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Financial Services Compensation: Do You Ask Your Doctor How They Get Paid?

By Patrick Canion, CFP

I recently went through a procedure that is all too common for middle aged aspiring golfers. It was the same sad story – my brain refused to recognise that my body is no longer 21 years old, and this resulted in a shoulder injury that eventually needed an operation. Initially, my surgeon didn’t want to operate.  But after a long year of trying less invasive methods, we concluded that the best option was to proceed with surgery.

(My fellow golfers will understand that giving up the game itself was never an option).

Now, I know a bit about financial planning, but very little about medicine.  I met my surgeon through a referral from my doctor, who told me he was one of the best. Compared to financial advising though, the ‘fact find’ process is minimal.  Some questions, a few arm movements and an MRI scan.  Still, this was better than the anaethetist, whom I only met minutes before he put me under, and who couldn’t remember the phone conversation we’d had the day before, where he asked me about allergies and existing medication.

Still, I guess he’s a good surgeon. I mean, not only am I alive, I am writing this blog with both hands!  And, thankfully, my shoulder is feeling a lot better.

Compensation Wasn’t a Conversation

Not once did we have a discussion about how much he would be paid. I don’t know if he paid my doctor a referral fee, or got a kickback from the hospital that he chose or even if the company that makes the scalpels he uses ever took him to a conference.

My lack of curiosity was partly because I had good insurance, partly because I just wanted to get better, but mainly because I knew that he would always act in my best interests.

I knew this because:

  • He was bound to an ethical code and had demonstrated behavior consistent with this
  • He was highly educated and independently assessed by a professional body
  • He was licensed by and subject to government law

When it comes to financial adviser remuneration, I believe a similar approach needs to apply.  Here in Australia, we are taking important steps to have the definition of “financial planner” enshrined in law, so that our clients can have the same comfort and clarity, knowing exactly what their adviser is required to do.  Combined with a peer accountability through an ethical code, and a regulatory ‘best interests’ test, clients can have the same comfort as I did with my surgeon, knowing that their best interests are protected.

Business Model Variety is a Good Thing

Within the context of this professional framework, I do not believe that there is one ‘right’ business or remuneration model for financial advisers. Each model has its strengths and weaknesses, and each has its potential for conflict.

Why? We need to be honest and acknowledge that there is a demand in the community for a variety of financial planning business models.  Just as some prefer to use public health, or to self-insure, over having choice and convenience, there are plenty of people who need quality financial advice but can’t afford an upfront fee and would rather amortise the advice cost over a period of time.

Just as there are those who prefer their adviser to charge a flat dollar fee and be completely agnostic towards their investments, there are others who take great comfort from knowing that their adviser charges a percentage of assets and makes more money, if they do well.

Too often, I see advisers take their defence of their business model or remuneration approach a step further and argue that what is right for them and their clients is also right for everyone else.  Frankly, the needs of our clients and their own styles and preferences are broader than that.

We need a diversity of business models to ensure that the greatest proportion of the community gets the advice they need.

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