The financial crisis has shaken client confidence in markets and in financial advice professionals all around the world. More than ever, clients want to know what advisers really do for the fees or commissions they charge.
The experience of Australian advisers, who operate under some of the most rigorous regulations in the English-speaking world, may provide a few pointers for U.S. advisers struggling with these issues.
In an industry paper issued last year, Australia's Financial Planning Association proposed a number of key principles to respond to client concerns about fees.
The Australian FPA determined that consumers must be able to understand the fees they are paying and be able to compare those of different products and advisers. Clients must also be presented with fees that are broken down by advice and product. And not only must they agree with the fee presented to them by their adviser, they also have the option of turning off the fee if no ongoing advice is being provided. Lastly, advisers must be paid by consumers for the services they receive, not by product manufacturers.
While these principles may be reasonably easy to understand and perhaps hard to challenge, consider the impact.
From now on, Australian advisers will need to articulate clearly to their clients precisely what they do for the money they are paid. In our experience, advisers around the world struggle with this concept.
JUSTIFYING FEES
What is your client value proposition? And, if you have developed such a proposition for your business, is it regularly reinforced to your clients, staff and alliance partners alike? Clients quickly forget what you do for them.
Advisers need to consider further how to present their fee structure in a clear, unambiguous way — in actual monetary amounts.
Certainly, this is a big challenge. And in Australia, the environment will become even more stringent: the government is working on new rules that would ban commissions and volume-based payments for retail investment products.
Whatever the final outcome, advisers will have to be able to explain their fee structure clearly to every client before taking any action. In doing so, they likely will have to differentiate between the different phases of the client relationship, such as the initial strategy stage, implementation via product selection and manufacturer liaison, and continuing portfolio management, including service and regular review.
Advisers will need to consider the potential effect to their existing revenue levels if clients decide they are not receiving ongoing value for the fees they are charged and, as a result, request that their fees be turned off. A client-driven annual “opt-in” provision also has been proposed.
In Australia as in the U.S., many firms have a significant percentage of inactive clients for whom they no longer perform ongoing work. Nevertheless, they continue to receive a trail fee on certain mutual funds and other products.
As their ongoing revenue level comes under threat, such firms ostensibly have two options. First, they can modify their practice's structure so that it does provide ongoing service to all clients, which would increase expenses. Or they can divest their “inactive” client base to another adviser who will be able to serve them profitably and perhaps more actively.
This pricing change would tend to affect the market value of the adviser's practice. Currently, a multiple of recurring revenue is the most commonly used method to calculate value in Australia.
Irrespective of the final outcome, we believe that Australian advisers will need to review their business model and most will need to make some changes. Before these changes occur, advisers should rethink how they communicate with clients.
Since an adviser's client value proposition must be relevant, understandable, sustainable and achievable, it makes sense to consider an independent, confidential survey of clients to be sure they are happy.
It's time to review your firm's business model. Decide if you are selling a product, providing advice or doing both. Prepare a document which clearly outlines your fees.
Australian firms are doing this now. American firms would be wise to do it sooner rather than later, because change is coming.
Ray Henderson is a partner and director of Business Health, an Australian consulting firm for the financial services industry that develops and markets -business diagnostic tools. He can be reached at [email protected].
