Many believe that in order to be a professional financial planner, one needs to shift towards a fee-based model within one’s practice, with a clear distinction between the provision of financial advice and the sale of products being drawn. Perhaps the word “fee” is also a bit deceptive in the financial planning profession; some say that the term “advisor charging” is more appropriate. Perhaps, explaining to a client how a practitioner earns their money is the most important issue, specifically in the realm of professionalism. There needs to be absolute clarity in the mind of the client. Also, the money earned should always be commensurate with the time actually spent with the client. That is professional if nothing else.
A Common Thread
When speaking to fee-based practitioners, there seems to be consensus on the topic of commissions earned on product sales. Traditionally, commissions were generally considered to be too high and insufficiently regulated. Whilst commissions are, these days, far more controlled, fee-based practitioners remain particularly concerned with, and actively guard against the overlapping of the concepts of financial advice/planning and product sales. They are especially wary of concepts such as “sell”, “products”, “brokers” and so forth. Moving to a fee-based practice means focusing on financial advice and planning, with a complete separation of commission-based product sales.
Sell Your Time and Knowledge
Operating a fee based model practice requires a specific infrastructure to be set up within your firm. Your fee or charging model needs to take the expenses of operating this infrastructure into account, and your fees or charges will need to be built accordingly. Furthermore practitioners will need to consider work on a more time-based model. As a professional you need to sell your time and knowledge. Formulas should work along a basis that takes into account the hours that you, as a professional, have available to devote to your practice, multiplied by the cost of the practice infrastructure, operating costs and expenses, together with, of course, the profit you wish to earn. Operating on this or a similar basis is how any other professional operates their practice.
There is no need to be secretive with clients with regards to the fees you charge. Clients will come to understand that paying for your time, is worth the cost, as they do with paying any other professional.
Barriers to the Fee-Based Model
Consensus remains that, whilst barriers to this type of model do exist, it should not prove to be a difficult switch. New entrants to this market should look to employ a fee-based or specific charging model to their firms from the get-go. Advisors and planners must consider themselves as true professionals, and right from day one, they should be looking to sell advice and time. The selling of products and the accompanying commission earned should possibly form another part of the business plan altogether.
Initiation of Products as Opposed to Selling of Products
If a fee-based practitioner does indeed engage in the actual sale of products to clients, this should be done in a manner different to what is traditionally done. Most practitioners operating a fee-based practice are all pretty clear on this: they provide financial planning and advice. They don’t sell products. A client comes in and requests assistance – this client needs a financial plan, for example, and this is the service that is provided. The client is assessed and thereafter provided with a plan, a report, specific guidance, etc. The client is never told to take on a specific product. Rather the client is told what his financial needs are and what should be done in order to satisfy those financial needs, all of which the advisor has now identified and has been paid for doing.
The client is then left to decide on how he would like to initiate the plan by way of possible products that may be required. Should the client then request the same financial advisor or planner, who is licensed to do so, to assist in obtaining a specific product, the financial advisor or planner will then assist in initiating the product based on the financial advice that was initially provided to the client. Another important thing to note here from a professional perspective is that this is a new “agreement” that is concluded. The initial agreement was for a financial plan or advice around specific client goals; this is then an agreement for initiation or implementation.
How you choose to administer such sales commissions earned will remain a question of discretion of the advisor or planner and cannot be dictated. Commissions on the sale of products continue to be paid and thus still provide a payment option in the implementation stage. Nonetheless, most practitioners go to lengths to continue to separate their services from those that would involve a commission being paid over from products and those that are pure advice and planning-based.
One example of operating is whereby any commission paid over to the firm is immediately credited to the relevant clients account, and thereafter billed fees are deducted from this amount. Should the situation arise where the clients account remains in credit from the pay over of such a credit and no further fees are owed by the client, the entire credit amount is paid over to the client’s bank account. It was evident that many clients still prefer to allow a product house to pay for their ‘fees’ that they have incurred for the work done. The difference however is that the client is absolutely and undoubtedly aware of what was happening and how. They know what they were paying for and valued the advice and it was an added bonus that they were able to ‘write-off’ their fees with the relevant commissions.
A Brief Practical Model
- Hold the first consultation with the client and charge a fee for doing so.
- Provide clients with an all-inclusive quote right from the beginning. Don’t be secretive with fees, advise clients of your costs and be upfront.
- Warn clients that cost may escalate depending on unforeseen work that may have to be undertaken depending on the portfolio.
- Open a file, meet with the client and take their instructions, and charge a fee for doing so.
- Immediately and right from the outset explain how you charge and have your client sign your terms and conditions of engagement. Explain as much as possible to your client and be transparent about your fees and services.
- Record minutes of all meetings with clients.
- Collect all identification documents required right from the outset.
- For all of the above, consider that, you are justified in charging a professional fee. Professionals charge for the time they engage in activities on behalf of their clients.
- Note furthermore, at this stage no financial advice has in fact been provided.
- The financial advisor or planner takes on the actual personal financial planning tasks related to this client and instructed to attend to by the client, for example, retirement planning, investment advice, estates and wills, etc.
- Each planning area should be dealt with separately (but as part of a holistic picture where appropriate) and of course in constant consultation with the client. The financial advisor or planner should employ a strict fee structure and generally look to charge his client for each and every activity undertaken. A charge for a full, all encompassing, holistic plan is also an option.
- As mentioned above, additional fees may be chargeable over and above the figure which was initially quoted to that client, based on the specific client portfolio. Such fees should indeed be charged. Again, it is implicit that advisors are upfront, transparent and professional about the costs of their services.
- The client is provided with a comprehensive piece of financial advice and/or plan according to their specific goals and requests. The client is advised on their current financial situation and they are given the advice that they require to move forward with their portfolio and they are advised of the specific steps that are required to reach that financial ideal.
- At this point, the financial advisor or planner has provided the financial planning advice that he was contracted to provide to the client, or in other words the initial financial advisory relationship has now technically been fulfilled. The financial advisor or planner has now completed his initial mandate. Additional services required by the client will in effect form a new relationship between the advisor and the client and a new professional agreement.
- The financial advisor or planner can now offer their services to the client for implementation of the financial advice or plan. In order to be truly professional this should be a separate mandate that is underpinned by a new agreement.
- Another reason why it is important to distinguish the initial advice or plan from the implementation through specific products is the fact that the client should be able to take the advice and/or plan and implement and/or monitor it beyond the existence of the planner who did the analysis. Planners aren’t around forever and from a succession point of view the client should be able to take it to another professional who can understand the reasons why the client’s portfolio looks the way it does.
POST ADVISORY & IMPLEMENTATION SERVICES
- This is another service underpinned by yet another agreement.
- Post advisory and implementation services could includes on-going monitoring and maintenance of client portfolios (includes research), and/or post advisory initiation of products at the client’s specific request.
In summary you need to consider that as a financial planner you are a professional. As a professional, you should learn to sell your time, knowledge and expertise and you should be moving away from selling products. Financial planners are professionals, not sales people.