Aussie planners accept fee-for-service

Cerulli Associates, Asia Pacific Edge, April 2008

Australian financial planners are embracing fee-for-service advice, find regulation expensive and onerous, and believe the cost of financial advice has increased for the end consumer.

These are the key findings of a small poll conducted by Cerulli Associates among Australian financial planners in March and April.

For years, there has been debate in the Australian investment industry about whether consumers would be better served by planners using a fee-for-service model rather than relying on trail fees from the products that they sell. The arguments in favour of this approach are that it fosters independence from product manufacturers, and over the long run represents a fairer remuneration from the customer’s perspective, since they are not paying a fee to planners for years down the track for advice that has been received once.

The main argument against is that clients are generally frightened off by the scale of a workable up-front fee, making trail fees a more effective method of ensuring clients still use financial advice.

Judging from those who responded to our recent survey, the transition has already been made. 84.2% of respondents offered advice on a fee-for-service basis, and 71.43% said that the proportion of fee for service advice had increased in the last two years. More than that, 28.57% of respondents expected that all the advice they give could be on a fee-for-service basis within the next three years, and more than half (57.14%) expected an increase in the proportion of fee-for-service over that period.

This suggests that clients have overcome any reticence to pay up front for their advice – possibly a consequence of the great media attention paid to this issue, which has perhaps created an image of the trail fee as something of a con. It brings planner remuneration more closely into line with that of a lawyer.

There have been few sectors of Australian professional life that have come under greater scrutiny than financial planners in recent years. They have been investigated in shadow shopping surveys by the Australian Securities & Investment Commission, which have cast doubt on their independence and processes; another shadow shopping survey, in which ASIC informants anonymously request advice from planners and then report back on the appropriateness of their advice, is expected shortly. And the effort required for compliance has increased dramatically, with large (many say too large) documents of explanation required every time they give financial advice.

They are feeling the pinch. Every respondent to our survey considered the regulation applying to financial planners to be onerous, with the only difference being the degree; one third through it excessively onerous, two thirds somewhat onerous (nobody thought it ‘about right’, or, needless to say, ‘not onerous enough’). Also, every respondent said compliance had become more expensive for financial planners in the last two years.

Most, but not all, appear to be passing on at least some of this additional expense to the end client. 71.43% of our respondents felt that advice had become more expensive for clients in the last two years, while 28.57% did not – suggesting that they take all of the additional costs of compliance onto their own books.

The issue of regulation, and its cost, is a thorny one in Australia. There is no doubt that greater requirements for disclosure have been well intentioned, but many people feel they have backfired. There are many stories about statements of advice running over 100 pages, completely defeating their very purpose because nobody has the time or patience to read them. When this happens, increased compliance requirements actually penalise the client, because not only do they not assist them in understanding why they are investing as they are, they also increase costs.

Instead, there is growing momentum towards simplifying statements of advice, dispensing with the legalease and making a great effort to explain to the client in a clear and succinct way just what is going on with their investments. Ideally, this would not only help people understand their financial position, but remove some of the additional cost that has clearly accrued to financial advice. Our findings underline the urgency of this measure.

When it comes to asset allocation, there is little evidence of the turmoil in global and local markets over the last year making any difference to planner thinking. We gave planners a list of six product categories – capital protected funds, structured products, exchange traded funds, derivatives based products, long-short products and fund of fund or multimanager products – and asked whether they expected to increase, decrease or leave unchanged the allocations they advise their clients to have. The majority, in all of these areas, expect to stay the same, and even in the area with the greatest variation (fund of funds) the vote was split on whether to increase or decrease allocation.

When it comes to selecting an asset manager for a client, financial planners showed two criteria made the biggest difference: a consistent style of investing, and a long-term approach. A distant third came an unblemished ethical reputation.

A handful of planners mentioned other criteria – high Morningstar or other ratings, low relative expenses, top performers, strong brand recognition, value-added practice management services, or recommendations by home office research staff – but none were considered anything like as important as consistency and the long-term style. It is quite telling that planners are little swayed by performance or fees.

At the bottom of the pile, nobody mentioned a strong reputation among advisors, range of investment styles, knowledgeable wholesalers, or innovative approaches to client education, as reasons to select an asset manager.

It’s not an easy life for a planner in Australia at the moment, combining heightened costs, public suspicion and now a bear market too. But our survey does suggest that clients have embraced the shift to a more transparent model of remuneration, which is at least a start.