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Remuneration Models: Why Planners Shouldn’t Outsource Product Sales

By Taylor Liao, CFP 

With the exception of fee-based financial planners, recommending products is a necessary part of the financial planning process. So, the question we have to ask is, “What makes us different from product salespeople?” When financial planners are deciding which product is a best fit, they are looking for a product that helps clients achieve their goals. When a product salesperson is making the decision, they consider the price of the product and the commission they’ll receive, among other things.

Some planners, when building their financial planning businesses, choose to be fee-only to avoid any conflict of interest. To do this, they either outsource product sales to other parties or they don’t recommend products at all. I can understand the benefits of a planner who doesn’t make product recommendations: they maintain their objective image as a planner and there is no confusion about their role.

Fee-Only Planners Can’t Complete the Financial Planning Process

The purpose of doing financial planning is to develop a comprehensive plan for the client. The financial planning process has 4 steps, in my opinion: planning, implementation, monitoring, and adjustment.

A fee-only planner who does not recommend or sell products is only in charge of the planning stage. After the planning, the implementation stage, in which an advisor and/or products are selected, takes place. The client might choose an advisor or products on their own or with the help of the planner. Either way, the planner has given up control over the solution-provider. How can the planner make sure the product seller has the same philosophy as themselves? And, how can the planner guarantee that the seller will suggest products that are in the client’s best interest? In addition to losing control, the planner will lose the opportunity to watch the client achieve their goals.

The fee-only business model can work, but only if clients are independent and fully knowledgeable about financial products.

If you are outsourcing to a salesperson during the implementation stage, you might deal with the following problems:

  1. You will have to manage several salespeople in different financial areas: insurance, fund house, bank etc. If they do something wrong, the client might hold you responsible.
  2. You will lose the ability to control the whole project. Since the planning and the solution will be done separately, your philosophy might not be carried through all the way.

For example, you find a client’s yearly premium of insurance is over their budget. Your suggest the client lower their premium by changing the endorsement policy to a term life policy. When the client approaches an insurance agent and asks for a term life policy, the agent does not want to sell the term life policy, because of the low premium and low commission rate. At the end of the day, this client was torn between product sales and financial planning.

Financial Planning Considers a Client’s Entire Life

If you are at the supermarket preparing for a party, you have to purchase decorations, candles, napkins, and other things. You must consider how compatible all the purchases are together – the colors, the look, etc. This is similar to what financial planners must do for clients. When we recommend/purchase products for clients, we consider how the product will fit into the bigger picture of the financial plan. A lot of times, the product with the lowest price is tempting, when not considering the big picture. But, after getting to know a client’s goals, there are many more factors that should be looked at, such as risk and maintenance.

I recently met with a new client who is a well-off doctor. He has a lot of investments in stocks, funds, and annuity insurances. The dividends he’ll receive from these three product categories will easily allow him to have a satisfying retirement. He was curious about investment and asset management but instead, I asked him what he wishes to accomplish in the future. He responded that he wanted to help his elder sisters and brothers, save for his son’s study abroad, and possibly open a business.  I proposed the idea of a trust that would have pay his siblings monthly and/or allow money for study abroad or opening a business. The client had never heard of this suggestion and thanked me. If my focus during the meeting was on selling products, I would have spent my time discussing asset management and investments, neglecting his future goals.

Many planners handle their clients’ investments and they are very skillful at it. In my opinion, investment needs to follow the same rules of financial planning. Planners watch the market trends and modify asset allocation, but they don’t always pursue maximum return. Risk control, in my opinion, is more important than return. We have to maintain low volatility and keep the necessary return within an acceptable amount of risk.

The Difference Between a Financial Planner and An Investment Adviser

It would be helpful to clarify the role of a financial planner versus that of an investment adviser. Investment management is a part of the financial planning process. The goal of a financial planner is to maintain the client’s money so it is readily available when they need it in the future. The client might have their money in a single investment or a fixed monthly investment.

The goal of a investment adviser, normally, is to pursue maximum return. Client’s measure their adviser by investment performance. Investment advisers don’t need to consider life goals or plans and they don’t care about when the client will need money in the future.

For example, I had a near-retiree client with a fifteen-year investment. When the financial crisis hit, they lost fifty percent of their total investment. What would have happened if this client was planning to withdraw a certain fixed amount from this investment for their spending money during retirement? What if this was the only source of their retirement income?

The investment had dropped fifty percent. Even if the investment returned ten percent every year, following the financial crisis, it would take ten years to return to the original amount. When managing an investment portfolio, the goal is not to pursue maximum return while ignoring risk.

A few years ago, some offshore products were introduced to Taiwan that caused a serious loss to clients: Viatical and Life Settlement. Some investment advisers used these products for their clients. This is not the proper way to manage a client’s assets. When we survey a product, risk is the first issue to be considered.

5 comments to Remuneration Models: Why Planners Shouldn’t Outsource Product Sales

  • Badrish

    Dear Taylor,

    This entire article is lucid explanation of a experienced planner. We encounter lot of problem as far as role of a financial planner is considered, sometime as investment adviser whose main focus on performance and a financial planners often gets treatment as Investment adviser.

    When we outsource the product to manufactures such as insurance,mutual fund,structured products we don’t have any control over their performance directly because of regulator and disclosure norms such as risk lies with investors.

    It is a hard task ahead of any planner to design and structure solutions and implement it. I am really delighted at your explanation given to your client about forming a trust to fulfill the need of his goals.

    We are all interrelated with regard to advise and its performance.

    All Parties in the game are protecting their own interest which is perhaps in conflict with others.

    Any ideas how we can specialize in designing and implementing and monitory solutions. which is indeed different from traditional out sourced products advises.

    Awaiting your kind reply on the same.

    Thanks

    • Taylor Liao

      Hi, Mr. Badrish, Sorry I didn’t visit here so often. We are trying to find a solution that is accepted by client: low cost, easy to maintain and we can share the AUM fee. The ETF platform from some of the american securities dealers maybe is the solution. We try to charge an external 1% from client and they save more percentage from local financial product provider.I will share in my blog in future whether it will work or not.

  • Scott

    I would tend to disagree with the author. Fee Only planners are responsible for implementation, monitoring and follow up, especially those that base their practice on the retainer model.

  • Hi Mr. Taylor,

    As i practice in India where the financial planning concept is slowly taking root and more and more people are approaching us for their financial planning needs. Fee only consultancy is presently not viable here as i mentioned that there are not enough clients who are aware of this concept, and that is why we find it better to offer products too to our clients. As you rightly said, we can control the type of products sold to our clients when the implementation is done at our end. In the end we are responsible for our clients and are also able to provide them access to complete updated information on their insurances and investments. Fee only model can be viable but it will take some time here.

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