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Pricing advice - opportunity or catastrophe? 

This is an article by Sue Viskovic, who is the Managing Director of Elixir Consulting, and author of the Adviser Pricing Models Research Report.  As experts in the field of practice development, Elixir Consulting has been engaged by Præmium to provide regular articles that may be of interest and use to our clients with issues that affect their businesses.  From time to time, Praemium clients will be provided special offers and opportunities from Elixir Consulting.

Whilst the industry has debated the virtues of fees and commissions for decades, there has never before been so much focus on the issue from outside forces. Even as there are many still continuing to passionately defend the need for commissions, it is rapidly becoming apparent that change is inevitable.

In case you've been preoccupied lately, this diagram illustrates it nicely.

From the terribly effective campaign by industry funds that demonised commissions in just a few short words, to the latest consumer campaign by CHOICE to ban commissions (and asset-based fees), it seems that everyone is attacking commissions.

There are not one but three separate Government enquiries currently underway which will visit adviser commissions in some form:

• The parliamentary joint committee enquiry into financial products and services (brought about by the collapse of Opes Prime, MFS, Westpoint, Storm Financial etc);
• The  Cooper review of the superannuation system; and
• The parliamentary enquiry into agribusiness MIS (brought about by the collapse of Timbercorp and Great Southern).

We dearly hope that the Henry Tax Review also visits the issue, and recommends that advice fees become tax deductible.

The IFSA Super Charter states (in summary) that super products are to be available on a no-commissions basis from 1^st July 2010 (less than a year away now), although products that are already in place will be ‘grandfathered'. The FPA paper proposes that no commissions are to be paid for financial advice from the 1^st July 2012 but they too have ‘grandfathered' existing products.

Much of the noise surrounding commissions can broadly be bottled down into two concerns:

• Many consumers have been paying trail commissions from their super and investments to advisers from whom they have received no service since they purchased the product, and they cannot switch these commissions off; and
• There is a belief that commissions encourage advisers to recommend inappropriate products and strategies to their clients.

Neither the IFSA charter nor the FPA paper will solve the first issue. The FPA paper was created with a view to be instrumental in moving the industry toward a fee-for-service model, but in a manner that is manageable by their members. The intention being to improve the reputation of the profession, and to also prevent government from stepping in and legislating in a manner that may be infinitely more unpalatable than what the FPA proposes. However, there has been greater speculation and public comment on the issue than when the FPA first deliberated, and certainly with the changes being introduced in the UK and the US - there are fears that our government will feel that the moves for the industry to self-regulate do not go far enough, and there is a risk that existing arrangements may be forced to cease.

Both Chris Bowen (Minister for Financial Services, Superannuation and Corporate Law) and Tony D'Aloisio (Commissioner of ASIC) have made it very clear that if the industry does not address remuneration and conflicts, they will call for the Government to regulate. ASIC has gone further in their submission to the Parliamentary Enquiry, calling for all commissions, and even asset-based fees to be banned.

Whilst the argument against banning commissions may be moot, we must passionately defend the right for financial advisers to determine how much, and how, they charge their fees. Aside from the freedom of choice issues and the cries of socialism, it will simply not be in the best interests of consumers for anyone to dictate a global price for advice. One of the main findings in our Adviser Pricing Models Research Report is that there is no "one size fits all" model for charging advice. A 30 year old wealth creator has very different advice needs to the 60 year old retiree, and what is a cost-effective pricing structure for one, may be very expensive for another.

Even if the current recommendations by IFSA and the FPA are enforced without alteration, it is highly likely that advisers will see significant attrition from their legacy trail books. There is no doubt that the Industry Super Funds will engage their very effective advertising people to ‘educate' consumers about the ability to move their super funds into a more cost-effective environment and cease trails paid to advisers.

In short, the time for discussion and (always passionate) debate is over. Whilst no one likes to be told how to run their business, many advisers are wisely putting aside their chagrin at this fact, and choosing to look at it as an opportunity rather than a catastrophe. They are taking this time to review their business models, including their pricing models, to position their business for the future.

