Fee Transparency
There is much talk at the moment on the financial planning industry, the fees and commissions earned and what is the right model going forward.
Recent governance has called for a fee for service based model but the FPA seem reluctant that this is the best model. Independent Financial Advisors are popping up where they offer a fee for service model and then rebate any commissions paid. When I recently asked about their fees, there was not a set hourly rate similar to other service based professions to use as a consumer guide.
This is hard for investors to make an informed decision on which financial advisor to visit when hourly rates are not easily available. It's a bit like going in to buy a new pair of jeans and having the shop assistant tell you, no you try on all the jeans first, find the ones you like and then I can tell you what they cost. If you are like me then you want to know what the jeans cost first and then you'll decide which ones to try on and ultimately make a decision as to which ones are best based on both fit and price.
Commission based fees can work fine as a model. The general insurance and real estate industries have used these models for years. Insurance brokers clearly identify their commissions each year on your policies to let you know just what they are getting paid for the work they do on your behalf. When talking to a general insurance broker, they will happily quote you their commission alongside the insurance premium over the phone. It is all very clear, well with the brokers I deal with it certainly is.
The real estate industry has also worked on a commission basis successfully for years. It is quite clear that the seller pays a commission when the house sells and therefore the agent has a primary interest to the seller and not you as a buyer.
So recent trouble with the financial planning industry is not so much around the commissions financial planners and advisors receive but rather that the fees haven't always been transparent to investors.
I propose the following solution to ASIC and the FPA as one model to consider that will provide transparent fees to investors.
The financial planning industry could easily work on a model similar to that of the medical profession.
Financial advisors charge an hourly rate that is quoted up front to the client. There is separate rates for the initial consultation and follow up consultations similar to that of any good specialist. Any monies that are currently paid out in commissions on any investments taken up are then rebated to the client similar to medicare and private health rebates. Rebates can be visible on fund websites and brochures, allowing investors to know what their out of pocket investment will be before they commit.
In house Financial Planners at superannuation funds, investment houses and banks will still have a place similar to that of the A&E departments at hospitals. Some investors will be happy to take the knowledge and advice given by free inhouse advisors with full knowledge that they will be receiving advice about inhouse products only.
Financial Advisors can also choose to charge a higher than rebate fee or be a bulk-billing style advisor and charge rebate only fees catering to those consumers who require advice but are not in a position to pay upfront for it at this point in time.
This model will also allow planners and advisors to charge hourly fees based on their experience, qualifications and knowledge similar to other service professions.
This model allows financial advice to be available to a wide range of consumers who can then make an informed choice as to which style of advice suits their immediate needs with the full knowledge they are getting what they pay for.
To provide a transparent fee structure will mean that upfront and hourly fees need to be made clear to consumers. The difficulty the industry faces now is that they are unsure what those rates should be. Someone will have to be the first in setting rates and it will take a brave soul to make that choice and say this is what I think I deserve to be paid for my knowledge and experience.
I look forward to following the progress made and seeing who leads this industry forward by choosing a transparent fee structure.
