Fee For Service?

Hi all,

I recently came across a financial planners website which said that they are Fee For Service. Reading further, I then found out that the financial planning company owns the administration company which is a white-badged platform which pays the administrator a volume bonus. This particular financial planning company uses gearing to invest to maximise client's potential (probably also their volume bonus).

What I can't get my head around and can't seem to find any clear cut rules around, is when a directly related party is receiving a commission (as the volume bonus is usually considered a commission from the administration fee) can the financial planner say they are really fee for service when a company they own (ie, the whitebadged administrator) receives a commission from a product provider (platform provider)?

Any thoughts?

Cheers,

Dan

Hi Dan, the Firm for which the financial planner works should ensure that the arrangement is disclosed in the Financial Services Guide and Adviser Profile. They have a fiduciary responsibility to disclose this arrangemet to their clients. The assumption I will make is that the arrangement is between two business ventures and the advisor does not receive a slice of the action. He/she is adequately compensated through other forms of remuneration. The clients pay a fee for service. That fee encompses the advice process. As long as the adviser is acting in the best interest of the client and the client has been educated and has a full understanding of the arrangements there should not be an issue. The only time a problem will occur is where the adviser does receive remuneration and the business proactively influences the adviser to recommend those products that pay the best.

Hi IntelliKev,

The adviser owns both businesses. While it is all disclosed are they really FFS when they receive a commission from a platform to one business venture (the administration business) and is this misleading? All very foggy to me.

Cheers,

Dan

Hi Dan, the fee for service relates to the service to the client, that is the fee they charge for their service offering. Do the planners reabte any trails or upfronts back to the client? If the adviser is ethical in his/her relationship/dealings with the client they will not be placing funds into the platform to reap the benefit of the trails. If the product meets the clients needs and objectives then I do not believe there is an issue however if there is a better performing product or a product that better serves the clients long term goals and the planner does not recommend them then I believe the planner is morally wrong in their actions. The area is a grey one. It is like a tradesperson purchasing from a preferred supplier at a discount and not passing that discount on to the householder. The issue of fees to financial planners is one that will not go away it is like a lot of other issues. If you want honest professional advice you have to pay for it. If all is disclosed and you feel you are being discriminated against then there are avenues for recourse. If you are happy with the advice given and the service standards agreed upon are met and exceeded then there is nothing to worry about.

Fee for service is the buzz word of the moment and it definately does mean whatever the user wants it it too. The smokescreen that that the financial advice industry is current setting up is to replace commissions with "fees for service" These fees for service will generally be calculated as a percentage of assets and be paid out of recommended product(s). These are simply commissions by another name.

There are two fundamental problems with the financial advice industry in Australia today. (1) Most advisers are licensed through companies owned by product manufacturers. They are incentivised in a number of transparent and not so transparent ways (e.g the volume bonuses mentioned) to recommend their owner's products and this sometimes conflicts with their client's best interests. (2) Advisers who are paid by commission (most of the industry) or via asset based "fee for service" place a filter over any advice they give and invariably always recommend products via which they can be paid commission (or asset based fee for service). Clients however need genuine advice without any filtering so they can be given the absolute best advice (and where appropriate products) by a professional instead of a sales person. This often means using products that don't allow the planners to be paid from them or other solutions not involving products at all.


The best way to ensure you get advice that solely has your interests at heart is to pay a direct fee to the planner and agree to have any commissions, volume bonuses and any other incentives received by the planner (both upfront and ongoing) rebated back to you directly or against the agreed fee. Finding a planner (rare though they may be) who has no conflicts of interest (and particularly does not own or is not owned by financial product providers) is also a good way to have confidence the advice you are getting is the very best the planner can provide.

At a minimum always read the fine print of a planner's financial services guide to identify conflicts of interest that the planner has has resist the planner using products that provide them with extra benefits.

There are a growing number of genuine fee for service planners but they are still the vast minority.

Regards

Jason Bragger
Brisbane Financial Planners | Financial Advice | Financial Advisor

I agree with Jason's comments.

There are a number of 'fee for service' advisers who are simply using that term because that is what potential clients think they want. In reality, these clients are looking for a FEE ONLY adviser.

What's the difference?

Fee for service

A fee for service adviser will charge you a 'fee' to do some sort of service, for example the initial plan. This is normally a low cost plan or SOA (statement of advice). In my experience, this is normally more like a PSD (product sale document) They might then charge a funds under management (FUM) fee, which will normally be a % of your investments. They may also accept volume bonuses from platforms they recommend or even commissions from investment product providers. PROBLEM #1

They might also accept commissions on insurance products they recommend. PROBLEM #2

Disclosure of these arrangements is just not good enough. The fact that advisers are going to make money based on the decision the client has to make automatically places them in a position where a conflict of interest exists.