Over the years we have helped many advisers transition their business to a fee for service model, and having researched a further 120 firms around the country, we know what is involved. In our experience, the process of transitioning to a fee-based remuneration model is one that is time consuming, emotional, often confronting, and you won't get it right immediately. But for all the pain, it is a very rewarding exercise, and the long-term benefits for your business and your clients far outweigh the short-term challenges. This was recently articulated by an adviser who is an "ex-lifey" in his 50's who was forced by his son (and business partner/successor) to change their business model to fee for service a number of years ago: "I argued and resisted for years about this change but now that we're out the other side, I am so glad we did it, and my only regret was that we didn't do it sooner."

When you embark on this journey, in this current environment particularly, you may start with more questions than answers:

• How to move to fee for service without missing out on the upside when markets recover?;
• How to move an established client base to a fee structure when we are already having difficult conversations with our clients on a daily basis?;
• How much to charge?;
• When to charge - at what point in the advice process?; and
• Should we charge fixed fee or a percentage of assets?

The best advice we can give on this issue is to undertake a process to arrive at your fee structure, do not simply take a punt. Rather than guessing at what you think your clients will pay, it is vital that you work through a robust process to price your services, not only to increase the likelihood of getting your pricing ‘right', but also to enable you and your staff to be confident in what you are charging.

The fact is that clients will pay for advice. Provided they can see value in your offering, they will absolutely pay for it. Without a doubt, the biggest obstacle an adviser has to overcome in moving their practice to fee for service lies between their own ears. Once they have overcome that obstacle, and they believe in the pricing and service model they are ‘selling' to their clients, they will be far more effective at engaging new and existing clients with their new pricing model.

Structuring your pricing model is only the tip of the iceberg. In reality, before you work out how to charge for your services, you need to determine what you are charging for. When you clarify what you will charge for your services, you're also motivated to ensure that those services are of consistent quality, your business is running at optimal efficiency, and you are achieving your own financial goals, as well as those of your clients.

You will certainly need to be having new conversations with clients. Discussing your fee structure and your service offering must become part of your routine with clients - both new and existing. You will also likely need to revisit your marketing material. In order to assist clients to grasp what they will be paying for, and make their decision to engage you easier, you will need to make the intangible, visible. Advice is a service - and if you can go some way to articulate that service - to enable your prospective clients to see, touch, and feel what you are offering, you will enable them to make that decision easier.

Finally, we recommend that you enlist the help of someone external to your business to help you through this process. All participants in our research stated that they used someone who was at arms length to assist them, be that their PDM from their dealer group, a BDM, or an external consultant. Not only did this allow them to get views of what others have done in the industry, but also provided them a sounding board and someone to challenge their thinking who was not emotionally connected to the business, and was able to assist them to see their model through the eyes of their clients.

Over the years we have perfected the process we take advisers through to create their pricing model, and we are putting the final touches on our Pricing Advice Program which will allow Elixir Consulting to deliver the program to advisers in a variety of forms, to allow them to select the engagement terms they feel most appropriate for their business. This program will be launched later this year.

Whilst some advisers may feel uneasy about the cost involved to seek external help, it should in fact be viewed as an investment. The great news is, making the transition to fee for service does not mean that your profits and revenue will drop. We have spoken with hundreds of advisers around the country who have been through it and emerged out the other side with a better business, and stronger client relationships.

So if you can put aside your annoyance at being told how to run your business, and embrace this challenging time as an opportunity to take control of your business, rest assured that by creating an appropriate pricing model for your REAL clients your business will be more profitable with better outcomes for you and your clients and it won't matter if your trails do get switched off.

About Elixir Consulting:

Elixir Consulting is an Australian organisation specialising in practice development, providing independent advice and solutions to institutions and financial planning businesses in the Financial Services industry.

Delivery of solutions range from customised business analysis and coaching, to group training and development sessions on the unique issues faced by financial planners in business today.

For more information, visit http://www.elixirconsulting.com.au/ or email sue@elixirconsulting.com.au

Disclaimer: The information in this publication is of a general nature. It has been provided by Elixir Consulting and is reproduced with permission.  The views expressed in this article are the views of its author and are not necessarily endorsed by Præmium Limited and its related bodies (‘Præmium') or any of their officers or staff.  Praemium endeavours to provide accurate and timely information however, Praemium does not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. No responsibility is accepted by Præmium for the accuracy of that information, and Præmium in no way takes any responsibility whatsoever for material contained on external websites referred to in this publication.