust defence of the right to charge such a fee - which I broadly agree with - I just think it should be really clear to a client what the fee will amount to. In the absence of good disclosure, the dispute resolution bodies will rule in the client's favour. I quite like the approach outlined by Bruce Patten, of LoanMarket, in the article. I believe that would stand up to a test such as this complaint.
Investment advice businesses appear to have been experimenting with different structures to manage, mitigate, or eliminate conflicts of interest for some time. See story below. I have heard of a few in the insurance sector - usually people offering options rather than an entire change of business model - but they are rare. Models that I have see offered: true nil commission options with a fee for placement, another Advice for fee and no offer of placement, another fee and commission refund (varying terms), and others simply presented hourly paid options. We have not yet seen these coupled with environmental, social, or governance goals explicitly as in the case below, although often proprietors are concerned about those issues, they are not wired in to the business. Perhaps that's an opportunity.
Donna Nicolof, who was the former head of BNZ's Private Bank has established Pāua Wealth Management. Donna has stated that the firm is determined to eliminate any conflicts of interest and remain independent. When analysing and making decisions, investment managers will be required to consider different external factors including environmental, social, and governance factors.
"Pāua Wealth Management has created a business model to support the independence and integrity of its advice and remove potential conflicts of interest, Nicolof says. She has said no to product commissions or referral fees in favour of a fees-for service approach.
“We believe New Zealand investors deserve truly independent advice and the better outcomes this delivers. We only receive fees agreed to by clients so they can be confident that we act only in their best interests,” she said.
“We do not manufacture investment products and our advisers are not incentivised to sell particular products or trade on clients’ portfolios, which can create conflicts of interest. We are motivated by delivering quality advice and superior service,” she said.” Click here to read more
In other news:
I am suspicious of 'unlimited.' it is meant to suggest limitless, but makes me wonder whether there is really an undisclosed limit, or worse still, a failure to work out what the limits are.
Working with some advisers that are selling their business recently, we accidentally got to talking about the limits to growth - why the business had never grown beyond a certain point. The expected maximum business size is limited by your rate of new business generation and your rate of lapses. When these two are equal the business ceases to grow. Most business development coaching works on increasing the rate of new business generation, a few then look at lapse rates.
But even before the new vs lapse limit is reached, often businesses cease to grow.
Then I got Seth Godin's piece about interaction debt in my inbox. I think this provides part of the answer. Many businesses never properly work out the cost of serving existing customers, and as the service requirements of those rise it reduces the time available for new business generation. It is particularly difficult to manage when the same person that is responsible for new business generation does all the existing business customer service. There are big advantages to that integration, but there are trade-offs too. Godin calls the servicing requirement an interaction debt. Focusing on it in that way highlights that it is unique interaction which is particularly costly. If that's appropriately charged, then there's no problem. If it is bundled with other costs one should periodically review it, as it is possible to get into a situation where revenue is insufficient to sustain the service promised.
I am particularly worried about the idea that a high upfront commission followed by a very small renewal should pay for an unlimited amount of future client service. That's a big promise. If you have run the numbers and you are happy with it, good for you. If you haven't checked, then you're just hoping it will be okay.
Professional IQ have announced that they will be holding a workshop to discuss clawback-related fees, or a fee contingent on the customer sustaining a product (usually a home loan or insurance) for a period of time. Virginia Douglas will be presenting. She will be using case studies from complaints about clawback fees to discuss the issues for advisers and what they should be considering when charging a clawback fee and what problems advisers should be looking out for. Click here to register
Ask people what they would be prepared to pay for a house in Auckland and I doubt you will get an answer equal to the current median price.
There is a well known economic concept called revealed preference, which is a way of saying that what people say they will do and what they actually do are two quite different things. People involved in fast moving consumer goods find it hard enough to get people to imagine whether they will buy something quite ordinary - like a new brand of frozen cheesecake - let a lone a complex proposition like financial advice, which varies so much, and is in large part created in collaboration with the client.
The point being: the thinking around fee-based advice remains immature. In an effort to quantify the challenge - and make no mistake, I am agreeing that there is a challenge - the questions being asked are quite simplistic ones. So the comparison between a notional "$2,000" required for advice (whatever is meant by that) while consumers are perhaps happy to pay "$500" seems to completely miss some significant features of the client experience today.
Financing is a concept incorporated in the commission model. If you want to challenge the commission model, sure go ahead, but consumers frequently like to spread lumpy costs, so no need to abandon that idea, and assume that fees must be lump sums.
Imagining the future is difficult. We are not the only ones struggling with it, clients do too. They don't necessarily say in answer to our research questions 'I am struggling to see how that would work' - humans are notorious for not owning up to a lack of knowledge.
Revealed and stated preferences are not the sole domain of clients, either. Many advisers say that they are motivated by annuity income, but their actions reveal a preference for upfront income.
So the future is much more likely to be created by experiment. Advisers will try things, clients will respond.
In the current environment, the financing of much financial advice through commissions, has some great features - and some pretty bad ones - but it works well for lots of people. Alternatives seem limited. But I am an optimist for more ways to give financial advice, and more ways to collect a fee that makes advice provision viable. There are lots of ways consumers pay for expensive intangible services right now. In fact, many, many, more than they did just a few years ago. Whether they are lawyers, accountants, nutritionists, beauticians, fitness instructors, therapists, architects, planners, designers, you name it, there are loads of services being delivered in ways that consumers are happy to pay for right now. While that goes on, commission will also remain an important and valuable way to finance and pay for an important and valuable service.
Recent research from Cerulli Associates has found that after surveying over 8,000 investors clients prefer fee-based advice as opposed to the commission-based option. Click here to read more.But these people are demographically different to insurance clients. Being older, and having capital, they can usually afford a large fee. They can easily rationalise self-financing: the expected return in an average year should well exceed the expected fee. The challenge will be how we get typical insurance clients to get to the same place - and all the while recognising that most of them do not have the money of lump sum investors. For those that offer fee-based research, and they are few, even fewer are tackling the financing of advice. This can be done, but takes effort.
Brian Klee, writing for life-info.org.nz, has written about the importance of product commission. The International Association of Insurance Supervisers largely agrees with Brian on this one too.