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Remuneration Model: Which One is Best?

 By Suresh Sadagopan, CFP

The perception most planners have is that clients will not pay for advice. This somehow has been so ingrained into the psyche of players in the financial services space that it is taken for gospel. However, as with any kind of generalization, this is just a myth.

There may always be people who are not willing to pay for services rendered. It is possible that financial planners whom they have dealt with in the past, have not provided much value, and as a consequence, they will never pay for advice again. Financial planners who deal with clients that have a negative predisposition this are facing resistance, which can be discouraging.

I would say the onus is on us to prove that we are indeed different. Financial planners need to position themselves as true advisors and communicate clearly that they represent the client’s interest at all times, as opposed to the agents and distributors, who represent their principals. This information seems obvious to us but this may not have reached our clients, at all. Their resistance to pay stems from the fact that they see no reason to pay a person who is working for someone else. We need to make it clear that we work for them. Once we have their buy-in, trust will begin to build and paying for services will become normal for them.

Clients are already paying for other services such as their doctor, their lawyer, their accountant etc. The service component in our economies is increasing, by the day. In addition, professional services from doctors, lawyers, accountants etc. have always been chargeable services. Planners need to understand that people are willing to pay for services, but the service has to be seen as valuable to them. Being paid for our advice is a matter of communicating the value of our proposition to our clients.

The Best Business Model

The straight answer is that there is no best business model, per se. There are several models which could work. In the US, where financial planning has been around for over three decades, a rich profusion of models coexist, including fee-only, fee and commission, hourly fee models, fee offset, commission only, etc. Each of these models work well and have been adopted by some planners. Also, there are different types of engagement and business models that these planners seem to have evolved into. There are regional firms, national firms, boutique firms and lone rangers – each with their own conviction about what they are doing. There are those who have franchised their operations, those who prefer to keep all operations in-house and others who prefer to do planning and farm-out portfolio management and other functions. In essence, there are a profusion of models, all of which seem to be working for the planners and their clients.

That brings us back to the question – What is the best model for me?  To answer this question, a bit of introspection is needed. The important thing to consider is that the business model should make sense for the clients and they should see value in what is being offered, irrespective of the model.

What About Fiduciary Responsibility?

It is a myth that if a planner is using anything other than a fee-only model, that they are acting in the best interest of their clients. Planners should realize that honesty and integrity are the pillars on which clients’ long-term well-being rests. Once a planner has internalized the fact that they are on the client’s side and have a fiduciary responsibility, they will act in the client’s best interest only. This is true for many advisors, (who are not financial planners) too, who tender correct advice, as they take it upon themselves to do the right thing for their clients.

It is best to allow your business model to evolve and coexist in the market place. A fee-only model is indeed a great model, as it stamps out the conflict of interest, conclusively. It does not, however, mean that if some are following other models for remuneration, they would be any less client-centric and loyal to client interests. Models themselves do not determine if the planners do well for their clients.  

Financial Regulation

It would be cynical to think that if an advisor/planner is using anything other than a fee-only model, they would somehow rip off their clients. Imposing iron-clad laws and agreements through regulation, is not the way out.

Regulators have to understand that they need to facilitate the emergence of a vibrant advisory community that offers good quality advice, which would benefit consumers. They should not attempt to impose one model on the entire community as it will curb variety, stunt creative evolution, and hinder client choices. Overregulation results in a stunted industry that harms the investors they seek to protect.

This profession is based on trust. Whether it is written down on paper or not, there are unwritten rules which a financial planner needs to follow. Conflict of interest should not be allowed to mar a good relationship. The best way to build trust is to establish a clear and transparent relationship with the client. Full disclosure is the surest way of ensuring that the client is not having a sneaking feeling that they are being cheated. When the client understands the model and goes ahead with the planner, the relationship will stand the test of time. A win-win relationship is what endures, and good planners know that.

4 comments to Remuneration Model: Which One is Best?

  • Rightly told Suresh. If client come to know how we are differ and how we are adding value to his financial goals and needs then no problem in converting him into fee based client.

  • Uttam Kumar Sen

    If a client understands about the basic objective of financial planning, s/he will not mind to pay upfront. Although there is nothing called free of cost in a profession. Sometimes hidden costs are painful and injurious for a client. Upfront charges are true cost associated with the services as anyone can understand the inner meaning. A fee based qualified planner can be benefitted by benefitting her/his clients. We have lack of awareness and it’d be good if such awareness campaign can be done. The role of both planner and distributor/agent are indispensible in our society but people should understand about the role a qualified planner and a distributor/agent as they can distinguish a doctor from a chemist.

  • Looi MF

    Very well put Suresh. Excellent article.

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