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Point, Counterpoint: Can fee-only financial planners serve smaller clients effectively?

Phil Billingham, CFP says yes:

As an argument for staying on commission, it’s right up there with ‘But my clients won’t pay fees’. It’s ‘If I move to fees, my older/smaller clients will not be able to afford me’. To translate this, the argument is that ‘I will have to stop looking after them because they will not be profitable enough’.

Can I suggest the following?

  1. That fees need not be a higher cost than commission – it’s just not a hidden cost
  2. That in my opinion, it should be possible to offer a ‘Planning Lite’ version of what we do, perhaps delivered in the main by Paraplanners and other lower costed staff, so that those with less complex needs can still get value for money.
  3. That people will not pay for things that they cannot value. So if you cannot articulate your value, don’t expect them to pay you
  4. Many planning firms are inefficient. We should be able to drive ‘Unit Costs’ of client take on and reviews down, often using technology. You don’t know your Unit Cost? In that case, you may have a separate problem.

So start at the beginning. There is only client money. How it is paid is mostly a matter of administration. Let’s not get too hung up on the label, and focus on ensuring that clients – and prospective clients – understand where we add value in their lives.

Patrick Canion, CFP says not necessarily:

In Australia, financial planners can no longer charge commissions on investment money.  So, in that context, we are all fee-only planners. In addition, our regulation puts a strong onus on ‘knowing your client’ and ‘best interest’ tests that planners need to be able to, potentially years after advice was given, demonstrate that they fulfilled. Additionally, all financial advice needs to be documented in a prescribed written format to your client.

This puts a huge cost and compliance barrier up for smaller clients – who are also usually the people who need advice most. Our regulator is working to introduce a concept of ‘scaled advice’ – the ‘Planning Lite’ that Phil refers to above. This would allow planners to take a triage approach – but much ambiguity remains and the ‘client’s best interests’ test still must be met. Frankly, no-one wants to be the first test case before a court.

This means that for us to serve smaller clients, we can only rely on scale to reduce our unit costs down to a level where we can still be profitable. Doing this, without compromising the quality and the personalized nature of advice, is a challenge. Personally I believe that with enough scale and the right use of technology it can be done.

I certainly hope so, because there is a whole generation of Australians currently missing out, whose lives would be improved through quality financial advice. Our legislators though have only been paying lip service to this fact – most financial planners would have a far easier life leaving smaller clients to fend for themselves and focus on the wealthy.

Niraj Nanal, CFP says it depends:

I think the whole exercise of financial planning constitutes detailing on part of the planner. Most people in India take financial decisions quite casually from buying an insurance policy to investing in real estate. Therefore, there is a strong case for financial planning as they say the “devil lies in the details.”

When we advocate the need and importance for comprehensive financial planning by taking in to consideration all aspects of a client’s life, it involves considerable time on the part of the planner. Now unless you are an institutional player, it becomes very difficult to create a viable business model by planning for smaller clients.

If you want the expertise and customization of the planner, it is difficult to address the needs of smaller clients. So I think it depends on the business model and the client segment in which planners would like to work.

I believe in creating a specialist practice rather than addressing the needs of everybody, but I also feel the need to share financial planning with everyone. When it comes time to address the needs of everyone, the quality of financial planning will have more credibility.

At this point in time, I think there is nothing wrong with serving the wealthier part of the community because serving some is better than serving none. In the future, either larger companies or certain planners will decide to serve the general market and that will be of great help to financial planning as a whole.

Phil:

The UK too has abolished commissions on investment products, and India and South Africa are not far away. Others will follow. So finding a way to make ‘fee only’ accessible to the mass market is a ‘must do’ not a ‘nice to Do’, for all of us.

Whilst I agree that scale should play a part, there is no evidence in the UK that this has worked. Larger firms tend to cost more, and give worse advice. Small independent firms have proven to be better for the consumer, both from a cost and quality standpoint.

The use of technology is certainly part of the answer, but I think it’s all about efficiency. Build a proper business process, reduce ‘bells and whistles’ that the client does not value, streamline workflows, and delegate – internally and externally – non-core tasks.

For too long the drug of high commission has allowed both planners and advisers the luxury of inefficient practices. Fee-only will work, but only if businesses are run properly, with cost controls, marketing messages and proper division of labour. 

5 comments to Point, Counterpoint: Can fee-only financial planners serve smaller clients effectively?

  • I agree with much of what has been said here. I have problems with the linking of advice to transactions. “Financial Advice” – which in South Africa is not adeaquately defined in the FAIS Act( I am being generous) and which is always linked into the selling of a defined financial product “struggles” for this reason. I don’t think that the whole market can be served by fee based planners. Simply because “the market” is not a single entity. South Africa experiences huge ranges of wealth and financial understanding. I can see no reason why a housewife in a supermarket should not be able to pay for funeral insurance (advice and cover) at the till point – or a place close to it! As a lawyer and CFP I am aware that many of my colleagues run small practices that don’t justify high fees – and their life styles reflect their incomes. There is a lesson in there somewhere.

  • Thanks for the reply Peter

    Your point on complexity of markets is well made, and South Africa is the ideal place from which to make the comparison.

    I do see we will and must move to advice at till point, reserving Advice / Fees for those where we add value!

    I spend a lot of time in SA – fancy meeting at some point?

  • Sure Phil, just let me know when you are out here. Best to contact me at peter@archenfield.biz. I am due to be in the UK end 2013ish. As it happens I am on the FPI remunerations committee and I am sure I have jeard you speak at the annual FPI conference.

  • I see lots of younger clients who are willing to pay a small regular retainer for financial advice. We just need to conceive of new business models to serve new constituencies.

  • The most needy for financial planning are the low networth people. Financial planning profession can be best justified by working for them. And fee only planners are best suited for this task.

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