PROBLEM #1 - if an adviser gets paid to recommend managed funds (therefore getting more FUM fees and volume bonuses), guess where you money is headed? The more you place with them, the more money they get. If the best advice is to pay off debt or purchase direct property, this option will not be given to you. The funds you are recommended are going to be high cost, because they need to pay commissions to advisers, so chances are, you're returns are going to be worse in the long term since high fees has a major effect on your total return.

PROBLEM #2 - Clients need to know that their advisers are on their side. An adviser that can objectively tell you how much insurance you need and not be paid based on whether or not you take up what they are advising is remaining objective. An adviser that accepts commissions when recommending insurance is waiting for you to sign the bottom line so they get paid. They cannot remain objective and you might be in a position where you're getting sold.

Fee only advice

An adviser's job is not to place money and products. That's a salesmen's job. An adviser's role is listen to their clients, understand exactly what they want to achieve and to bring the information and the strategy to the table. Present a number of options to get them there. These options have to be objective and free of conflicts.

A fee only adviser charges clients a fixed $ based fee for the complexity of the work involved in providing advice and service. They have no incentive to recommend anything other than that which is in the clients best interest.

This I believe is what clients are truly after when looking for a "fee" based adviser.

Neil Salkow

Independent Financial Adviser

Modern Medical Doctor's no longer sell products unlike times past. Medical professionals dispense advice for which they are paid consultation fees. They recommend products which the Pharmacists sell. Hence we generally trust doctor's advice and are comfortable asking Pharmacist's questions about the products that a doctor has recommended. Only witch doctor's earn their living selling potions.

This separation of advice and product serves the health field well.

Financial advice needs a similar model. Qualified advisers should be paid for advice which should be delivered without fear or favour. Certainly it should be free from conflicts of interest. Product manufacturer would then have to convince advisers they had the best available products for certain client situations and the advisers would recommend only the products that best suited individual client circumstances.

Unfortunately at the moment in fianncial services the "drug companies" employ the "doctors" and pay them based on volume sold. As a result clients are often over medicated with unneccessary or overly expensive drugs (financial products).

The only way this will change is if goverment restructures the industry via legislation. Unfortunately financial institutions appear to have a more powerful lobby than the pharmaceutical companies do.

In the meantime caveat emptor!

Jason Bragger
Brisbane Financial Planners | Financial Advice | Financial Advisor

RoskowNS, you are so right.

I do not make use of a financial planner although I have spoken to a few, all of which have managed to turn me off. I simply won't pay $5000 for a template document, nor will I pay a percentage of my assets to have some guy suggest a textbook split between a couple of different investment vehicles.

I have, OTOH, happily paid $1500 for three hours of someone's time to look over what I'm doing, understand my situation and goals, and tell me whether my approach has any holes in it. I'd happily do that every few years.

$500 per hour is a pretty good earning rate for the professional giving me the advice, and for me it works out the equivalent of 0.006% of "FUM".

Fee-only Advice, as you say, is definitely the way to go. I don't want someone to "manage" my assets or "place" my money for me -- I just want a coach to look over my strategy and tell me where I could do better.

Fee for service really hasn't worked (IMHO) as most FP can't define what service is, hence why they charge $5000 for a template that was done by a 23 yr old para planner @ head office.

But a fancy office, high fees makes all the bunny's feel extremely please

Glad I'm no bunny with my money

Poddy

I can absolutely agree with the frustration of having to pay for an advice documents (Statement of Advice - often from 60 to 100 pages) that at the end of the day, probably has been produced on a template by a paraplanner. I would love to be able to sit and talk with a client, follow it up with a 3 page dot point document and appropriate invoice. And I hope one day our industry will have evolved far enough to do that. But right now, we are heavily regulated by compliance and legislation - this is 'supposed' to protect the consumer (ha ha). While it is debatable how effectively this is working, there is no debate over the extra costs it is incurring to the consumer to get advice. We are 'stuck' with expensive advice documents for now - and so I am grateful for templates, processes and systems that enable us to gain some efficiencies in producing them. Ultimately, if you are working with a quality adviser with a professional, objective approach that is aligned to your best interests, the 'pain' of the fees will diminish and you will reap the value.